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(1990 2006)
We would like to seek the indulgence of the reader for some Bar Questions which are
Edited and Arranged by:
improperly classified under a topic University
and for College
some topics which are improperly or
of Law Batch 2005
ignorantly phrased, for the authors are just Bar Reviewees who have prepared this
Updated by:

work while reviewing for the Bar Exams under time constraints and within their
D BAR-Retake 2007
limited knowledge of the law. We would like to seek the readers indulgence for a lot

of typographical errors in this work.

The Authors
July 26, 2005 LAW SCHOOLS 2005
Updated: June
27, 2007
June 27, 2007
Mercantile Law Bar Examination Q & A (1990-2006) Page 3 of 103
General Principles of Mercantile Law..............................................................................12
Commercial Transaction (2003) 12 Joint Account (2000) 12 Joint Account vs.
Partnership (2000) 12 Theory of Cognition vs. Theory of Manifestation (1997) 12

Banking Law...........................................................................................................................12
Banks: Applicability: Foreign Currency Deposit Act & Secrecy of Bank Deposits
(2005) 12 Banks: Collateral Security (2002) 12 Banks: Secrecy of Bank Deposits;
Garnishment (2004) 13 Banks; Classifications of Banks (2002) 13 Banks;
Conservator vs. Receiver (2006) 13 Banks; Diligence Required (1992) 14 Banks;
Insolvency; Prohibited Transactions (2000) 14 Banks; Insolvency; Requirements
(1997) 14 Banks; Restrictions on Loan Accommodations (2002) 14 Banks;
Restrictions on Loan Accommodations (2006) 15 Banks; Safety Deposit Box;
Liability 15 Banks; Secrecy of Bank Deposit; AMLC (2006) 15 Banks; Secrecy of
Bank Deposit; Exceptions (2006) 16 Banks; Secrecy of Bank Deposits (1990) 16
Banks; Secrecy of Bank Deposits (1991) 16 Banks; Secrecy of Bank Deposits
(1992) 17 Banks; Secrecy of Bank Deposits (1994) 17 Banks; Secrecy of Bank
Deposits (1995) 17 Banks; Secrecy of Bank Deposits (1998) 17 Banks; Secrecy of
Bank Deposits (2000) 18 Banks; Secrecy of Bank Deposits; Exceptions (2004) 18
Banks; Secrecy of Bank Deposits; Garnishment (2001) 18 BSP; Receivership;
Jurisdiction (1992) 18 Legal Tender (2000) 19 PDIC Law vs. Secrecy of Bank
Deposits Act (1997) 19 Responsibilities & Objectives of BSP (1998) 19 Truth in
Lending Act (1991) 19 Truth in Lending Act (2000) 19

Bulk Sales Law ......................................................................................................................20

Bulk Sales Law; Covered Transactions (1994) 20 Bulk Sales Law; Covered
Transactions (2000) 20 Bulk Sales Law; Covered Transactions (2006) 20 Bulk Sales
Law; Exclusions (1993) 20 Bulk Sales Law; Obligation of the Vendor (1995) 21 Bulk
Sales Law; Obligation of the Vendor (1997) 21 Bulk Sales Law; Obligation of the
Vendor (2001) 21

Consumer Protection Law..................................................................................................21

Metric System Law (1994) 21
Mercantile Law Bar Examination Q & A (1990-2006) Page 4 of 103 Corporation
BOD: Election of Aliens as members (2005) 22 BOD; Capacity of Directors (1996)
22 BOD; Compensation (1991) 22 BOD; Conflict of Interest (1994) 22 BOD;
Interlocking Directors (1995) 22 BOD; Interlocking Directors (1996) 23 By-Laws;
Validity; limiting qualifications of BOD members (1998) 23 By-Laws; Validity;
limiting qualifications of BOD members (2000) 23 By-Laws; Validity; limiting
qualifications of BOD members (2001) 23 By-Laws; Validity; limiting qualifications
of BOD members (2003) 24 Close Corporations; Deadlocks (1995) 24 Closed
Corporation; Restriction; Transfer of shares (1994) 24 Controversy; Intra-
Corporate (1994) 25 Controversy; Intra-Corporate (1996) 25 Controversy; Intra-
Corporate (1996) 25 Controversy; Intra-Corporate (2006) 25 Controversy; Intra-
corporate; Jurisdiction (1997) 25 Corporation Sole; Definition (2004) 26
Corporation: Issuance of shares of stock to pay for the services (2005) 26
Corporation: Right of Repurchase of Shares; Trust Fund Doctrine (2005) 26
Corporation: Sole Proprietorship (2004) 26 Corporation; Articles of Incorporation
(1990) 26 Corporation; Bulk Sales Law (2005) 27 Corporation; By-laws (2001) 28
Corporation; Commencement; Corporate Existence (2003) 28 Corporation;
Conversion of Stock Corporation (2001) 28 Corporation; De Facto Corporation
(1994) 28 Corporation; Dissolution; Methods of Liquidation (2001) 28 Corporation;
Incorporation; Requirements (2006) 28 Corporation; Incorporation; Requisites
(2002) 29 Corporation; Meetings; BOD & Stockholders (1993) 29 Corporation;
Nationality of Corporation (1998) 29 Corporation; Non-Stock Corporation (1993) 29
Corporation; Power to Invest Corporate Funds for other Purpose (1995) 30
Corporation; Power to Invest Corporate Funds in another Corporation (1996) 30
Corporation; Recovery of Moral Damages (1998) 30 Corporation; Separate
Juridical Personality (1995) 31 Corporation; Separate Juridical Personality (1996)
31 Corporation; Separate Juridical Personality (1996) 31 Corporation; Separate
Juridical Personality (1999) 31 Corporation; Separate Juridical Personality (2000)
32 Corporation; Separate Juridical Personality (2000) 32 Corporation; Set-Off;
Unpaid Subscription (1994) 32 Corporation; Stock Corporation (2001) 32
Corporation; Validity of Corporate Acts (1998) 33 Corporation; Validity of
Corporate Acts (2002) 33 Corporation; Voluntary Dissolution (2002) 33
Corporation; Voting Trust Agreement (1992) 33
Mercantile Law Bar Examination Q & A (1990-2006) Page 5 of 103
Derivative Suit: Requisites (2004) 34 Derivative Suit: Watered Stock (1993) 34
Derivative Suit; Close Corporation; Corporate Opportunity (2005) 34 Derivative
Suit; Minority Stockholder (2003) 35 Distinction: De facto Corporation vs.
Corporation by Estoppel (2004) 35 Distinction: Dividends vs. Profit: Cash Dividend
vs. Stock Dividend (2005) 35 Distinction; Private vs. Public Corporation (2004) 35
Distinction; Stock vs. Non-Stock Corporation (2004) 36 Dividends: Declaration of
Dividends (2005) 36 Dividends: Sources of Dividends; Trust Fund Doctrine (2005)
36 Dividends; Declaration of Dividends (1990) 36 Dividends; Declaration of
Dividends (1991) 36 Dividends; Declaration of Dividends (2001) 36 Dividends;
Right; Managing Corporation (1991) 37 Doctrine of Corporate Opportunity (2005)
37 Effect: Expiration of Corporate Term (2004) 37 Effects; Merger of Corporations
(1999) 37 Effects; Winding Up Period of a Corporation (1997) 38 Effects; Winding
Up Period of a Corporation (2000) 38 Foreign Corporation; Doing Business in the
Philippines (1998) 38 Foreign Corporation; Doing Business in the Philippines;
Acts or Activities (2002) 38 Foreign Corporation; Doing Business in the
Philippines; Test (2002) 39 Joint Venture; Corporation (1996) 39 Liabilities; BOD;
Corporate Acts (1996) 39 Liabilities; Stockholders, Directors, Officers (1997) 39
Piercing the Corporate Veil (1994) 39 Piercing the Corporate Veil (1996) 40
Piercing the Corporate Veil (2001) 40 Piercing the Corporate Veil (2004) 40
Piercing the Corporate Veil (2006) 40 Pre-emptive Right (2001) 40 Pre-Emptive
Right vs. Appraisal Right (1999) 41 SEC; Jurisdiction; Transferred Jurisdiction
(1996) 41 Stockholder; Delinquent; Unpaid Subscription (1997) 41 Stockholders:
Preemptive Right (2004) 42 Stockholders; Appraisal Right (2003) 42 Stockholders;
Removal of Officers & BOD (2001) 42 Stockholders; Removal; Minority Director
(1991) 42 Stockholders; Rights (1996) 42 Stockholders; Voting Power of
Stockholders (1990) 42 Stocks; Increase of Capital Stock (2001) 42 Stocks; Sale,
Transfer of Certificates of Stock (1996) 43 Stocks; Sale, Transfer of Certificates of
Stock (2001) 43 Stocks; Sale, Transfer of Certificates of Stock (2004) 43 Trust Fund
Doctrine (1992) 43 Trust Fund Doctrine; Intra-Corporate Controversy (1991) 43

Credit Transactions..............................................................................................................44
Chattel Mortgage vs. After-Incurred Obligations (1991) 44
Mercantile Law Bar Examination Q & A (1990-2006) Page 6 of 103
Chattel Mortgage vs. After-Incurred Obligations (1999) 44 Chattel Mortgage;
Foreclosure (1997) 44 Chattel Mortgage; Ownership of Thing Mortgaged (1990) 45
Credit Transactions (1999) 45 Mortgage (1999) 45 Mortgage vs. Levy (2003) 46
Mortgage; Extrajudicial Foreclose (2006) 46 Mortgage; Foreclosure (2003) 46
Mortgage; Foreclosure (2003) 46 Mortgage; Foreclosure of Improvements (1999)
46 Mortgage; Foreclosure; Effect of mere taking by creditor-mortgagor of property
(1992) 47 Mortgage; Redemption Period; Foreclosed Property (2002) 47 Mortgage;
Remedies (2003) 48 Preference of Credits (2002) 48 Promissory Note: Liability
(2001) 48 Remedies; Available to Mortgagee-Creditor (1996) 48 Remedies;
Available to Mortgagee-Creditor (2001) 49 Remedies; Secured Debt (1991) 49

Insurance Law........................................................................................................................49
Beneficiary: Effects: Irrevocable Beneficiary (2005) 49 Beneficiary: Rights;
Irrevocable Beneficiary (2005) 50 Beneficiary; Life Insurance; Prohibited
Beneficiaries (1998) 50 Concealment; Material Concealment (2001) 50
Concealment; Material Concealment: Incontestability Clause (1994) 50
Concealment; Material Concealment: Incontestability Clause (1996) 50
Concealment; Material Concealment: Incontestability Clause (1997) 51
Concealment; Material Concealment; Incontestability Clause (1991) 51
Concealment; Material Concealment; Incontestability Clause (1998) 51 Insurable
Interest: Bank Deposit (2000) 51 Insurable Interest: Public Enemy (2000) 52
Insurable Interest: Separate Insurable Interest (1999) 52 Insurable Interest;
Equitable Interest (1991) 52 Insurable Interest; Life vs. Property Insurance (1997)
52 Insurable Interest; Life vs. Property Insurance (2000) 52 Insurable Interest; Life
vs. Property Insurance (2002) 53 Insurable Interest; Property Insurance (1994) 53
Insurable Interest; Property Insurance (2001) 53 Insurance; Cash & Carry Basis
(2003) 53 Insurance; Co-Insurance vs. Re-Insurance (1994) 53 Insurance; Double
Insurance (2005) 54 Insurance; Double Insurance; effect (1993) 54 Insurance;
Effects; Payment of Premiums by Installment (2006) 54 Insurance; Life Insurance;
Assignment of Policy (1991) 54 Insurance; Perfection of Insurance Contracts
(2003) 54 Insurance; Property Insurance; Prescription of Claims (1996) 54
Insurance; Return of Premiums (2000) 55 Insured; Accident Policy (2004) 55
Insured; Accident vs. Suicide (1990) 55
Mercantile Law Bar Examination Q & A (1990-2006) Page 7 of 103
Insured; Accident vs. Suicide (1993) 56 Insured; Accident vs. Suicide (1995) 56
Insurer: Effects: Several Insurers (2005) 56 Insurer; 3rd Party Liability (1996) 56
Insurer; 3rd Party Liability (2000) 57 Insurer; 3rd Party Liability; No Fault
Indemnity (1994) 57 Insurer; 3rd Party Liability; Quitclaim (1994) 57 Insurer;
Authorized Driver Clause (1991) 57 Insurer; Authorized Driver Clause (2003) 57
Insurer; Authorized Driver Clause; vehicle is stolen (1993) 58 Insurer; Group
Insurance; Employer-Policy Holder (2000) 58 Insurer; Liability of the Insurers
(1990) 58 Loss: Actual Total Loss (1996) 59 Loss: Constructive Total Loss (2005) 59
Loss: Total Loss Only (1992) 59 Marine Insurance; Implied Warranties (2000) 60
Marine Insurance; Peril of the Ship vs. Peril of the Sea (1998) 60 Mutual Insurance
Company; Nature & Definition (2006) 60

Intellectual Property .............................................................................................................60

Copyright (1995) 60 Copyright; Commissioned Artist (1995) 60 Copyright;
Commissioned Artist (2004) 60 Copyright; Infringement (1994) 60 Copyright;
Infringement (1997) 61 Copyright; Infringement (1998) 61 Copyright; Infringement
(2006) 61 Copyright; Photocopy; when allowed (1998) 61 Infringement vs. Unfair
Competition (1996) 61 Infringement vs. Unfair Competition (2003) 61
Infringement; Jurisdiction (2003) 61 Patent; Non-Patentable Inventions (2006) 61
Patents: Gas-Saving Device: first to file rule (2005) 62 Patents: Infringement;
Remedies & Defenses (1993) 62 Patents; Infringement (1992) 62 Patents; Rights
over the Invention (1990) 63 Trademark (1990) 63 Trademark (1994) 63
Trademark, Test of Dominancy (1996) 63 Trademark; Infringement (1991) 63
Trademark; Test of Dominancy (1996) 64 Tradename: International Affiliation
(2005) 64

Insolvency & Corporate Recovery ...................................................................................64

Insolvency vs. Suspension of Payment (1998) 64 Insolvency: Voluntary Insolvency
(2005) 64 Insolvency; Assets vs. Liabilities (1998) 65 Insolvency; Assignees (1996)
65 Insolvency; Effect; Declaration of Insolvency (1991) 65
Mercantile Law Bar Examination Q & A (1990-2006) Page 8 of 103
Insolvency; Fraudulent Payment (2002) 65 Insolvency; Jurisdiction; Sole
Proprietorship (1990) 66 Insolvency; obligations that survive (1997) 66 Insolvency;
Voluntary Insolvency Proceeding (1991) 66 Insolvency; Voluntary vs. Involuntary
Solvency (1995) 66 Law on Corporate Recovery (2003) 67 Rehabilitation; Stay
Order (2006) 67 Suspension of Payment vs. Insolvency (1995) 67 Suspension of
Payments vs. Stay Order (2003) 67 Suspension of Payments; Rehabilitation
Receiver (1999) 67 Suspension of Payments; Remedies (2003) 68

Letters of Credit ....................................................................................................................68

Letter of Credit: Mortgage (2005) 68 Letter of Credit; Certification from Consignee
(1993) 68 Letters of Credit; Liability of a confirming and notifying bank (1994) 69
Letters of Credit; Liability of a Notifying Bank (2003) 69 Letters of Credit; Three
Distinct Contract Relationships (2002) 69

Maritime Commerce .............................................................................................................69

Average; Particular Average vs. General Average (2003) 69 Bottomry (1994) 70
Carriage of Goods: Deviation: Liability (2005) 70 Carriage of Goods; Deviation;
When Proper (2005) 70 Carriage of Goods; Exercise Extraordinary Diligence
(2005) 70 Charter Party (1991) 70 Charter Party (2004) 71 COGSA: Prescription of
Claims/Actions (2004) 71 COGSA; Prescription of Claims (1992) 71 COGSA;
Prescription of Claims (2000) 72 COGSA; Prescriptive Period (1995) 72 Doctrine of
Inscrutable Fault (1995) 72 Doctrine of Inscrutable Fault (1997) 72 Doctrine of
Inscrutable Fault (1998) 72 Limited Liability Rule (1994) 72 Limited Liability Rule
(1997) 72 Limited Liability Rule (1999) 72 Limited Liability Rule (2000) 73 Limited
Liability Rule; Doctrine of Inscrutable Fault (1991) 73 Limited Liability Rule;
General Average Loss (2000) 73 Limited Liability Rule; General Average Loss
(2000) 73

Nationalized Activities or Undertakings........................................................................74

Nationalized Activities or Undertakings (1993) 74 Nationalized Activities or
Undertakings (1994) 74 Nationalized Activities or Undertakings (1995) 75 Retail
Trade Law (1990) 75 Retail Trade Law (1991) 75 Retail Trade Law (1992) 75
Mercantile Law Bar Examination Q & A (1990-2006) Page 9 of 103
Retail Trade Law (1993) 76 Retail Trade Law (1996) 76 Retail Trade Law (1996) 76
Retail Trade Law; Consignment (1991) 76

Negotiable Instruments Law ..............................................................................................76

Bond: Cash Bond vs. Surety Bond (2004) 76 Checks: Crossed Checks (2005) 77
Checks: Crossed Checks vs. Cancelled Checks (2004) 77 Checks; Crossed Check
(1991) 77 Checks; Crossed Check (1994) 77 Checks; Crossed Check (1995) 78
Checks; Crossed Check (1996) 78 Checks; Crossed Check (1996) 78 Checks;
Effect; Acceptance by the drawee bank (1998) 78 Checks; Effects; Alterations;
Prescriptive Period (1996) 78 Checks; Forged Check; Effects (2006) 79 Checks;
Liability; Drawee Bank (1995) 80 Checks; Material Alterations; Liability (1999) 80
Checks; Presentment (1994) 80 Checks; Presentment (2003) 80 Checks; Validity;
Waiver of Banks liability for negligence (1991) 80 Defenses; Forgery (2004) 81
Forgery; Liabilities; Prior & Subsequent Parties (1990) 81 Forgery; Liabilities; Prior
& Subsequent Parties (1995) 81 Incomplete & Delivered (2004) 82 Incomplete and
Delivered (2005) 82 Incomplete Instruments; Incomplete Delivered Instruments
vs. Incomplete Undelivered Instrument (2006) 82 Indorser: Irregular Indorser vs.
General Indorser (2005) 82 Negotiability (1993) 82 Negotiability (2002) 83
Negotiability; Holder in Due Course (1992) 83 Negotiability; Requisites (2000) 83
Negotiable Instrument: Ambiguous Instruments (1998) 84 Negotiable Instrument:
Definition & Characteristics (2005) 84 Negotiable Instrument: Identification (2005)
84 Negotiable Instrument: Negotiable Document vs. Negotiable Instrument (2005)
85 Negotiable Instrument; Negotiability (1997) 85 Negotiable Instruments; Bearer
Instrument (1998) 85 Negotiable Instruments; Bearer Instruments (1997) 85
Negotiable Instruments; bearer instruments; liabilities of maker and indorsers
(2001) 85 Negotiable Instruments; incomplete and undelivered instruments;
holder in due course (2000) 86 Negotiable Instruments; Incomplete Delivered
Instruments; Comparative Negligence (1997) 86 Negotiable Instruments; kinds of
negotiable instrument; words of negotiability (2002) 86 Negotiable Instruments;
Requisites (1996) 87 Notice Dishonor (1996) 87 Parties; Accommodation Party
(1990) 87 Parties; Accommodation Party (1991) 87 Parties; Accommodation Party
(1996) 87
Mercantile Law Bar Examination Q & A (1990-2006) Page 10 of 103
Parties; Accommodation Party (1998) 87 Parties; Accommodation Party (2003) 88
Parties; Accommodation Party (2003) 88 Parties; Accommodation Party (2005) 88
Parties; Holder in Due Course (1993) 88 Parties; Holder in Due Course (1996) 88
Parties; Holder in Due Course (1996) 88 Parties; Holder in Due Course (1998) 89
Parties; Holder in Due Course; Indorsement in blank (2002) 89 Place of Payment
(2000) 89

Public Service Law ...............................................................................................................89

Certificate of public Convenience (1998) 89 Certificate of Public Convenience;
inseparability of certificate and vessel (1992) 90 Certificate of Public Convenience;
Requirements (1995) 90 Powers of the Public Service Commission (1993) 90 Public
utilities (2000) 90 Revocation of Certificate (1993) 91 Revocation of Certificate
(1993) 91

Securities Regulation ..........................................................................................................91

Insider (2004) 91 Insider Trading (1995) 91 Insider Trading; Manipulative Practices
(1994) 92 Manipulative Practices (2001) 92 Securities Regulation Code; Purpose
(1998) 92 Securities; Definition (1996) 92 Securities; Selling of Securities; Meaning
(2002) 92 Tender Offer (2002) 93

Transportation Law ..............................................................................................................93

Boundary System (2005) 93 Carriage; Breach of Contract; Presumption of
Negligence (1990) 93 Carriage; Breach of Contract; Presumption of Negligence
(1997) 93 Carriage; Fortuitous Event (1995) 93 Carriage; Liability; Lost Baggage or
Acts of Passengers (1997) 94 Carriage; Prohibited & Valid Stipulations (2002) 94
Carriage; Valuation of Damaged Cargo (1993) 94 Common Carrier (1996) 94
Common Carrier; Breach of Contract; Damages (2003) 94 Common Carrier;
Defenses (2002) 95 Common Carrier; Defenses; Fortuitous Events (1994) 95
Common Carrier; Defenses; Limitation of Liability (1998) 95 Common Carrier;
Defenses; Limitation of Liability (2001) 95 Common Carrier; Duration of Liability
(1996) 95 Common Carrier; Duty to Examine Baggages; Railway and Airline
(1992) 96 Common Carrier; Test (1996) 96 Common Carriers; Defenses (1996) 96
Common Carriers; Liability for Loss (1991) 96
Mercantile Law Bar Examination Q & A (1990-2006) Page 11 of 103
Common vs. Private Carrier; Defenses (2002) 97 Kabit System (2005) 97 Kabit
System; Agent of the Registered Owner (2005) 97 Maritime Commerce; Bareboat
(2003) 97 Prior Operator Rule (2003) 97 Registered Owner; Conclusive
Presumption (1990) 98 Trans-Shipment; Bill of Lading; binding contract (1993) 98

Trust Receipts Law...............................................................................................................98

Trust Receipts Law; Acts & Omissions; Covered (2006) 98 Trust Receipts Law;
Liability for estafa (1991) 99 Trust Receipts Law; Liability for Estafa (1997) 99
Trusts Receipt Law (2003) 99

Usury Law ...............................................................................................................................99

Usury Law (199) 99
Warehouse Receipts Law .................................................................................................100
Bill of Lading (1998) 100 Delivery of Goods; Requisites (1998) 100 Delivery of the
Goods (1991) 100 Garnishment or Attachment of Goods (1999) 100 Negotiable
Documents of Title (1992) 100 Ownership of Goods Stored (1992) 101 Right to the
Goods (2005) 101 Unpaid Seller; Negotiation of the Receipt (1993) 101 Validity of
stipulations excusing warehouseman from negligence (2000) 101

Miscellaneous ......................................................................................................................102
Energy Regulatory Commission: Jurisdiction & Power (2004) 102 Four ACID
Problems of Philippine Judiciary (2006) 102 Government Deregulation vs.
Privatization of an Industry (2004) 102 Political Law; WTO (1999) 102 Power of the
State: Regulating of Domestic Trade (2004) 103 Tariff and Customs Code: Violation
of Customs Laws (2004) 103
Mercantile Law Bar Examination Q & A (1990-2006)

General Principles of
Mercantile Law
What do you (2003)
understand by the term
commercial transaction? Is it essential that
at least one party to a contract be a
merchant in order to consider such a
transaction? (4%)
A Commercial transaction is defined as ......
It is not essential that at least one party to
the commercial transaction be a merchant.
What is essential is that the transaction
evince an intent to engage in commerce or
Joint Account
What is a joint account? (2%)
A joint account is a transaction of merchants
where other merchants agree to contribute
the amount of capital agreed upon, and
participating in the favorable or unfavorable
results thereof in the proportion they may
Joint Account vs.
Distinguish (2000)
account from partnership.
(3%) ANSWER:
The following are the distinctions between
joint account and partnership:
(1) A partnership has a firm name while a
joint account has none and is conducted in
the name of the ostensible partner.
(2) While a partnership has juridical
personality and may sue or be sued under
its firm name, a joint account has no juridical
personality and can sue or be sued only in
the While
name aofpartnership has partner.
the ostensible a common fund,
a joint account has none.
(4) While in a partnership, all general
partners have the right of management, in a
joint account, the ostensible partner
manages While liquidations
its business of a partnership
may, by agreement, be entrusted to a partner
or partners, in a joint account liquidation
thereof can only be done by the ostensible
Mercantile Law Bar Examination Q & A (1990-2006) Page 12 Page
13 103
of 103
I, Andrew Lee, hereby assign, transfer and
convey, absolutely and unconditionally, to Banking Law
Banks; Classifications of
Ready Credit Bank (hereinafter called the Banksare
There (2002)
six (6) classes of banks Foreign identified
Bank) all of my right, title and interest in and Currency
in the General Deposit Act &
Banking LawSecrecy
of 2000. of Name at
to my accounts receivable from Home Bank
Hi least
of them filedand a complaint
explain the
Builders Development Corporation against
five of its characteristic
officers for or violation
function of of
(hereinafter called the Obligor) arising from SUGGESTED
each one. 31 of ANSWER:
(5%) the Corporation Code. The
delivery of housing units with a total contract Any four (4)
corporation of the following
claimed that the six said(6) classes
officers of
price of P4,000,000.00, the description and werebanks guiltyidentified in the General
of advancing theirBanking
personal Law
contract value of which are attached hereto 1Universal
of 2002,
interests to wit:
to theBanks prejudice These
of the arecorporation,
those which
In the event
as Annex that I shall called
A (hereinafter be unable the to pay my andused that to be theycalledwereexpanded
negligent in
Receivables). indebtedness owned to the banks and
handling the operations
its affairs. Aside from of which are now
Bank, the Bank shall have the right, without primarily governed by the
and contracts, the corporation also submitted General Banking
any further formality or act on its part, to Law of 2002.
in evidence Theyofcan
records theexercise
officers the U.S.powers
Dollar of
collect the Receivables from the Obligor and an investment house and
deposits in several banks overseas - Boston invest in non-allied
to apply the proceeds thereof toward For their part,
Bank, Bank of the
have filed
Switzerland, the and a Bank
highest of New
payment of my said indebtedness. complaint
York. against the directors
requirement. of Hi Yielding
Andrew failed to pay the loan on its due date Corporation for violation
on September 1, 2002. When the Bank 2Commercial Banks of Republic
These areAct No. or
6426, otherwise
regular commercialknownbanks,
as the as Foreign
attempted to collect from the Obligor, the Currency
Bank discovered that the latter had already from a Deposit
universal Act of the
bank. TheyPhilippines.
have a lower The
officers alleged that their bank
capitalization requirement than universal deposits were
closed operations and liquidated all its illegally disclosed for want of a court order,
assets. The Bank sued Andrew for collection, banks and cannot exercise the powers of an
that such deposits house and were not in
invest even the
but Andrew moved to dismiss the complaint subject of the case against them. a) Will the
Yielding Corporation
on the ground that the debt had already complaint filed against theprosper?
directorsExplain.of Hi
been paid by reason of his execution of the 3Thrift Banks
SUGGESTED ANSWER: These banks (such as
aforesaid Deed of Assignment which, being No, because
savings andthe Foreign
mortgage Currency
banks, stock Deposit Act
absolute and unconditional, was in essence a (R.A.
and No.
loan 6426),
associations, including
and its
private punitive
dacion en pago. The Bank opposed the provisions,
development refersbanks)
to foreign
may currency
exercise deposits
most of
motion, contending that the Deed of accounts
the powersconstituted
and within
functions the
of a Philippines.
commercial It
bank application
except that at
they all to
cannot, accounts,
among even
(Sincewas only a security
the question is outside for a scope
the loan. If of
you were though
open currentthey or arecheck banks,
accounts opened
withoutand prior
BarJudge, how would
Examination, you resolve
it is recommended
the motion to dismiss filed by Andrew? b) Was
a violation
Board of theand
approval, Secrecy
they of Bank
that the candidate be given full credit of
Explain5%,(5%) Deposits
issue lettersLaw (Republic
of credit. Their Act No. 1405)?
operations Explain.
whatever may be his answer, and he
The motion to dismiss
be given a bonusshould
if he made be granted.
an answerThe in
governed primarily by the Thrift Banks Act of
simple the
unconditional 1995 (RA 7906).
No, because the punitive provisions of the
conveyance embodied in the deed of 4RuralofBanks
Secrecy Bank these
Deposits are those
Law (R.A. which areNo.
assignment would be operative, and the organized primarily to extend loans and other
1405), including the statutory exemptions
assignment would constitute essentially a credit facilities
provided therein, to arefarmers, fishermen
not applicable or farm
mode of payment or dacion en pago. families, as well as cooperatives, merchants,
Banks: Secrecy of Bank Deposits; accounts, even when constituted locally.
and private
(Intengan v. Court andofpublic employees
Appeals, G.R. No.and whose
CDC maintained (2004)
a savings account with operations are
February 15, 2002 ) primarily governed by the
CBank. On orders of the MM Regional Trial Banks:
Rural Banks CollateralAct of 1992 (RA 7353).
Court, the Sheriff garnished P50,000 of his Security
Andrew is(2002)
engaged in these
the business
5Cooperative Banks are those of
account, to satisfy the judgment in favor of building low-cost housing units under
which are organized primarily to provide
his creditor, MO. CDC complained that the contracts with real estate developers. He
financial and credit services to cooperatives
garnishment violated the Law on the Secrecy applied for a loan of P3 Million from Ready
Theory and whose operations are primarily governed
of BankofDeposits
Cognition becausevs.the Theory
existence of of
Credit Bank (the Bank),
The Civil Code (1997)adopts the theory of by the Cooperative Code ofwhich required
the Philippines
his savings account was disclosed to the Andrew to provide collateral security for it.
ANSWER: the Code of Commerce (RA 6938).
public. (5%) Is CDC's complaint meritorious Andrew offered to assign to the Bank his
No. CDC'srecognizes
generally complaint is not
or not? Reason briefly. the theory Itofwas held 6Islamic Banks these are those which are
China Banking Corporation v. of
Ortega, 49 SCRA 355receivables amounting to P4 million from
manifestation, in the perfection contracts. organized primarily to provide financial and
that Home Builders Development Corporation (the
How do peso
SUGGESTEDthese deposits
ANSWER: may be
two theories garnished and the
differ? credit services in a manner or transaction
Under the bank
depositary theory of
can comply cognition,
with the order the of Obligor). The Bank accepted the offer.
consistent with the Islamic Shariah. At
garnishment is considered to effectively
without violating the Law bind on the Accordingly, Andrew obtained the loan and
present, only the Al Amanah Islamic
offeror of
onlyBankfrom the time
Deposits. it came is
Execution tothehis he executed a promissory note undertaking
Investment Bank of the Philippines has been
knowledge. Under
goal of litigation as it isthe
its fruit. theory
Garnishment of to pay the loan in full in one lump sum on
organized as an Islamic Bank.
is part of the the contract
execution is perfected
process. Upon at September 1, 2002, together with interest
moment of when the acceptance
the notice of garnishment is declared
on the thereon at the rate of 20% per annum. At the
or made by thethe
bank where offeree.
defendant deposited funds, same time, Andrew executed a Deed of
such funds become part of the subject Assignment in favor of the Bank assigning to
matter of litigation. the Bank his receivables from the Obligor.
The deed of assignment read:
Mercantile Law Bar Examination Q & A (1990-2006) Page 14 of 103 payable to himself in the sum
the ordinary course of business, or has of P5 million. This is paying out or permitting
insufficient realizable assets to meet its to be paid out funds of the bank after the
liabilities, or cannot continue in business latter became insolvent. This act is penalized
without probable losses to its depositors or by fine of not less than P1,000.00 nor more
creditors; or has willfully violated a final cease than P10,000.00 and by imprisonment for
and desist order, involving acts or not less than two nor more than ten years.
transactions amounting to fraud or a
dissipation of the assets of the institution. The Banks; Insolvency;
main purpose of the Receiver is to Requirements (1997)
Give the basic requirements to be complied
recommend theDiligence
rehabilitation or liquidation of with by the BSP before the Monetary Board
Placido, (1992)
the bank.a bank depositor, left his checkbook can declare a bank insolvent, order it closed
on his desk at his house. Unknown to him, a and forbid it from doing further business in
visitor at the time, noticing the same, took a SUGGESTED ANSWER:
the Philippines.
check therefrom, filled it up in the amount of Before the Monetary Board can declare a
P3,000.00 and succeeded in encashing the bank insolvent, order it closed and forbid it
check on the same day. Placidos account from doing further business in the
was thereby debited in the same amount. Philippines, the following basic requirements
Discovering the erroneous debit, Placido 1There
must bemust be anwith
complied examination by to
by the BSP, thewit:
demanded that the bank credit him with a of the Department of Supervision or his
like amount. The bank refused on the examiners or agents into the condition of the
ground that Placido was negligent in leaving bank.
his checkbook on his desk so that he could 2The examination discloses that the
not put up the defense of forgery or want of condition of the bank is one of insolvency, or
The Factsunder
authority disclose that even to the naked
the NIL. that its continuance in business would
eye, there were marked differences between involve probable loss to creditors or
Placidos signature and the one in the check depositors.
forged by the visitor. As between Placido and 3The head of said Department shall inform in
the bank, whoANSWER:
should bear the loss? Explain. writing the Monetary Board of such facts.
The bank should bear the loss. A drawee bank 4Upon finding said information or statement
must exercise the highest diligence in to be true, the Monetary Board shall appoint
safeguarding the accounts of its client- a receiver to take charge of the assets and
depositors. The bank is also charged with liabilities of the bank.
genuineness of the signatures of its current 5Within 60 days, the Monetary Board shall
account holders. But what can be more determine and confirm if the bank
striking is that there were marked differences Banks; Restrictions on is Loan
insolvent, and
As public interest requires,
(2002) against
part of the safeguards to
between Placidos signature and the one in order the liquidation of the bank.
the check forged by the visitor. Certainly, banking, the General Banking Law imposes
Placido was not negligent in leaving his limits or restrictions on loans and credit
checkbook in his own desk (PNB v Quimpo accommodations which may be extended by
158 SCRA 582)
Insolvency; Prohibited banks. Identify at least two (2) of these limits
The (2000)
Monetary Board of the BSP closed Urban or restrictions and explain the rationale of
Bank after it encountered crippling financial SUGGESTED
each of them.ANSWER:
difficulties that resulted in a bank run. X, one Any two (2) of the following limits or
of the members of the BOD of the bank, restrictions on loan and credit transactions
attended and stayed throughout the entire which may be extended by banks, as part of
meeting of the Board that was held well in the safeguards against imprudent banking,
advance of the bank run and before news 1
wit:Rules (i.e., Single Borrowers Limit)
had begun to trickle to the business rules are those promulgated by the Bangko
community about the dire financial pit the Sentral ng Pilipinas, upon the authority of
bank had fallen into. Immediately after the Banks;
Section Conservator
35 of the General Bankingvs. Law of
meeting, X caused the preparation and Receiver
2000, (2006)
which regulatebetween the
the total role of of
amount a
issuance of a managers check payable to conservator
loans, and that of a receiver
credit accommodations and of a bank.
himself in the sum of 5 million pesos (2.5%) that
guarantees ANSWER:
may be extended by a bank
The person,
to any Conservator is appointed
partnership, for a period not
equivalent to the amount placed or invested
exceeding one (1) year, to take
corporation or other entity. The rules charge
seek of
to the
in the bank by a business acquaintance. He
now claims that he is keeping the funds in protect a bank from making excessive loans a
assets, liabilities, and the management of
trust for ANSWER:
the owner and that he had to abank or borrower
single a quasi-bank in a state of
by prohibiting it continuing
SUGGESTED inability, or unwillingness
lending beyond a specified ceiling. to maintain a
No. no violation
I do not agree that thereof the
is no General
violation of condition of liquidity deemed adequate to
the statuteAct(RA
amended) Xfor which
violated 2DOSRI Rules These rules promulgated by
protect the interest of depositors and
Sec should
85 when be he
punished. Do preparation
caused the you agree thatand the BSP, upon authority of Section 5 of the
creditors. On the other hand, the Receiver is
issuance of a managers checkof the statute?
has been no violation General Banking Law of 2000, which regulate
appointed to manage a bank or quasi-bank
(3%) the amount of credit accommodations that a
that is unable to pay its liabilities in
bank may extend to its
Mercantile Law Bar Examination Q & A (1990-2006) Page 15 of 103 observed by the depositary.
directors, officers, stockholders and their Any stipulation exempting the depositary
related interests (thus, DOSRI). Generally, from any liability arising from the loss of the
a banks credit accommodations to its thing deposited would be void for being
DOSRI must be in the regular course of contrary to law and public policy. The
business and on terms not less favorable deposit box is located in the bank premises
to the bank than those offered to non- and is under the absolute control of the
3. DOSRINo commercial
borrowers. bank shall make any bank.
loan or discount on the security of shares of Banks; Secrecy of Bank Deposit;
its own capital stock. AMLC
Rudy is(2006)
jobless but is reputed to be a jueteng
operator. He has never been charged or
Banks; Restrictions on Loan convicted of any crime. He maintains several
Pio is the president of(2006)
Western Bank. His bank accounts and has purchased 5 houses
wife applied for a loan with the said bank to and lots for his children from the Luansing
finance an internet cafe. The loan officer told Realty, Inc. Since he does not have any
her that her application will not be approved visible job, the company reported his
because the grant of loans to related purchases to the Anti-Money Laundering
interests of bank directors, officers, and Council (AMLC). Thereafter, AMLC charged
stockholders is prohibited by the General him with violation of the Anti-Money
Banking Law.ANSWER:
Explain whether the loan Laundering Law. Upon request of the AMLC,
Section 36 of the General Banking Law of
officer is correct. (5%) the bank disclosed to it Rudy's bank deposits
2000 does not entirely prohibit directors or 1. Can Rudy
amounting to move to dismiss
P100 Million. the case on
Subsequently, he
officers of the bank, directly or indirectly, the ground that he has no criminal record?
was charged in court for violation of the Anti-
from borrowing from the bank. In this case, (2.5%)
Money Laundering
No. Under Law.
the Anti-Money Laundering Law,
Pio is the president of Western Bank, which
makes him an officer, director and Rudy would be guilty of a "money laundering
stockholder of the said bank. The General crime" committed when the proceeds of an
Banking Law provides for additional "unlawful activity," like jueteng operations,
restrictions to the bank before it can lend to are made to appear as having originated from
its directors or officers. A written approval of legitimate sources. The money laundering
the majority vote of all the directors of the crime is separate from the unlawful activity of
bank, excluding the director concerned, is being a jueteng operator, and requires no
required. Furthermore, such dealings must previous conviction for the unlawful activity
be upon terms not less favorable to the bank (See also Sec. 3, Anti-Money Laundering Act
2. To raise funds for his defense, Rudy sold
of 2001).
than those offered to others (Section 1326,
the houses and lots to a friend. Can Luansing
Central Bank's "Manual of Regulations for
Realty, Inc. be compelled to transfer to the
Banks and Other Financial Intermediaries,
buyer ownership of the houses and lots?
Banks; in Ranioso v. CA, G.R. No. 117416,
MN OP rented a A
and 2000). violation
safety of this
deposit box at Luansing Realty, Inc. is a real estate
provision will cause his or her position
SIBANK. The parties signed a contract of to be company, hence it is not a covered institution
lease with the conditions that: the bank or
vacant and the erring director is under Section 3 of the Anti-Money Laundering
officer subjected of
not a depository to the
the contents
penal provisions of
of the safe Act. Only banking institutions, insurance
the New Central Bank Act.
and has neither the possession nor control of companies, securities dealers and brokers,
the same; the bank assumed no interest in pre-need companies and other entities
said contents and assumes no liability in administering or otherwise dealing in
connection therewith. The safety deposit box currency, commodities or financial
had two keyholes: one for the guard key derivatives are covered institutions. Hence,
which remained with the bank; and the other Luansing Realty, Inc. may not use the Anti-
for the renters' key. The box can be opened Money Laundering Act to refuse to transfer to
disclosing Rudy's
ownership of bank accounts
the houses and to the
only with the use of both keys. The renters AMLC, did the bank violate any law? (2.5%)
deposited certificates of title in the box. But SUGGESTED ANSWER:
later, they discovered that the certificates
SUGGESTED ANSWER: No, the bank did not violate any law. The
The bank is MN
gone. andbased
liable, OP now
on claim for
the decisions of bank being specified as a "covered
damages from SIBANK. Is the bank
the Supreme Court in CA Agro-Industrial liable? institution" under the Anti-Money Laundering
Explain briefly.
Development (5%)
Corp. v. Court of Appeals, 219 SCRA Law, is obliged to report to the AMLC covered
426 (1993) and Sia v. Court of Appeals, 222 SCRA and suspicious transactions, without thereby
24 (1993). In those cases, the Supreme Court violating any law. This is one of the
ruled that the renting out of safety deposit exceptions to the Secrecy of Bank Deposit
boxes is a "special kind of deposit" wherein Act.
the bank is the depositary. In the absence of
any stipulation prescribing the degree of
diligence required, that of a good father of a
family is to be
Mercantile Law Bar Examination Q & A (1990-2006)
4. Supposing the titles of the houses and lots
are in possession of the Luansing Realty,
Inc., is it under obligation to deliver the titles
to Rudy? (2.5%)
Yes, it has an obligation to deliver titles to
Rudy. As Luansing Realty, Inc. is not a
covered institution under Section 3 of the
Anti-Money Laundering Act, it may not
invoke this law to refuse delivery of the titles
to Rudy. Secrecy of Bank Deposit;
Under (2006)
Republic Act No.1405 (The Bank
Secrecy Law), bank deposits are considered
absolutely confidential and may not be
examined, inquired or looked into by any
person, government official, bureau or office.
What are the ANSWER:
exceptions? (5%)
The exceptions to the Bank Secrecy Law are
the following:
1. Special or general examination of a
bank, authorized by the Bangko Sentral ng
Pilipinas' Monetary Board, in connection with
a bank fraud or serious irregularity.
2. Examination by an independent
Auditor, hired by the Bank and for the
Bank's Disclosure with the Depositor's written
exclusive use.
In case of Impeachment.
In cases of Bribery or dereliction of duty by
a Public Officer, upon order of a competent
In cases of money deposited/invested
which, in turn, is the subject of Litigation,
upon order of a competent Court.
4. DOSRI Loans: Loans with their Banks
of Bank Directors, Officers, Stockholders and
related interests.
Loans in excess of 5% of the Bank's
Capital & Surplus
The Borrower waived his right as regards
the Secrecy of Bank Deposits
5. Violation of the Anti-Graft and
Corrupt Practices Act.
6. Coup d' etat Law (RA 6968,
7. BIR Commissioner's authority to verify
Oct 24,1990).
a decedent's Gross Estate and a taxpayer's
request for a compromise agreement due to
incapacity to pay his tax liability.
8. Foreign Currency Deposits by foreign
lenders & investors under PDs 1034.
9. Violations of the Anti-Money
10. When
Laundering the State exercises/invokes its
Police Power.
Mercantile Law Bar Examination Q & A (1990-2006) Page 16 17
Page of 103
of 103
a complaint
of other with
the City
impairment clause. RA 6832, creating a Fiscal
of Manila
Miguels for unlawfully
theory anddisclosing
restrict the
commission to conduct an investigation of information
inquiry only aboutto property
her bankheld account.
by or a) in the
the failed 1989 coup detat and to thename
said suit
of the prosper?
governmentExplain official
your answer.
would make
recommend measures to prevent similar available to persons in government who
attempts to seize power is a valid exercise of illegally acquire property an easy means of
police power. Secrecy of Bank b) evading
Supposing that Gigi
prosecution. is charged
All they have to do with
Socorro (1992)$10,000 from a foreign bank
received unlawfully
would beacquiring
to simply wealthplace the under RA 1379
property in the
although she was entitled only to $1,000.00. andnamethat ofthe fiscal issued
persons other than a subpoena
their spouses duces
In an apparent plan to conceal the tecum
and for the records
children of the bank
(Banco Filipino Savings account
vs. of
erroneously sent amount, she opened a dollar Gigi. May 161
Purisima Gigi scravalidly
576; Secoppose
8 Anti-Graft theLawsaid as
account with her local bank, deposited the Banks; onSecrecy
issuance the195) groundof Bank that the same
amended by BP
$10,000 and issued 4 checks in the amount Deposits
violates the (1995)
law on secrecy of authority
ANSWER: without bank deposits? funds of
of $2,000 and 1 check for $1,000 each a) theThe Secrecy
Explain your answer. inofthe Bank
amounts Deposits
of P500th Actand
payable to different individuals who prohibits,
US$50th subject to its exclusionary
for services he claims he clauses,
deposited the same in their respective dollar anyforperson
the benefitfrom examining, inquiring or He
of the partnership.
The sender
accounts withbank thenlocal
different brought
banks.a civil suit looking into all
deposited thedeposits
P500th ofinwhatever
his personal nature peso
before the RTC for the recovery of the with banksaccount
current or banking institutions
with Prosperity Bank in andthe the
erroneously sent amount. In the course of the Philippines
US$50th which in his by law are
personal foreign declared
trial, the sender presented testimonies of absolutely
savings accountconfidential in nature.
with Eastern Bank.Manosa
bank officials to show that the funds were, in who The partnership
merely overheard instituted an action to
what appeared in be
fact, deposited in a bank by Socorro and paid a vague remark of a Bank employee to a co- to
against Michael, Prosperity, and Eastern
compel MichaelANSWER:to return the subject funds to
out to several persons, who participated in employee and writing the same in his
a) the
The partnership
complaint against Manosalitigationwill not
the concealment and dissipation of the newspaper column isand pending
neither the inquiry nor to
order bothbecause merely
banks to disallow writing a vague
amount that Socorro had erroneously disclosure contemplated by law. any withdrawal
Socorro moved to strike out said testimonies remark
from of hisaaccounts.
Bank employee to a co-employee
received. is not the initial
disclosure contemplated bythe law.court
from the record invoking the law on secrecy At the hearing of the case
of bank deposits. If you were the Judge, anyone
ordered should be liable,
Prosperity it will be
to produce thethe bank of
employee ANSWER:
who disclosed
would you issue an order to strike them out? Michaels peso currentthe information.
account, and Eastern
b) Among the instances excepted from the
Why? ANSWER: to produce the records of his foreign
I will not strike out the testimonies from the coverage of the Secrecy of Bank Deposits
currency savings account.
record. The testimonies of bank officials ActCanare the
court compelcases. Prosperity
Hence Gigiand may not
indicating where the questioned dollar validly oppose the issuance
to disclose the bank deposits of Michael? of a subpoena
accounts were opened in depositing duces tecum
SUGGESTED for the bank records on her.
Yes, as Secrecy
far as the peso of Bank account is concerned.
misappropriated sums must be considered as
The (RA(1991)
Sec 2 of RA 1405 allowsa the
law 6832) creating Commission
disclosure to of
likewise involved in litigation one which is
conduct a Thorough Fact-Finding
bank deposits in case where the money Investigation
among the excepted cases under the Secrecy
of deposited
the Failed Coup
is the detatmatter
subject of Dec 1989,
of litigation.
of Bank Deposits Act (Melon Bank v Magsino
Banks; Secrecy of Bank Recommend
Since the case Measures
filed against to Michael
Preventis aimed the
190 SCRA 633)
Miguel, a (1994)
special customs agent is charged Occurrence
at recovering of Similar Attempts
the amount he At a Violent
withdrew from
before the Ombudsman with having acquired Seizure
the fundsof Powerof theand for Otherwhich
partnership, Purposes,
property out of proportion to his salary, in provides that thedeposited
he allegedly Commission in his may account,
ask the a
violation of the Anti-Graft and Corrupt Monetary
disclosure Board of histo disclose
bank deposits information wouldonbe
Practices Act. The Ombudsman issued a No,
and/or with
proper. grant respect
authority to tothe foreign
examine any currency
subpoena duces tecum to the Banco de Cinco
deposits, Underortheinvestment
Foreign Currency funds, Law, or
commanding its representative to furnish the the exemption
banking transactions to inthethe prohibition
name of and/or against
Ombudsman records of transactions by or in disclosure
utilized by a person,of information
natural or concerning
juridical, under bank
the name of Miguel, his wife and children. A deposits is
investigation written consent
by the Commission, in any of bankthe
or banking Secrecy inof
institution the Bank
Philippines, when
second subpoena was issued expanding the
1998 (20) (1998)
An insurance
the Commission has reasonable company is deluded
ground to
first by including the production of records of
into releasing a check to A
believe that said deposits, trust or investment for P35th to pay
friends of Miguel in said bank and in all its
Miguel moved to quash theoffices,
subpoenas arguing for Treasury
funds, or ANSWER:
banking Bills transactions
(T-bills) whichhave A claimsbeen to
and extension
BENE: Itthe
is suggested that
that they violate Secrecy of Bank be
usedLaw en
in onroute
support on board an armored truck from
naming given full credit) The Secrecyorof in Bankfurtherance
Deposits isofitself the
Law.the above
In addition, he contends that the a government
objectives of the saidbank. The check
coup detat. is delivered the to
merely a statutory enactment, and Does it may,
subpoenas are in the nature of fishing A who
above depositsnot
provision it toviolate
his account the with on
Banks; Secrecy of Bank therefore, be modified, or amended (such as
expedition or general warrants and are Bank of
Secrecy before
Bank the insurance
Deposits (RA company realizes
Deposits (1990)
Manosa, a newspaper columnist, while by providing further exceptions therefrom),
constitutionally impermissible with respect to it is a scam. Upon such realization, the
making a deposit in a bank, overheard a or even repealed, expressly or impliedly, by
private individuals who are not under insurance company files an action against A
pretty bank ANSWER:
SUGGESTED teller informing a coemployee a subsequent law. The Secrecy of Bank
investigation. Is Miguels contention tenable? for recovery of the amount defrauded and
a wellcontention
known publicis notofficial,
hasThe Deposits Act did not amount to a contract
obtains a writ of preliminary attachment. In
a few into hundred
in her property
bank between the depositors and depository
addition to the writ, the Bank is also served a
account andtothat
her where such will
next check property
in all is banks within the meaning of the non-
subpoena to examine the account records of
concealed bounce.
by being Manosa
held by or wrote
this in impairment clause of the Constitution. Even
A. The Bank declines to provide any
information in his newspaper column. Thus, if it did, the police power of the State is
information in response to the writ and
Gigi superior to the non-
moves to quash the subpoena invoking
secrecy of bank
Mercantile Law Bar Examination Q & A (1990-2006)
deposits under RA 1405, as amended. Can
the Bank justifiably invoke RA 1405 and a)
not respond to the writ and b) quash the
subpoena for ANSWER:
examination? (5%)
Yes. Whether the transaction is considered a
sale or money placement does not make the
money subject matter of litigation within
the meaning of Sec 2 of RA 1405 which
prohibits the disclosure or inquiry into bank
deposit except in cases where the money
deposited or invested is the subject matter
of litigation nor will it matter whether the
money was Secrecy of Bank
GP (2000) jueteng lord who is
is a suspected
rumored to be enjoying police and military
protection. The envy of many drug lords who
had not escaped the dragnet of the law, GP
was summoned to a hearing of the
Committee on Racketeering and Other
Syndicated Crimes of the House of
Representatives, which was conducting a
congressional investigation in aid of
legislation on the involvement of police and
military personnel, and possibly even of local
government officials, in the illegal activities of
suspected gambling and drug lords.
Subpoenaed to attend the investigation were
officers of certain identified banks with a
directive to them to bring the records and
documents of bank deposits of individuals
mentioned in the subpoenas, among them
SUGGESTED the banks opposed the production
of the banks records
Yes. The opposition is of deposits
valid. GP isonnotthe
a public
ground that no such inquiry is allowed
official. The investigation does not involve under
the Law on Secrecy of Bank Deposits
of the exceptions to the prohibition against (RA
1405 as amended).
disclosure Is the opposition
of any information of GP
concerning bank
and the banks
deposits undervalid?
the LawExplain.
on Secrecy of Bank
Deposits. The Committee conducting the
investigation is not a competent court or the
Ombudsman authorized under the law to
issue a subpoena for the production of the
bank record involving such disclosure.
Banks; Secrecy of Bank Deposits;
The (2004) of Bank Deposits
Law on Secrecy
provides that all deposits of whatever nature
with banks or banking institutions are
absolutely confidential in nature and may not
be examined, inquired or looked into by any
person, government official, bureau or office.
However, the law provides exceptions in
certain instances. Which of the following may
amongof the exceptions:
2. In cases involving
3. In cases involving BIR
4. In cases of anti-graft and corrupt
5. In cases where the money involved is the
subject of
Mercantile Law Bar Examination Q & A (1990-2006) Page 18 19
Page of 103
of 103
of the
6(F) of
It shall
No. The RTC has no authority to restrain the National
promote Internal
and maintain
RevenuemonetaryCode, thestability
monetary board of the BSP from statutory Commissioner
and convertibility
of Internal
of theRevenue
Peso. can
authority to undertake receivership and inquire into the deposits of a decedent for
ultimate liquidation of a bank. Any opposition theTruth
purposeinof determining
Lending the gross estate
to such an action could be made to the court Act
Dana (1991)
of such decedent. Apart purchased
from this on case,
a 36a BIRmonth
itself where assistance is sought. The action installment
inquiry into bank basis
depositsthe cannot
latest bemodelmade.of the
of the RTC where the proceeding is pending Nissan
Thus, Sentra3Sedan
exception may not caralways
from the
be Jobel Cars
appeal have to be made in the Court of Turning
Inc. Intoaddition
applicable. exception 4, an
to the inquiry into
advertised bankprice,
Appeals. Tender deposits is possible
the latter imposed only in prosecutions
finance for
charges consisting
After many years of shopping in the Metro unexplained
of interests, wealth
feesunder the Anti-Graft
and service charges. andIt did
Manila area, housewife HW has developed Corrupt Practices Act, according
not, however, submit to Dana a written to the
the sound habit of making cash purchases Supreme
statementCourt in the casesforth
setting of Philippine
therein the
only, none on credit. In one shopping trip to National Bank v. Gancayco, 15
information required by the Truth SCRA 91 (1965)
in Lending
Mega Mall, she got the shock of her shopping However,
Banco all other casesand of anti-graft and v.
Nevertheless, Mortgage
the Bank
life for the first time, a stores smart salesgirl Has
Purisima, practices
there been will not warrant
substantial an inquiry
compliance of the
deed 161 of SCRA
sale 576 which(1988).
the parties executed
refused to accept her coins in payment for a intoaforesaid
bank deposits.
Act? Thus, exception 4 may
mentioned that the total amount indicated
purchase worth not more than one hundred notIfalways be applicable.
your answer tosuch Like any question
the foregoing other is in
therein included finance charges.
pesos. HW was paying seventy pesos in 25- exception, it must
the negative, whatbe interpreted
is the effectstrictly.
of the
violation 1, on2the
5, on the other hand, are
centavo coins and twenty five pesos in 10
provided expressly in
In the event of a violationthe Lawofon Secrecy
the Act, whatof
centavo coins. Strange as it may seem, the
Bank Depositors. They are
remedies may be availed of by Dana?available to
salesgirl told HW that her coins were not
SUGGESTED ANSWER: depositors at all times.
No. The tender. Do you
salesgirls agree with that
understanding the coins Banks; Secrecy of Bank Deposits;
salesgirl in respect of her understanding of
are not legal tender is not correct. Coins are Garnishment
The Law on Secrecy (2001) of Bank Deposits,
legal tender? Explain (2%)
legal tender in amounts not exceeding fifty otherwise known as RA 1405, is intended to
pesos for denominations from twenty five encourage people to deposit their money in
centavos and above, and in amounts not banking institutions and also to discourage
exceeding twenty pesos for denominations private hoarding so that the same may be
PDIC Law vs.and
ten centavos Secrecy
less. of Bank properly utilized by banks to assist in the
An employee Actof(1997)
a large manufacturing firm economic development of the country. Is a
earns a salary which is just a bit more than notice of garnishment served on a bank at
what he needs for a comfortable living. He is the instance of a creditor of a depositor
thus able to still maintain a P10,000 savings SUGGESTED ANSWER:
covered by the said law? State the reason(s)
account, a P20,000 checking account, a No. The notice of garnishment served on a
for your answer. (5%)
P30,000 money market placement and a bank at the instance of a creditor is not
P40,000 trust fund in a medium-size covered by the Law on Secrecy of Bank
by the PDIC. b) State which of the above
commercial bank. a) State which of the four Deposits. Garnishment is just a part of the
accounts are covered
accounts are deemed by insured process of execution. The moment a notice of
the Law on Secrecy of Bank garnishment is served on a bank and there
SUGGESTED ANSWER: exists a deposit by the judgment debtor, the
a) The P10th savings account and the P20thbank is directly accountable to the sheriff, for
account are deemed insured by the PDIC. b)
checking the benefit of the judgment creditor, for the
The P10th savings account and the P20th whole amount of the deposit. In such event,
account are covered by the Law on Secrecy of
checking the amount of the deposit becomes, in effect,
Bank BSP; Receivership;
a subject of the litigation.
Family Bank was (1992)
placed under statutory
Responsibilities & Objectives receivership and subsequently ordered
of BSP
What (1998)
are the responsibilities and primary liquidated by the Central Bank (CB) due to
objectives of the BSP? (5%) fraud and irregularities in its lending
SUGGESTED ANSWER: operations which rendered it insolvent.
The BSP shall provide policy directions in the Judicial proceedings for liquidation were
areas of money, banking and credit. It shall thereafter commenced by the CB before the
have supervision over the operations of RTC. Family Bank opposed the petition.
banks and exercise such regulatory powers Shortly thereafter, Family Bank filed in the
as provided in the Central Bank Act and same court a special civil action against the
other pertinent laws over the operations of CB seeking to enjoin and dismiss the
finance companies and non-bank financial liquidation proceeding on the ground of grave
litigation. Explain
institutions your answer
performing or
quasi-banking abuse of discretion by the CB. The court
choice briefly.such
functions, (5%)as quasi-banks and poised to: 1) restrain the CB from closing
SUGGESTEDprimary objective of
institutions performing the BSP
similar is to
functions. Family Bank; and 2) authorize Family Bank to
maintain price stability conducive to a SUGGESTED ANSWER:
withdraw money from its deposits during the
balanced and sustainable growth
pendency of the case. If you were the Judge,
would you issue such orders? Why?
Mercantile Law Bar Examination Q & A (1990-2006) Page 20 of 103 their loan portfolios. Company X
without more, proceeds to arrange the was faced with the dismal choice of either
delivery and installation of your new home suspending its operations or selling its
theater system. You know you will receive a business. It chose the latter. Having struck a
statement on your credit card purchases deal with Company Z, a more viable entity
from the bank containing an option to pay engaged in the same business, Company X
only a minimum amount, which is usually sold its entire business to the former without
1/36 of the total price you were charged for much fanfare or any form of publicity. In fact,
your purchase. Did Embassy Appliances evidence exists that the transaction was
SUGGESTED ANSWER: furtively entered into to avoid the prying
comply with the provisions of the Truth in
There is no need for Embassy Appliances to eyes of Company Xs creditors. The creditor
Lending Act (RA 3765)?
comply with the Truth in Lending Act. The banks and other financial institutions sued
transaction is not a sale on installment basis. SUGGESTED ANSWER:
Company X for violation of the Bulk Sales
Embassy Appliances is a seller on cash basis. Company X violated the Bulk Sales Law when
Law. Decide. (5%)
It is the credit card company which allows it sold its entire business to Company Z
the buyer to enjoy the privilege of paying the furtively to avoid the prying eyes of its
price on installment basis. creditors. Its manufactured goods are sold
wholesale to distributors and dealers. The
Bulk Sales Law sale of all or substantially all of its stocks, not
in the ordinary course of business,
Bulk Sales Law; Covered
constitutes bulk sale. The transaction being a
Stanrus (1994)
Inc a department store with outlets in
bulk sale, entering into such transaction
Makati, Mandaluyong, and Quezon City, is SUGGESTED ANSWER:
without complying with the requirements of
contemplating to refurbish and renovate its Bulk Sales Law; Covered
thea)Bulk There
Sales was
Law, no substantial
Company X violated compliance
Makati store in order to introduce the most Transactions
with to
the a (2006)
Truth of execution
in Lending issued
Act. byThethe law
modern and state of the art equipment in Regional
provides Trial Court
that theincreditor
"Expressmust Bankmake v. Dona full
merchandise display. To carry out its plan, it Rubio," the sheriff
disclosure of the levied andlost.
credit sold The at public
intends to sell ALL of the existing fixtures and auction
that 8the photocopying
total amount machines due ofincludes
Don the
equipment (display cases, wall decorations, Rubio. Is the and
principal sheriff's
the sale covered
financial by the without
furniture, counters, etc.) to Crossroads SUGGESTED
Bulk Sales ANSWER:
specifying Law? the(5%)
amounts due on each portion
Department Store. Thereafter, it will buy and No.thereof
The sale by sheriff atbepublicinsufficient
would sale is not a and
install new fixtures and equipment and saleb) by a merchant.
unacceptable. violation Section
of the 8 of
Truth the Bulk
in Lending Act
continue operations. Crossroads wants to Sales Law itself provides that it
will not adversely affect the validity of the has no
know from you as counsel: 1) Whether the application
contract to executors, administrators,
creditors of Stanrus. receivers,
c) Itassignees
would allow in insolvency,
Dana to refuse or public
intended sale is bulk sale. 2) How can it
protect itself from future all
claims of and officers, acting under
of financial charges process.
or, if The Bulk Sales
already paid, to
1) Yes. The sale involves fixtures
Law only applies
recover to the sale
the same. Danaor mayencumbrance
also initiate
equipment, not in the ordinary course of
of acriminal
merchant of goods,
charges against merchandise
the creditor. or
trade and the regular prosecution of business
commodity done "in bulk" as defined by the
of Stanrus, Inc. (Sec 2 Act 3952, as amended) Bulk Sales Law;
Law itself.
In c) annual
the (Per Atty (1993) Jomby
meeting Paras
of XYZ if u read the
2) Crossroads should require from Stanrus theprovisions
stockholders closely)
unanimously Underadopted the Truth
a in
Inc. submission of a written waiver of the Bulk Lendingproposed
resolution Act, said by financial
the BOD charges
to sell are valid,
Sales Law by the creditors as shown by and Dana all
substantially maythenot refuse
fixtures and payment
equipment thereof.
verified statements or to comply with the usedOnlyin and criminal
about its charges
business. may be initiated
The President
requirements of the Bulk Sales Law, that is, against
of the the creditor.
Corporation approached you and asked
the seller must notify his creditors of the for Truth in Lending
legal assistance to effect the sale. 1) What
terms and conditions of the sale, and also, valid? 2)
steps What
(2000) aretakethe so
you two instances
that salewhen
the home may theater
before receiving from the vendee any part of the sale,
be components transfer, that are designed and
the purchase price, deliver to such vendee a mortgage or as
customized assignment
entertainmentof stockcenters
of goods,for
written sworn statement of the names and merchandise,
consumers provision,
within or materials otherwise
the medium-to-high price
addresses of all his creditors together with in the ordinary
bracket. Most, if course
not all,of trade
of these and the regular
Bulk Sales of
Law; Covered due to each (Sec prosecution
the amount
(2000) are sold on ofinstallment
the businessbasis, of theusually
vendor are by
2 Act 3952, amended)in the business of
X, engaged deemed
means of to be acards
credit sale or transfer
allowing a in
maximum of
manufacturing car parts and accessories, bulk?
36 equal monthly of payments. Preferred
operates a factory with equipment, 1) The requirements the Bulk Sales Law credit
machinery and tools for this purpose. The cards of this type are those issued by banks,
must be complied with. The seller delivers to
thewhich regularlya list hold
of hismall wide and sales
manufactured goods are sold wholesale to purchaser creditors theblitzes
distributors and dealers throughout the participated in by appliance retailers like
purchaser in turn notifies such creditors of
Philippines. Company X was among the You aretime a buyer of a
sale at a stipulated in
business entities adversely hit by the 1997 home theater center at Embassy Appliances.
Asian business crisis. Its sales dropped with The salesclerk who is attending to you simply
the decline in car sales and its operating swipes your credit card on the electronic
costs escalated, while its creditor banks and approval machine (which momentarily prints
other financial institutions tightened out your charge slip since you have unlimited
credit), tears the slip from the machine,
hands the same over to you for your
signature, and
Mercantile Law Bar Examination Q & A (1990-2006) Page21 of 103 indebtedness due or owing, on
2) If the sale and transfer is made a) by the account of the goods, fixtures or business
vendor, mortgagor, transferor or assignor subject matter of the bulk sale.
who produces and delivers a written waiver
of the provisions of the Bulk Sales Law from Bulk Sales Law; Obligation of the
his creditors as shown by verified statement; Vendor
A (2001) engaged in the sale of a
is a merchant
and b) by a vendor, mortgagor, transferor or variety of goods and merchandise. Because
assignor who is an executor, administrator, of the economic crisis, he incurred
receiver, assignee in insolvency, or public indebtedness to X, Y and Z. Thereafter, A
officer acting under judicial process, the sale sold to B all the stock of goods and
or transfer is not covered by the Bulk Sales in bulk of his
merchandise. goodssteps
a) What to B. should
(2%). A
Law. Sales Law; Obligation of the SUGGESTED ANSWER:
undertake to effect a valid sale
House Pizza (Pizza) is the owner and A must prepare an affidavit stating the
operator of a nationwide chain of pizza names of all his creditors, in this case, X, Y,
outlets. House of Liquor (Liquor) is a retailer and Z, their addresses, the amount of their
of all kinds of liquor. credits and their maturity. A should give the
House of Foods (Foods) has offered to affidavit to B who, in turn, should furnish a
purchase all of the outlets, equipment, copy to each creditor and notify the creditors
fixtures and furniture of Pizza. Foods also that there is a proposed bulk sale in order to
offered to purchase from Liquor all of its enable the latter to protect their interests.
moderately priced stock constituting 50% of b) Suppose A submitted a false statement on the
its total inventory. schedule of his creditors. What is the effect of
Both Pizza and Liquor have creditors. What false statement as to Vendee B.
legal requirements must Pizza and Liquor (2%) ANSWER:
comply with in order for Foods to If the vendee does not have knowledge of
the falsity of the schedule, the sale is valid.
consummate the transactions? Discuss fully.
SUGGESTED ANSWER: However, if the vendee has knowledge of
Pizza and Liquor must prepare an affidavit such falsity, the sale is void because he is in
stating the names of all their creditors, their bad faith.
addresses, the amounts of their credits and c) What is the right of creditors X, Y, and Z if A
their respective maturities. Pizza and Liquor to comply with the procedure/steps required by
must submit said affidavit to Foods which, in under question letter (a) hereof?
turn, should notify the creditors about the (1%) ANSWER:
ALTERNATIVE The recourse of X, Y, and Z is to question the
transaction ANSWER:
which is about to be concluded
As validity of the sale from A to B so as to
PizzaasandLiquor concerned, it must
prepare an affidavit stating the names of all recover the goods and merchandise to
its creditors, their addresses, the amounts of satisfy their credits.
their credits and their respective maturities.
It must submit said affidavit to its buyer, who Consumer Protection Law
in turn, should notify the creditors about the
transaction which is about to be concluded Metric System
with as
his far as Pizza is concerned, it is not
covered by the Bulk Sales Law. So Foods can Law (1994)
Angelene is a customer of Meralco Electric
consummate the transaction without doing Company (MECO). Because of the abrupt rise
anything. in electricity rates, Angelene complained
Bulk Sales Law; Obligation of the with MECO insisting that she should be
The sole (1997)
proprietor of a medium-size grocery charged the former rates. However,
shop, engaged in both wholesale and retail Angelene did not tender any payment.
When MECOs employees served the first 48-
transactions, sells the entire business lock,
hour notice of disconnection, Angelene
stock and barrel because of his plan to
protested. MECO, however, did not implement
emigrate abroad with his family. Is he
the 48-hour notice of disconnection. Instead,
covered by the provisions of the Bulk Sales
its employees examined Angelenes electric
Law? In the affirmative, what must be done
SUGGESTED ANSWER: meter, changed the same, and installed
by the parties so as to comply with the law?
Yes. This is a sale of the stock of goods, another. Still, Angelene, made no tender of
fixtures and entire business, not in the payment.
ordinary course of business or trade of the MECO served a second 48-hour notice of
vendor. Before receiving from the vendee disconnection on June 22, 1984. It gave
any part of the purchase price, the vendor Angelene until 5 pm of June 25, 1984 within
must deliver to such vendee a written which to pay. As no payment had been
statement, duly sworn, of the names and made, MECO cut Angelenes electric service
addresses of all creditors to whom said on June 28, 1984. Angelene contends that
vendor may be indebted, together with the the 48-hour written notice of disconnection
amount of rule cannot be invoked by MECO
Mercantile Law Bar Examination Q & A (1990-2006) Page22 of 103 Gregorio of 500 bags, which
when there is a bona fide and just dispute as Gregorio accepted, is an entirely new
to the amount due as her electric transaction. (Yao Ka Sin Trading v CA GR 53820
consumption rate. Is Angelenes contention June 15, 1992 209s763)
valid? ANSWER:
No. Angelenes only legal recourse in this BOD;
case was to pay the electric bill under Compensation
After many difficult years, which called for
protest. Her failure to do so justified MECO to (1991)
sacrifices on the part of the companys
cut the electric service (Ceniza v CA 218 S 290) directors, ABC Manufacturing Inc was finally
earning substantial profits. Thus, the
President proposed to the BOD that the
Corporation Law directors be paid a bonus equivalent to 15%
of the companys net income before tax
BOD: Election of Aliens as during the preceding year. The Presidents
A (2005)joined a corporation which
Korean national proposal was unanimously approved by the
is engaged in the furniture manufacturing BOD. A stockholder of ABC questioned the
Yes, the stockholder as a valid and legal
business. He was elected to the Board of bonus. Does he have grounds to object?
ground to object to the payment to the
Directors. To complement its furniture directors of a bonus equivalent to 15% of the
manufacturing business, the corporation companys net income. The law provides
also engaged in the logging business. With that the total annual compensation of the
the additional logging activity, can the directors, in the preceding year, cannot
Korean national still be a member of the exceed 10% of the companys net income
Yes, just as long as sixty percent (60%) of the BOD; Conflict
Board of Directors? Explain. (3%)
Board of Directors are Filipinos. Corporations before income tax (Secof30 Corp Code).
ABC (1994)
Pigger Inc is engaged in raising and
that are sixty percent (60%) owned by
selling hogs in the local market. Mr. De Dios,
Filipinos can engage in the business of
one of its directors while traveling abroad,
exploration, development and utilization of
met a leather goods manufacturer who was
natural resources. (Art. XII, Sec. 2, 1987
interested in buying pig skins from the
Constitution) The election of aliens as
Philippines. Mr De Dios set up a separate
members of the Board Of Directors engaging
company and started exporting pig skins to
in partially-nationalized activities is allowed
his foreign contact but the pig skins exported
in proportion to their allowable participation
were not sourced from ABC. His fellow
or share in the capital of such entities. (Sec.
directors in ABC complained that he should
2-A, Anti-Dummy Law) Nothing in the facts SUGGESTED ANSWER:
have given this business to ABC. How would
shows that more than forty percent (40%) of I would decide in favor of Mr De Dios. ABC is
BOD; Capacity of you decide on this matter?
the Board of Directors are foreigners. engaged in raising and selling hogs in the
Rodman, (1996)
President of TF Co, wrote a letter local market. The company that Mr De Dios
to Gregorio, offering to sell to the latter 5,000 had set up was to engage, as it did, in the
bags of fertilizer at P100 per bag. Gregorio export of pigs skins. There is thus no conflict
signed his conformity to the letter-offer, and of interest between Mr. De Dios and ABC
paid a down-payment of P50th. A few days Pigger Inc so as to make the case fall within
later, the Corporate Secretary of TF informed Observation:
the conflict The situation
of interest term conflict of
under the
Gregorio of the decision of their BOD not to interest is
law (Sec 34 Corp Code)susceptible to varied views
ratify the letter offer. However, since Gregorio and interpretations.
had already paid the down-payment, TF BOD; Interlocking
delivered 500 bags of fertilizer which Gregorio Directors
Chito (1995)
Santos is a director of both Platinum
accepted. TF made it clear that the delivery Corporation and Kwik Silver Corporation. He
should be considered an entirely new owns 1% of the outstanding capital stock of
transaction. Thereafter, Gregorio sought Platinum and 40T of Kwik. Platinum plans to
enforcement of the letter-offer. Is there a enter into a contract with Kwik that will make
binding contract for thecontract
5,000 bags of 5,000 both companies earn very substantial profits.
No, there is no binding for the
fertilizer? Explain. The contract is presented at the respective
bags of fertilizer. First, the facts do not 1. In order that the contract and
will not be
board meetings of Platinum Kwik.
indicate that Rodman, the President of TF Co, voidable, what conditions will have to be
was authorized by the BOD to enter into the complied with? Explain.
said contract or that he was empowered to do 2. If these conditions are not met, how may
so under some provision of the by-laws of TF this contract be ratified? Explain.
Co. The facts do not also indicate that
Rodman has been clothed with the apparent
power to execute the contract or agreements
similar to it. Second, TF Co has specifically
informed Gregorio that it has not ratified the
contract for the sale of 5,000 bags of fertilizer
and that the delivery to
Mercantile Law Bar Examination Q & A (1990-2006) Page 23 of 103 The BOD of X Co, acting on a
a) his presence as director at the standing authority of the stockholders to
meeting is not necessary to constitute a amend the by-laws, amended its by-laws so
quorum for such meeting; as to disqualify any of its stockholders who is
b) his vote is not necessary for the also a stockholder and director of a
approval of the contract; and c) the competitor from being elected to its BOD.
contract is fair and reasonable under the
circumstances. Y, a stockholder holding sufficient assets to
assure him of a seat in the BOD, filed a
At the meeting of the BOD of Kwik to approve the petition with the SEC for a declaration of
contract, Chito would have to make sure that nullity of the amended by-laws. He alleged
- a) there is no fraud involved; and b) the among other things that as a stockholder, he
contract is fair and reasonable under the had acquired rights inherent in stock
circumstances. ownership such as the right to vote and be
voted upon in the election of directors. Is the
SUGGESTED ANSWER: No. There is no vested right of a stockholder
2. If the conditions relating to the quorum stockholders petition tenable? (5%)
to be elected as director. When a person
and required number of votes are not met, buys stock in a corporation he does so with
the contract must be ratified by the vote of the knowledge that its affairs are dominated
stockholders representing at least 2/3 of the by a majority of the stockholders. To this
outstanding capital stock in a meeting called extent, the stockholder parted with his
for the purpose. Furthermore, the adverse personal right to regulate the disposition of
interest of Chito in the contract must be his property which he invested in the capital
disclosed and the contract is fair and stock of the corporation and surrendered it
BOD; Interlocking
reasonable. (Secs. 32 and 33, BP 68) to the will of the majority of his fellow
Leonardo the Chairman and President, Corporations have the power to make by-
incorporators or stockholders.
while Raphael is a Director of NT Corporation. laws declaring a person employed in the
On one occasion, NT Co, represented by service of a rival company to be ineligible for
Leonardo and A Ent, a single proprietorship the Corporations BOD. An amendment
owned by Raphael, entered into a dealership which renders a director ineligible, or if
agreement whereby NT Co appointed A Ent elected, subjects him to removal, if he is also
as exclusive distributor of its products in a director in a corporation whose business is
Northern Luzon. Is the dealership agreement in competition with or is antagonistic to the
The dealership agreement is voidable at the By-Laws; Validity; limiting
valid? Explain. other corporation is valid.
option of NT Co inasmuch as the facts do not qualifications of BOD members
indicate that the same was approved by the At the annual stockholders meeting of MS
BOD of NT Co before it was signed or, Corporation, the stockholders unanimously
assuming such approval, that it was passed a resolution authorizing the Board of
approved under the following conditions: 1) Directors to amend the corporate by-laws so
meeting of
of Raphael,
the BOD at
of A as to disqualify any stockholder who is also a
Ent, agreement was approved was not
necessary to constitute a quorum for director or stockholder of a competing
2) That
suchthe vote of Raphael was not
meeting; business from being elected to the Board of
necessary for the approval of the Directors of MS Corporation. The by-laws
agreement; 3) That the agreement is fair were accordingly amended. GK, a stockholder
and reasonable under the circumstances of MS Corporation and a majority stockholder
(Sec 32 Corp ANSWER:
Code) of a competitor, sought election to the Board
The dealership agreement is valid upon the of Directors of MS Corporation. His
assumption that the same was approved by nomination was denied on the ground that he
the BOD of NT Co before it was signed and was ineligible to run for the position. Seeking
that such approval was made under the a nullification of the offending disqualification
following conditions: 1) That the presence of provision,
The provision GK consults
in theyouamended
about its by-laws
in the the
Raphael, meeting
ownerofofthe BOD at which the
A Ent, under the Corporation Code of the Phils. What
disqualifying any stockholder who is also a
agreement was approved was not would your legal advice be? (3%)
director or stockholder of a competing
necessary to constitute a quorum for
2) That business from being elected to the Board of
suchthe vote of Raphael was not
necessary for the approval of the Directors of MS Corp is valid. The corporation
agreement; 3) That the agreement is fair is empowered to adopt a code of by-laws for
and reasonable under the circumstances its government
SUGGESTED ANSWER: not inconsistent with the Corp
(Sec 32 Corp Code) 1. At the meetingdisqualifying
Code. Such of the BOD of provision
Platinumisto not
By-Laws; Validity; limiting inconsistent with the Corp Code.
approve the contract, Chito would have to
By-Laws; Validity; limiting
qualifications of BOD members make sure that
qualifications of BOD members
Mercantile Law Bar Examination Q & A (1990-2006) Page 24 of 103 which to invest the funds of
Is a by-law provision of X Corporation the corporation. Robert wants the deadlock
rendering ineligible or if elected, subject to broken.
removal, a director if he is also a director in a 1. What are the remedies available to Robert
corporation whose business is in competition under the Corp code to break the
with or is antagonistic to said corporation deadlock? Explain.
valid and legal? State your reasons. (5%). 2. Are there any remedies to prevent the
Yes, the by-law provision is valid. It is the paralyzation of the business available to
right of a corporation to protect itself against Robert under PD 902-A while the petition
possible harm and prejudice that may be SUGGESTED
to break ANSWER:
the deadlock is pending
caused by its competitors. The position of 1. Robert can petition the SEC to arbitrate
litigation? Explain.
director is highly sensitive and confidential. the dispute, with such powers as
To say the least, to allow a person, who is a provided in Sec 104 of the Corp Code.
director in a corporation whose business is in 2. The SEC can appoint a rehabilitation
competition with or is antagonistic to X receiver or a management committee.
Corporation, to become also a director in X
Corporation would be harboring a conflict of
interest which is harmful to the latter
By-Laws; Validity; limiting
(Gokongwei Jr v SEC 89 S 336 (1979); 97 S 78
qualifications of BOD members
To prevent the entry of Marlo Enriquez,
whom it considered as one antagonistic to its
interests, into its Board of Directors, Bayan
Corporation amended its articles of
incorporation and by-laws to add certain
qualifications of stockholders to be elected
as members of its Board of Directors. When
presented for approval at a meeting of its
stockholders duly called for the purpose, the
amendments were overwhelmingly ratified.
Marlo Enriquez brought suits against Bayan
Corporation to question the amendments.
(per Dondee) The SC reiterated in the case of
Would the action
SMC vs. SEC decidedprosper? Why?
in April 11, (4%)
1979, that it
is recognized by all authorities that 'every
corporation has the inherent power to adopt
by-laws 'for its internal government, and to
regulate the conduct and prescribe the rights
and duties of its members towards itself and
among themselves in reference to the
management of its affairs.'" At common law,
the rule was "that the power to make and
adopt bylaws was inherent in every
corporation as one of its necessary and
inseparable legal incidents. And it is settled
throughout the United States that in the
absence of positive legislative provisions
limiting it, every private corporation has this
inherent power as one of its necessary and
inseparable legal incidents, independent of
Closespecific enabling provision in its charter
or in general
Robert, Rey (1995)law, such power
and Ben executed a joint of self-
government being essential to enable
agreement to form a close corporation under the
corporation to accomplish the purposes
the Corp Code the outstanding capital stock of its
of which the three of them would equally
own. They also provided therein that any
corporate act would need the vote of 70% of
the outstanding capital stock. The terms of
the agreement were accordingly
implemented and the corresponding close
corporation was incorporated. After 3 years,
Robert, Rey and Ben could not agree on the
business in
Mercantile Law Bar Examination Q & A (1990-2006) Page 25 of 103 Jennifer and Gabriel owned the
Here, limiting the price to be paid, when the controlling stocks in MFF Co and CLO Inc,
right of first refusal is exercised, to not more both family corporations. Due to serious
than 25% par value, without any qualification disagreements, Jennifer assigned all her
whatsoever, is not in the articles. It is merely shares in MFF to Gabriel, while Gabriel
stated in the By-laws. Therefore such assigned all his shares in CLO to Jennifer.
limitation shall not be binding on the Subsequently, Jennifer and CLO filed a
purchaser. (GoSock & Sons & Sy Gui Huat Inc v complaint against Gabriel and MFF in the
IAC 19 Feb 87 Min Res) Intra- SEC seeking to recover the corporate records
Because (1994)
of disagreement with the BOD and a and funds of CLO which Gabriel allegedly
threat by the BOD to expel her for refused to turn over, and which remained in
misconduct and inefficiency, Carissa offered SUGGESTED ANSWER:
the offices of MFF. Is there an intra-corporate
in writing to resign as President and member Yes, there is an intra-corporate controversy in
controversy in this case?
of the BOD, and to sell to the company all her this case. The fact that, when the complaint
shares therein for P300,000.00 Her offer to against Gabriel and MFF was filed with the
resign was effective as soon as my shares SEC (per 2006, RTCs Jurisdiction), Jennifer
are fully paid. At its meeting, the BOD Closed
and CLOCorporation;
were no longer Restriction; stockholders of MFF
accepted Carissas resignation, approved her Transfer
did not of shares
divest the SEC (1994) (per 2006, RTCs
offer to sell back her shares of stock to the Rafael inherited
Jurisdiction) of itsfrom his uncle
jurisdiction over the 10,000
company, and promised to buy the stocks on shares of Sta. Ana
inasmuch as Jennifer was a former Corporation, a close
a staggered basis. Carissa was informed of corporation.
stockholder The of shares
MFF andhave a par value arose
the controversy of
the BOD Resolution in a letter-agreement to P10.00 per share. Rafael notified
out of this relation. (SEC v CA GR 93832 Aug 23 Sta. Ana
thatControversy; Intra-
which she affixed her consent. The 91;he was selling
201s124) his shares at P70.00 per
Corporate is an (2006)
share. There being no takers controversy?
What intra-corporate among the
Companys new President singed the SUGGESTED ANSWER:
Carissa wants to sue the Company to collect (8%)
stockholders, Rafael sold the same to his
promissory note. After payment P100,000 the An intra-corporate controversy is a conflict
the balance. If you were retained by Carissa cousin Vicente (who is not a stockholder) for
company defaulted in paying the balance of The between
Corporate stockholders,
Secretary members refused toortransfer partners
as her lawyer, where will you file the suit? A) P700,000.
SUGGESTED ANSWER: and the corporation, association
the shares in Vicentes name in the corporate or
Labor Arbiter; b) RTC; or c) SEC?
The RTC has jurisdiction over this case which partnership
books because regarding Alberto, the regulation
one of of the the
involves intra-corporate controversy. As of corporation. The controversy
stockholders, opposed the transfer on the must arise out
2006, the applicable rule is that there is a ground that the same violated the by-laws.of
of intra-corporate or partnership relations
TRANSFERRED JURISDICTION under Sec. 5.2 the parties;
Alberto offeredortobetween buy thesuch sharescorporation,
at P12.50
of the SRC, the Commissions jurisdiction perpartnership
share, as fixed or association
by the by-laws and theorState a total
over all cases enumerated under PD 902-A insofar
price ofthe as it concerns
P125,000 of Sta.
only. their
provides that
sec. 5 has been transferred to the Courts of thefranchises.
right of first It is further
refusal canrequired that theat
be exercised
general jurisdiction or the appropriate dispute
a price notbeexceeding
intrinsically connected
25% more than with the
Regional Trial Court. Intra- parregulation
value ofof such the corporation
shares, the Articles of
In 1970, Magno(1996)joined AMD Co as a Junior Incorporation
Distributing simply
Corp., etandal. provides
v.Exchange that the
Court of Appeals, et al,
Is the Securities
Accountant. He steadily rose from the ranks stockholders
G.R. No. 149351, of Marchrecord17, 2004;shall
Intestate have
Commission the venue for actions
until he became AMDs Executive VP. of Alexander
preferential rightT.Tyv. Court of Appeals,
to purchase said G.R. No.It
involving intra-corporate controversies?
Subsequently, however because of his Is Rafael
is silent
to by 2001).
ANSWER: the pricing proviso under
involvement in certain anomalies, the AMD theNo,
pursuant of Sta. Ana Corporation?
to Subsection 5.2 of the
BOD considered him resigned from the SUGGESTED
Securities ANSWER:
Regulation Code, the quasi-judicial
company due to loss of confidence. Yes. In a closeofcorporation,
jurisdiction the Securities theand restriction
Exchange as
Aggrieved, Magno filed a complaint in the to Commission
the transfer to ofhear shares has to
corporate cases, be stated/
SEC questioning the validity of his annotated
the Articles controversies,
of Incorporation, under
termination, and seeking reinstatement to his theSection
By-Laws 5 of Pres. Decree No. of
and the certificate stock.has
902-A, Thisbeen
former position, with backwages, vacation serves as notice
expressly to the to
transferred person dealing with
the designated
and sick leave benefits, 13th month pay and such sharesTrial
Regional likeCourt.Rafael in this tocase.
Pursuant a With
such notice, ANSWER:
he is bound by the pricing
Christmas bonus, plus moral and exemplary memorandum circularby issued by the proviso
in theis By-laws.
not bound the pricing
damages, attorneys fees and costs. AMD Court,
under theonly particularly
By-laws of Sta designated
Ana Corporation.RTC
filed a motion to dismiss, arguing that the special
Under the commercial
corporation courts law, the in each judicialon
SEC has no jurisdiction over cases of illegal
right have originalshares
to transfer and exclusive
must appear jurisdiction
dismissal, and has no power to award over such cases (See Intestate Estate of
As of 2006, the applicable rule is that there is theControversy;
articles of incorporation
Intra-corporate; and in the by-
damages. Should the motion to dismiss be Alexander T.stockholder
a TRANSFERRED JURISDICTION under Sec. laws aswas wella
Juan as the ofcertificate
X Co. He G.R.
of No.
owned a
granted? Explain. 112872, April 19, 2001).
5.2 of the SRC, the Commissions jurisdiction otherwise,
total of 500 the shares
same shall evidencednot be bybinding
Cert of on
over all cases enumerated under PD 902-A anyStock
No 1001. thereof He sold in good faith. Moreover
the shares to Pedro.
sec. 5 has been transferred to the Courts of theAfter
gettingshall paid,not Juanbeindorsed
more onerous and than
general jurisdiction or the appropriate granting
delivered thesaid existing
Certificate stockholders
of Stock Noor1001 theto
Pedro. The the option to
following day,purchase
Juan went theto shares
Controversy; Intra- of offices
the transferring stockholder with that such
of the corporation and claimed
Corporate (1996) reasonable term or period stated therein.
his Certificate of Stock No 1001 was lost and
that, despite diligent efforts, the certificate
Mercantile Law Bar Examination Q & A (1990-2006) Page 26 of 103 stock may include labor
not be located. The formalities prescribed by performed for or services actually rendered
law for the replacement of the lost to the corporation.
certificate were complied with. Eventually X
Co issued in substitution of the lost Corporation: Right of Repurchase of
certificate, Cert of Stock No 2002. Juan Shares; Trust Fund Doctrine (2005)
forthwith transferred for valuable Under what conditions may a stock
consideration the new certificate to Jose who corporation acquire its own shares? (2%)
knew nothing of the previous sale to Pedro. SUGGESTED ANSWER:
In time, the corporation was confronted with In line with the trust fund doctrine that
the conflicting claims of Jose and Pedro. The generally renders it unlawful for the
controversy between Pedro and Jose,
BOD of X Co invited you to enlighten them on should thecorporation to return assets to the
matter be submitted to the SEC or to
these questions; viz: a) If a suit were to bethe stockholders
regular representing capital, a
courts? b) Between Jose and Pedro,
initiated in order to resolve the whom corporation may acquire its own shares only
should the when there exists in the books unrestricted
corporation so recognize as the rightful retained earnings to cover the repurchase of
stockholder? 1ELIMINATE
shares. The fractional
purpose shares
of thearising out of of
How would you respond to the above stock
must be a legitimate business
queries? ANSWER:
purpose of or
corporation, an indebtedness
such as to:
a) The matter should be submitted to the to the corporation arising out of unpaid
regular courts specifically in the Regional subscription in a delinquency sale;
Trial Court where the principal office of the 3to PURCHASE delinquent shares sold during
corporation is located. The controversy the sale; and
between Pedro and Jose is not an intra- 4to PAY dissenting or withdrawing
corporate controversy. stockholders entitled to such payment under
b) If there is no over-issuance of shares the Corporation Code. (Sees. 41 and 82,
resulting from the two-transactions of Juan, Corporation Code)
the corporation should recognize both Pedro
and Jose as rightful stockholders. This is
without prejudice to the right of the
corporation to claim against Juan for the
value of the shares which Juan sold to Jose.
Corporation Sole;
Definition (2004) sole?
What is a corporation
Section 110 of the Corporation Code defines
a "corporation sole" as one formed for the
purpose of administering and managing, as
trustee, the affairs, property and
temporalities of any religious denomination,
sect or church. It is formed by the chief
archbishop, bishop, priest, minister, rabbi or
other presiding elder of such religious
denomination, Issuance of shares of
sect or church.
stock to pay for the services (2005)
Janice rendered some consultancy work for
XYZ Corporation. Her compensation included
shares of stock therein. Can XYZ Corporation
issue shares of stock to pay for the services
of Janice as its consultant? Discuss your
answer. (2%)
Yes, provided the approval of stockholders
representing two-thirds (2/3) of the
outstanding capital stock is obtained.
Although the facts indicate that the
consultancy work has already been
"rendered" constituting "previously contracted
debt," under Section 39 of the Corporation
Code, the pre-emptive rights of existing
stockholders need not be respected "in
payment of a previously contracted debt," but
only with the indicated stockholders' approval.
Under Section 62 of the Corporation Code,
consideration for the issuance of
Mercantile Law Bar Examination Q & A (1990-2006) Page 27 of 103
stockholders representing at least two-thirds
c) Seventh Article. The capital stock of the (2/3) of the outstanding capital stock, as
corporation is One Million Pesos mandated under Sec. 40 of the Corporation
(P1,000,000) Philippine Currency. Code. The sale would be void in case of
What are your comments and suggested failure to meet the twin approvals. (Islamic
changes to the proposed articles? ALTERNATIVE
Directorate ofANSWER:
the Philippines v. Court of Appeals,
G.R. No. Corporation
117897, May 14, can1997)sell the items to its
a) On the First Article, I would suggest competitor, Top Grade Fashion Corporation.
that the corporate name indicate the fact of However, Divine Corporation must comply
incorporation by using either Toho with Sections 3, 4 and 5 of the Bulk Sales
Marketing Corporation or Toh Marketing Law, namely: (1) deliver sworn statement of
Company, Incorporated. the names and addresses of all the creditors
b) The Third Article should indicate the to whom the vendor or mortgagor may be
City or the Municipality and the Province in indebted together with the amount of
the Philippines, and not merely the region or indebtedness due or owing to each of the
as its BOD may later designate, to be its said creditors; (2) apply the purchase or
place of principal office. mortgage money to the pro-rata payment of
c) The Seventh Article must additionally bona fide claims of the creditors; and (3)
point out the number of shares into which make a full detailed inventory of the stock of
the capital stock is divided, as well as the par goods, wares, merchandise, provisions or
value thereof or a statement that said stock 3) How would you protect the interests
materials, in bulk, and notify every creditor at
or a portion thereof are without par value. of the creditors of Divine Corporation?
(10) days before transferring
(Sec 14 & 15 Corp Code) possession. that Divine Corporation has
Corporation; Bulk Sales Considering
Law (2005)
Divine Corporation is engaged in the entered a de facto stage of dissolution with
manufacture of garments for export. In the the ceasing of its operations, I would invoke
course of its business, it was able to obtain on behalf of the creditors
Corporation: Sole the protection
loans from individuals and financing under
ProprietorshipSec. 122 of
(2004) the
YKS Trading filed a complaint for specific Corporation Code, that
institutions. However, due to the drop in the the proceeds
performance withof damagesthe sale against should firstPWC be
demand for garments in the international applied towards
Corporation for failure theto settlement
deliver cement of the
market, Divine Corporation could not meet its obligations
ordered by of the corporation,
plaintiff. In its answer, before
PWC any
Under the Bulk Sales Law, if the proceeds are
obligations. It decided to sell all its equipment amount
denied can be
liability on paid
the to the stockholders.
ground, inter alia, that
not; applied proportionately towards the
such as sewing machines, perma-press YKS has no personality
settlement of the accounts to sue, not corporate
of the being
machines, high speed sewers, cutting tables, incorporated,
debts, to have the sale of the subject PWC
and that the President of matters
ironing tables, etc., as well as its supplies and wasto not Top authorized
Grade to enter into
Fashion Corp.,a contract
as being
materials to Top Grade with plaintiff by thevoid"PWC and Board of Directors,
The transactions would Fashion Corporation,
constitute a sale of "fraudulent and obtain satisfaction
its competitor. (5%) 1) How would you hence
from the properties which are YKS
the contract is ultra vires. deemedTradingto still
"substantially all of the assets of Divine
classify the transaction? replied
be owned by Divine Corporation inowned
that it is a sole proprietorship spite of
Corporation complying with the test under
by delivery
YKS, andtothat thethebuyer.President The ofcreditors
PWC hadcan
Sec. 40 of the Corporation Code, the
made it appear
collect ANSWER: in several
on the credit against Divineletters presented
transactions not being "in the ordinary course SUGGESTED
in evidence
the suit thatwill
andhe had if itauthority
prosper. cannotAs to sign
of business," and one "thereby the
creditors canthe behalf of the
apply Board of Directors
of YKS Trading
for attachment on the
corporation would be rendered incapable of 4) In case Divine Corporation violated the law,
of PWC.
hasproperty Will
the capacity the to suit
fraudulently actprosper
not? Reason
(See People to v.
continuing the business or accomplishing the what remedies are available to Top Grade Fashion
PWC. (5%)
It is
G.R. not
No. necessary
48836, September for YKS Trading
21, 1942)
purpose for which it was incorporated." Corporation against Divine
It is a sale and transfer in bulk in to be incorporated before it can sue. On the
contemplation of the Bulk Sales Law. Under Corporation?
other hand,
If the salePWC byisDivineestopped from asserting
Corporation did not
Sec. 2 of the Bulk Sales Law, a bulk sale that its President had no authority to enter
obtain the required two-thirds (2/3) vote of
includes any sale, transfer, mortgage, or intothe
the outstanding
contract, considering capital that, stock,in several
then the
assignment of all, or substantially all, of the of PWC's letters, it had clothedDirectorate
its President
transaction is void . (Islamic of the
business or trade theretofore conducted by Topapparent
withPhilippines authority
Court ofCorporation
to deal
Appeals, G.R.can
with YKSthe
the vendor, mortgagor, transferor, or Corporation;
Trading. declared Articles void and of recover the
May 14, 1997)
assignor. This is exactly what happened in Incorporation
The of (1990)
purchase price paid, as well registered
articles incorporation to be as damages
the case Can
at Divine
bar. Corporation sell the in the SEC contained the following
aforesaid items to its competitor, Top Grade against the directors and provisions
officers who
-- a) First Article.
undertook ANSWER:
the The name of
transaction intheviolation of the
Fashion Corporation? What are the For
corporation violation
shall of
be the
Toho Bulk
MarketingSales Law, the
requirements to validly sell the items? law.
principal officers of the Divine Corporation
Explain. b) can
For such a transaction to be valid, it requires not only the be Article. The principal
held criminally liable. office of such
In addition, Top
favorable resolution of the Board of Directors of Divine corporation shall be
Grade can sue Divine Corporationlocated in Region III, in
Corporation, but also the ratificatory vote of such municipality
damages. Violation thereinof the as Bulkits Board
Sales Law of
would may render designate.
such a sale fraudulent and
void. Since Top Grade would be compelled
to return the goods to Divine Corporation,
Mercantile Law Bar Examination Q & A (1990-2006) Page 28 of 103
Top Grade can compel Divine Corporation to
return the purchase price and pay damages. b) No, my answer will not be the same. In a
non-stock corporation, the members are not
Corporation; By- entitled to share in the profits of the
laws (2001)
Suppose that the by-laws of X Corp, a mining corporation because all present and future
firm provides that The directors shall be profits belong to the corporation. In
relieved from all liability for any contract converting the non-stock corporation to a
entered into by the corporation with any firm stock corporation by a mere amendment of
in which the directors may be interested. the Articles of Incorporation, the non-stock
Thus, director A acquired claims which corporation is deemed to have distributed an
overlapped with Xs claims and were asset of the corporation i.e. its profits,
necessary for the development and among its members, without a prior
(Observation: The question is rather vague
operation of Xs mining properties. a) Is the dissolution
more of the corporation.
particularly Under
question 1b. The Sec
his mining
by-law provisionclaims over
valid? and(3%)
Why? above that of
b) What 122, thedoes non-stock corporation
not specify that the conversionmust
is frombe
the corporations
happens if director A claims? (2%)
is able to consummate dissolved first. corporation to a stock corporation.
SUGGESTED ANSWER: The candidate is likely to be confused because
a) No. It is in violation of Section 32 of the Corp of the words if at the inception, X Co is a
Code. nonstock corporation. Hence, any answer
b) A should account to the corporation for Corporation;
along the same Deline should
Facto be treated with
A liberality)(1994)
corporation was created by a special law.
the profits which he realized from the
transaction. He grabbed the business Later, the law creating it was declared
opportunity from the corporation. (Section invalid. May such corporation claim to be a
de facto corporation?
Corporation; Commencement; No. A private corporation may be created
Corporate Existence (2003) only under the Corporation Code. Only public
1. When does a corporation acquire corporations may be created under special
corporate existence? law.
SUGGESTED ANSWER: Where a private corporation is created under
a special law, there is no attempt at a valid
2. CBY & Co., Inc., registered with the incorporation. Such corporation cannot claim
Securities and Exchange Commission its a de facto status.
articles of incorporation. It failed, however, Corporation; Dissolution; Methods of
for one reason or another, to have its by-laws Liquidation
X Corporation(2001)
shortened its corporate life by
filed with, and registered by, the amending its Articles of Incorporation. It has
Commission. It nevertheless transacted and no debts but owns a prime property located
did business as a corporation for sometime. A in Quezon City. How would the said property
suit was commenced by its minority be liquidated among the five stockholders of
stockholders assailing the continued said corporation? Discuss two methods of
existence of CBY & Co., Inc., because of the
SUGGESTED ANSWER: The prime property of X Corporation can be
non-adoption and registration of its by-laws.
liquidated among the five stockholders after
Would the action prosper? Why? (6%)
the property has been conveyed by the
Corporation; Conversion of Stock corporation to the five stockholders, by
X company is a (2001)
stock corporation composed dividing or partitioning it among themselves
of the Reyes family engaged in the real in any two of the following ways: 1) by
estate business. Because of the regional PHYSICAL DIVISION or PARTITION based on
crisis, the stockholders decided to convert the proportion of the values of their
their stock corporation into a charitable non- 2) SELLING THE
stockholdings; orPROPERTY to a third person
stock and non-profit association by amending and dividing the proceeds among the five
the articles of incorporation. a) Could this be stockholders in proportion to their
legally done? Why? (3%) b) Would your stockholdings; or
X Company
answer is a non-stock
be the same corporation? Why?
if at the inception, 3) after the determination of the value of the
(2%) ANSWER:
a) Yes, it can be legally done. In converting THE PROPERTY to one stockholder with the
the stock corporation to a non-stock obligation on the part of said stockholder to
corporation by a mere amendment of the pay the other four stockholders the amount/s
articles of incorporation, the stock in proportion to the value of the stockholding
corporation is not distributing any of its of each.
assets to the stockholders. On the contrary, Corporation; Incorporation;
the stockholders are deemed to have waived Requirements
What (2006)
is the minimum and maximum number
their right to share in the profits of the of incorporators required to incorporate a
corporation which is a gain not a loss to the stock corporation?
Mercantile Law Bar Examination Q & A (1990-2006) Page 29 of 103 Center, Pasig, MM while its
Is this also the same minimum and factory processing leather products, is in
maximum number of directors required in a Manila. The corporation holds its annual
stock corporation?
SUGGESTED ANSWER: (2.5%) stockholders meeting at the Manila Hotel in
Under Section 10 of the Corporation Code, Manila and its BOD meeting at a hotel in
any number of natural persons not less than Makati MM. The by-laws are silent as to the
five (5) but not more than fifteen (15), all of place of meetings of the stockholders and
legal age and a majority of whom are directors. 1) Who shall preside at the
residents of the Philippines, may form a meeting of the directors? 2) Can Ting, a
private corporation for any lawful purpose. stockholders
stockholder, who didannual meeting
not attend the in Manila,
This is the same minimum and maximum validity
questionofthethe corporate resolutions passed at
number of directors required in a stock meeting?
such 3) Can the same stockholder
corporation under Section 14(6) of the question the validity of the resolutions
Corporation Code. adopted by the BOD at the meeting held in
Corporation; Incorporation; Residency Makati?
Requirements (2006) SUGGESTED ANSWER:
Must all incorporators and directors be 1) The President presides over the meeting
residents of the Philippines? (2.5%) of the directors, if there is no position of
SUGGESTED ANSWER: Chairman provided in the By-Laws. If there is
Not all directors and incorporators need to be the position of Chairman provided in the By-
residents of the Philippines. Under Section 10 Laws, the Chairman presides over the
of the Corporation Code, only a majority of meeting of the Directors (Sec 54 Corp Code)
the incorporators need to be residents of the 2) No. The law provides that the annual
Philippines. As provided in Section 23 of the stockholders meeting shall be held in the
same Code, only a majority of the members city or municipality where the principal office
of the Board of Directors need to be residents of the Corporation is located. For this
of the Philippines. purpose, the law also provides that Metro
Corporation; Incorporation; Manila is considered a city or municipality.
You have been(2002)
asked to incorporate a new Since the principal place of business of MIC is
company to be called FSB Savings & Pasig, MM, the holding of the annual
Mortgage Bank, Inc. List the documents that stockholders meeting in Manila is proper.
you must submit to the Securities and 3)
51 The law allows the BOD to hold its
Exchange Commission (SEC) to obtain a meeting anywhere in the Philippines. The
certificate of incorporation for FSB Savings & holding of the BOD meeting in Makati was
Mortgage Bank, Inc. (5%) proper and the validity of the resolutions
The documents to be submitted to the
adopted by the Board in that meeting cannot
Securities and Exchange Commission (SEC) be questioned. (Sec 53 Corp code)
to incorporate a new company to be called Corporation; Nationality of
FSB Savings & Mortgage Bank, Inc., to obtain Corporation
What is the (1998)
nationality of a corporation
the certificate of incorporation for said organized and incorporated under the laws
company, are: 1) Articles of Incorporation 2) of a foreign country, but owned 100% by
Treasurers Affidavit; 3) Certificate of SUGGESTED ANSWER:
Filipinos? (2%)
Authority from the Monetary Board of Under the control test of corporate
the BSP; nationality, this foreign corporation is of
4) Verification slip from the records of Filipino Nationality. Where there are grounds
the SEC whether or not the proposed name for piercing the veil of corporate entity, that
has already been adopted by another is, disregarding the fiction, the corporation
corporation, partnership or association; will follow the nationality of the controlling
5) Letter undertaking to change the members or stockholders, since the
proposed name if already adopted by corporation will then be considered as one
another corporation, partnership or Corporation;
and the same. Non-Stock
6) Bank certificate of deposit concerning
association; Corporation
The AB (1993)
Memorial Foundation was
the paid-up capital; incorporated as a non-profit, non-stock
7) Letter authorizing the SEC or corporation in order to establish and
Monetary Board or its duly authorized maintain a library and museum in honor of
representative to examine the bank records the deceased parents of the incorporators.
8) Registration
regarding the deposit of the paid-up capital; Its Articles of Incorporation provided for a
Sheet; board of trustees composed of 5
Corporation; Meetings; BOD & incorporators, which authorized to admit new
Under (1993)
the Articles of Incorporation of Manila members. The Articles of Incorporation also
Industrial Corp, its principal place of allow the foundation to receive donations
business shall be in Pasig, MM. The principal from members. As of Jan 30, 1993, 60
corporate offices are at the Ortigas members had been admitted by the BOT.
Mercantile Law Bar Examination Q & A (1990-2006) Page30 of 103 incidental to, or necessary for
1) Can the Foundation use the funds donated the existence of the corporation.
to it by its members for purchase of food and
medicine for distribution to the victims of the
Pinatubo eruption? 2) Can the Foundation SUGGESTED ANSWER:
operate a specialty restaurant that caters to 2.a) The procedure in securing the approval
the general public in order to augment its of the BOD is as follows:
funds? 3) One of the original trustees died a notice of the BOD should be sent to all the
and the other two resigned because they directors. The notice should state the
immigrated to the US. How will the vacancies purpose of the meeting.
1) Yes, (Sec 36(9) of the Corp Code) as long At the meeting, each of the project should be
in the BOT be filled?
as the amount of donation is reasonable. approved by a majority of the BOD (not
merely a majority of those present at the
2) If the purposes of the corporation are meeting)
limited to the establishment and 2.b) The procedure in securing the approval
maintenance of the library and museum as of the stockholders is as follows:
stated in the problem, the foundation cannot Written notice of the proposed investment
operate a specialty restaurant that caters to and the time and place of the stockholders
the general public. In such case, the action of meeting should be sent to each stockholder
the foundation will be ultra vires. at his place of residence as shown on the
2) If the act of the corporation is justified by books of the corporation and deposited to
the secondary purpose of the corporation the addressee in the post office with postage
which includes the act of operating a prepaid, or served personally.
restaurant, the foundation will be within its At the meeting, each of the projects should
power to do so. be approved by the stockholders
3) Since there are only 2 of the members of
representing at least 2/3 of the outstanding
the BOT remaining and there is no quorum,
capital stock. (Sec 42 BP 68)
the vacancies will have to be filled up in a
special meeting of the members (sec 29
Corporation; Power to Invest
Corporate Funds for other Purpose
Stikki Cement Co was organized primarily for
cement manufacturing. Anticipating
substantial profits, its President proposed that
Stikki invest in a) a power plant project, b) a
concrete road project, and c) quarry
operations for limestone in the manufacture
the proposed
of cement. 1) investments?
What corporate Explain. 2) or
Describe the procedure
votes are needed for in securing these
approvals. ANSWER:
1. Unless the power plant and the concrete
road project are reasonable necessary to the
manufacture of cement by Stikki (and they
do not appear to be so), then the approval of
said projects by a majority of the BOD and
the ratification of such approval by the
stockholders representing at least 2/3 of the
outstanding capital stock would be
As for the quarry operations for limestone,
the same is an indispensable ingredient in
the manufacture of cement and may,
therefore, be considered reasonably
necessary to accomplish the primary
purpose of Stikki. In such case, only the
approval of ANSWER:
the BOD would be necessary
1. The
(Sec 42majority
BP 68) vote of the BOD is necessary.
The investment in a) a power plant project,
b) a concrete road project, and c) quarry
operations of limestone used in the
manufacture of cement, is within the express
or implied power of the corporation, or at
least the same is
Mercantile Law Bar Examination Q & A (1990-2006) Page 31 of 103 stopping payment thereof,
Yes. When a juridical person has a good Seldon was acting in his capacity as an
reputation that is debased, resulting in officer of Turtle. He was not acting in his
social humiliation, moral damages may be personal capacity. Furthermore, no facts
awarded. Moreover, goodwill can be have been provided which would indicate
considered an asset of the corporation. that the action of Seldon was dictated by an
TAKE NOTE: In the case of FBN Inc. vs intent to defraud Shamron by himself or in
AMEC, January 17, 2005, the SC ruled that; collusion with Turtle. Having acted in what he
FBNI contends that AMEC is not entitled to considered as his duty as an officer of the
moral damages because it is a corporation. corporation, Seldon should not be held
personally liable. Separate Juridical
A juridical person is generally not entitled to Personality
PR Co owns a(1996) beach resort with several
moral damages because, unlike a natural cottages. Jaime, the President of PR,
person, it cannot experience physical occupied one of the cottages for residential
suffering or such sentiments as wounded purposes. After Jaimes term expired, PR
feelings, serious anxiety, mental anguish or wanted to recover possession of the cottage.
moral shock. The Court of Appeals cites Jaime refused to surrender the cottage,
Mambulao Lumber Co. v. PNB, et al. to contending that as a stockholder and former
justify the award of moral damages. President, he has a right to possess and
However, the Court's statement in Mambulao enjoy the properties of the corporation. Is
Jaimes contention is not correct. Jaime may
that "a corporation may have a good Jaimes contention correct? Explain.
own shares of stock in PR Corp but such
reputation which, if besmirched, may also be
Nevertheless, ownership does not entitle him to the
a ground for theAMEC's
award of claim for moral
moral damages" is
damages falls under item 7 of Article 2219 of possession of any specific property of the
an obiter dictum.
the Civil Code. This provision expressly corporation or a definite portion thereof.
authorizes the recovery of moral damages in Neither is he a co-owner of corporate
cases of libel, slander or any other form of Corporation; Power to
property. Properties Invest Corporate
registered in the name
defamation. Article 2219(7) does not qualify Funds
of theincorporation
another Corporation
are owned by (1996)
it as an
whether the plaintiff is a natural or juridical WhenStockholders
entity like Jaime
a corporation
separate and only
distinct own
fromits shares
funds of
its in
person. Therefore, a juridical person such as stock
another in the corporation.
stockholders. or Such
business shares
or forofanystock
a corporation can validly complain for libel or do purposes?
other not represent
SUGGESTED ANSWER: specific corporate property.
A corporation may invest
(Rebecca Boyer-Roxas v CAits
100866 in Jul
14, 92
any other form of defamation and claim for corporation or business or for any other
Moreover, where the broadcast is libelous per
moral damages. 211s470)
se, the law implies damages. In such a case, Corporation;
purpose other than Separate Juridical
the primary purpose for
evidence of an honest mistake or the want of Personality
which was (1996)
it owns 90% of the shares
organized when of the the said
character or reputation of the party libeled capital stock
investment of GOM Co.
is approved byOn a one occasion,
majority of the
goes only in mitigation of damages. Neither BOD GOM andrepresented
such approval by Richard as President
is ratified by the
in such a case is the plaintiff required to and General
stockholders Manager executed
representing at leasta 2/3 contract
of the to
introduce evidence of actual damages as a sell a subdivision
outstanding lot in favor
capital stock. Written of Tomas.
notice of Forthe
condition precedent to the recovery of some failure of
proposed GOM to develop
investment and the thedate,
time and
damages. In this case, the broadcasts are Tomas
place filedstockholders
of the an action for rescission
meeting at andwhich
SUGGESTED ANSWER:GOM and Richard. Will the
libelous per se. Thus, AMEC is entitled to suchdamages
proposal against
will be taken up must be sent to
Corporation; The action may
Corporation; prosper against
Recovery of Moral GOM but
moral damages. Separate Juridical eachaction
complaint notfiled
42 Corp
Richard has a
XYZ Corporation,
Ronald Sham (1995)
doing business under the name
of SHAMRON Machineries (Shamron) sold to legalTrading
Luzon personality separate alleged
Corporation and distinct thatfromits
Turtle Mercantile (Turtle) a diesel farm that of GOM.
President & GeneralIf he singed
Manager, the who
is alsoto sell,
tractor. In payment, Turtles President and he did so as
stockholder, the President
suffered mental and General
anguish, fright,
Manager Dick Seldon issued a check for Manager
social of GOMand
humiliation and serious
not in his personal
anxiety as a
P50th in favor of Shamron. A week later, capacity.
result of Mere
the ownership
tortuous by Richard
acts of ofXYZ 90%
In its counterclaim,
of the
Corporation. capital stock XYZ ofCo
is notto of have
Turtle sold the tractor to Briccio Industries
suffered moral
sufficient damages
ground due to besmirched
to disregard his separate
(Briccio) for P60th. Briccio discovered that
reputation or goodwill
legal personality as a result
absent a showing,of Luzonfor
the engine of the tractor was reconditioned
he acted 1)maliciously
May Luzon or in bad
so he refused to pay Turtle. As a result, Dick the Corporation;
allegations of Separate
the Juridical
faith Co recover
(EPG Const Co vcomplaint?
damages based on
CA GR 103372 Jn 22,92
Seldon ordered Stop Payment of the check (2%)Personality
As a result
2) May of (1999)
XYZ perennial
Co recover business
moral losses, a
issued to sued Turtle and Dick Seldon.
Shamron. 210s230)
SUGGESTED (3%) net worth has been wiped out.
Shamron obtained a favorable judgment
it is now in being an artificial
negative territory.person
holding co-defendants Turtle and Dick Seldon which has no feelings,
Nonetheless, emotionsdid
the stockholders or notsenses,
like to
jointly and severally liable. Comment on the
SUGGESTED andgivewhich cannot experience
up. Creditor-banks, however, do physical
decision ofANSWER:
the trial court. Discuss fully.
The trial court erred in holding Dick Seldon, suffering
share theor mental
of the is stockholders
not entitled to and
moral toANSWER:
refuse grant more loans. a) What tools are
President and GM of Turtle, jointly and
severally liable with Turtle. In issuing the replenish
available to thecapital? (3%) to
check issued to Shamron and, thereafter,
Mercantile Law Bar Examination Q & A (1990-2006) Page 32 of 103 Philippines (BP 68).
b) Assuming that the corporation Incorporator S was elected director and
continues to operate even with depleted president general manager. Part of his
capital, would the stockholders or the emolument is a Ford Expedition, which the
managers be solidarily liable for the corporation owns. After a few years, S lost his
obligations incurred by the corporation? corporate positions but he refused to return
Explain. (3%) ANSWER: the motor vehicle claiming that as a
a) In the face of the refusal of the creditor- stockholder with a substantial equity share,
banks to grant more loans, the following are he owns that portion of the corporate assets
tools available to the stockholders to SUGGESTED ANSWER:
now in his possession. Is the contention of S
replenish additional
capital, subscription to shares of stockNo. The contention of S is not valid. The Ford
to wit: valid? Explain (5%)
of thecorporation by stockholders or by Expedition is owned by the corporation. The
2) investors;
advances by the stockholders to the corporation has a legal personality separate
corporation; and distinct from that of its stockholder.
3) payment of unpaid subscription by the What the corporation owns is its own
stockholders. property and not the property of any
SUGGESTED ANSWER: stockholder even how substantial the equity
b) No. As a general rule, the stockholders or Corporation; Set-Off;owns.
share that stockholder Unpaid
the managers cannot be held solidarily liable Subscription
Victor (1994)in MAIA Corporation. He
was employed
for the obligations incurred by the subscribed to 1,500 shares of the corporation
corporation. The corporation has a separate at P100 per share or a total of P150,000. He
and distinct personality from that of the made an initial down payment of P37,500.00.
stockholders or managers. The latter are He was appointed President and General
presumed to be acting in good faith in Manager. Because of his disagreement with
continuing the operation of the corporation. the BOD, he resigned and demanded
The obligations incurred by the corporation payment of his unpaid salaries, his cost of
are those of the corporation which alone is living allowance, his bonus, and
liable therefor. However, when the reimbursement of his gasoline and
corporation is already insolvent, the directors MAIA Corporation
representation admits that it owed Victor
and officers become trustees of the business P40,000. but told him that this will be applied
and assets of the corporation for the benefit to the unpaid balance of his subscription in
Corporation; Separate Juridical the amount of P100,000.00 There was no call
of the creditors and are liable for negligence
Marulas (2000)Technology Inc., an e-
Creative or notice for the payment of the unpaid
or mismanagement.
business enterprise engaged in the subscription. Victor questioned the set-off. 1)
manufacture of computer media accessories; May MAIA set-off the unpaid subscription
rents an office and store space at a with victors claim for salaries? 2) Would your
commercial building owned by X. Being a answer be the same if indeed there had been
start-up company, Marulas enjoyed some SUGGESTED ANSWER:
a call for the unpaid subscription?
leniency in its rent payments; but after three 1) No. MAIA cannot setoff the unpaid
years, X put a stop to it and asked Marulas subscription with Victors claim for salaries.
president and general manager, Y, who is a The unpaid subscription is not yet due as
stockholder, to pay the back rentals there is no call.
amounting to a hundred thousand pesos or to 2) Yes. The reason is that Victor is entitled to
vacate the premises at the end of the month. the payment of his salaries which MAIA has
Marulas neither paid its debt nor vacated the no right to withhold in payment of unpaid
premises. X sued Marulas and Y for collection subscription. To do so would violate Labor
SUGGESTED ANSWER: Laws (Apodaco v NLRC 172 S 442)
Yes,thethe unpaid rentals,
suit will plusagainst
prosper interest and costs
Marulas. It Corporation; Stock
of litigation.
is the Will the
one renting the suit
officeprosper against
and store space,X?
XY (2001) club which was
is a recreational
as lessee, Y? from
(5%) the owner of the building, X,
organized to operate a golf course for its
as lessor. members with an original authorized capital
But the suit against Y will not prosper. Y, as stock of P100M. The articles of incorporation
president and general manager, and also nor the by-laws did not provide for
stockholder of Marulas Creative Technology, distribution of dividends although there is a
Inc., has a legal personality separate and provision that after its dissolution, the assets
distinct from that of the corporation. The shall be given to a charitable corporation. Is
liability of the corporation is that of the SUGGESTED ANSWER:
XY a stock corporation? Give reasons for
corporation and not that of its officers and XY is a stock corporation because it is
your answer? (5%)
stockholders who are not liable for corporate organized as a stock corporation and there is
liabilities. Separate Juridical no prohibition in its Articles of Incorporation
Nine (2000)
individuals formed a private corporation or its by-laws for it to declare dividends.
pursuant to the provisions of the Corporation When a corporation is organized as a stock
Code of the corporation and its articles of Incorporation
or By-Laws
Mercantile Law Bar Examination Q & A (1990-2006)
are silent, the corporation is deemed to have
the power to declare dividends under Sec
43. Since it has the power to declare
dividends, XY is a stock corporation.
The provision of the Articles of Incorporation
that at dissolution the assets of the
corporation shall be given to a charitable
corporation does not prohibit the corporation
from declaring dividends before dissolution.
Corporation; Validity of
The Acts (1998)
stockholders of People Power Inc (PPI) approved
two resolutions in a special stockholders
meeting: a) Resolution increasing the
authorized capital stock of PPI; and b)
Resolution authorizing the BOD to issue, for
cash payment, the new shares from the
proposed capital stock increase in favor of
outside investors who are non-stockholders.

The foregoing resolutions were approved by

stockholders representing 99% of the total
outstanding capital stock. The sole dissenter
was Jimmy Morato who owned 1% of the
1. Are the resolutions binding on the
corporation and its stockholders including
Jimmy Morato, the dissenting
2. What remedies,
stockholder? if any, are available to
1. No. The resolutions are not binding on the
corporation and its stockholders including
Jimmy Morato. While these resolutions were
approved by the stockholders, the directors
approval, which is required by law in such
case, does not exist.
2. Jimmy Morato can petition the SEC (Now RTC) to
declare the 2 resolutions, as well as any and all
actions taken by the BOD thereunder, null and
Mercantile Law Bar Examination Q & A (1990-2006) Page 34 of 103 Page 33 of 103
584943435 committed
SUGGESTED the breach of trust against the
f50524f464 Valid of the corporation would be to
NOTE: (per Dondee) The law simply provides that a
94c450001 interests
voting trust agreement is an agreementin writing emasculate the right of minority
whereby one or more stockholders of a corporation 3) XL toFoods
consentto transfer his or theirshares to a trustee in stockholders seekCorporation
redress for guaranteed
the the
orderto vestin the lattervoting or other rights pertaining
loan of its sister company
corporation. Filing such action as a XL Meat Products,
d6e747252 Inc.
to said shares for a period not exceeding five years upon
474220585 derivative suit even by a lone stockholder is
the fulfi Void This is an ultra vires act on part of XL
95a2007ce one of the protections extended by law to
Derivative Corporation,
Suit: Watered and is not one of the
000200090 minority stockholders against abuses of the
006003100 became a stockholder ofinPrime
A (1993)
provided for Sec.Real36 Estate
of the
006163737 Corporation
Corporation Code.
(PREC) on July 10, 1991, when he
04d534654 Corporation; Voluntary
was given one share by another stockholder
Undersection 59 ofthe C orporation000000004
C ode, supra, a voting trust Dissolution
Name three (2002)
(3) methods by which a stock
945432073 to qualify him as a director. A was not re-
agreem ent may confer upon a trustee not only the stockholder's corporation may be voluntarily dissolved.
voting rights butalso otherrights pertaining to his shares as long elected director in the July 1, 1992 annual
000000000 Explain each
SUGGESTED method. (5%)
as the voting trustagreem entis notentered "for the purpose of meeting
The three (3) methods bytowhich
but he continued be a aregistered
circum venting the law againstmonopolies and
0000000f6 shareholder
corporation of PREC.
may be voluntarily dissolved are:
illegalcombinations in restraintoftrade orused forpurposes
d60001000 When he was still a director, A discovered
offraud." (section 59, 5th paragraph ofthe Corporation Code). 1) Voluntary Dissolution where no creditors
00000d32d that on Jan 5, 1991, PREC issued free of
Thus, the traditional concept of a voting trust agreem ent are affected. This is done by a majority vote
primarily intended to single out a stockholder's right to vote from charge 10,000 shares and
of the directors, to X a lawyerof who
resolution at least
000000000 assisted in a court case involving PREC.
his other rights as such and m ade irrevocable for a lim ited 2/3 vote of stockholders, submitted to the
duration m ay in practice becom e a legal device whereby a
transfer of the stockholders shares is effected subjectto the
Securities and Exchange Commission.
specific provision ofthe voting trustagreem ent. 2) Voluntary dissolution where creditors
1) are affected. This is done by a petition for
The execution of a voting trust agreem000000000
ent, therefore, m ay
Can A nowthebring anoraction
000000000 in the name of the dissolution
corporation which must the
to question be issuance
filed with theshares to
of the
create a dichotom y between equitable beneficial
ownership ofthe2) 000000000
corporate shares ofa stockholder, on the one Securities and Exchange Commission, signed
Can Xthereto
hand, and the legaltitle question 000000000
on the the right
other of A
hand. (Lee by a majority
CA,sue him in behalf of the members
of the corporation on theofground
the board
that ofA has only o
Feb. 4, 1992) 3) directors, verified by the president or
Cannot the shares 727400000 issued to X be considered secretary,
as wateredand stock?upon affirmative vote of
Derivative Suit: stockholders representing at least 2/3 of the
AA, a minority (2004)
stockholder, filed a suit
336465736 3) Dissolution
outstanding by shortening of the
capital stock.
against BB, CC, DD, and 300000184 EE, the holders of corporate term. This is done by amendment
majority shares of MOP Corporation, 0000006c7 for of the articles of incorporation.
alleged misappropriation774707400 of corporate
The complaint averred, inter alia, that MOP
00014626b Corporation; Voting Trust
Corporation is the corporation 707400000 in whose Agreement
A distressed(1992) company executed a voting
behalf and for whose benefit 204000000the derivative trust agreement for a period of three years
suit is brought. In their capacity as members over 60% of its outstanding paid up shares in
of the Board of Directors, the
000000146 majority favor of a bank to whom it was indebted, with
stockholders adopted
Corporation; Validity of a resolution
758595a00 the Bank named as trustee. Additionally, the
Corporate MOP Corporation
Acts (2002)
Which of the following000146258
00022c000to withdraw
corporate acts are the Company mortgaged all its properties to the
suit. Pursuant
valid, void, to said
or resolution,
voidable? Indicate the your answer Bank. Because of the insolvency of the
by writing counsel
the filed
paragraph a Motion
No. All the requisites for a valid derivative to Dismiss
of the in Company, the Bank foreclosed the
the name
query, of the
followed MOPby
suit exist in this case. First, Corporation.
AA was exempt the mortgaged properties, and as the highest
motion be as
granted 400000254 bidder, acquired said properties and assets of
from answer
exhausting hisorremedies
Valid, denied?
orReason briefly.
within the as The three-year period prescribed in the
(5%) the case may
corporation, and be.
did If notyour
have answer
to make is Void,
a the Company.
46d646400 Voting Trust Agreement having expired, the
demand onyour answer.
the Board In case of a
Directors forVoidable
the company demanded the turn-over and
latter to sue. specify such 000887675
Here, what conditions
a demand
would bebe transfer of all its assets and properties,
futile, sinceor thecomplied
directors with
who tocomprise
34c000000 make thethe including the management and operation of
food business,
corporate act valid. entered
(5%) 1)into a contract with
XL Foods
majority (namely, BB, CC, DD
867669657 and EE) are the the Company, claiming that under the Voting
its President
Corporation, whichJose is Cruz,
engaged wherebyin the the latter
ones guilty of the wrong 7000003d4
complained of. fast- Trust Agreement, the Bank was constituted
Second, would supply the
AA appears to be corporation
000000246 withat its
and poultrymisappropriation
requirements. of
c756d6900 as trustee of the management and operations
time the alleged Does
SUGGESTED ANSWER: 0003f8000 of thethe demand of the Company tally with
corporate funds. 000146d65 the concept of a Voting Trust Agreement?
Voidable A contract
Third, the suit is brought617300000 of the corporation
on behalf and for with
Explain briefly.
theone or more
benefit of MOP of its directors
this or
The demand of the company does not tally
connection, isitvoidable,
(Phils.) Inc. held
was at the option
v. Securities
in of such
and Exchange with the concept of a Voting Trust
corporation (Sec 32, Corporation
Commission, 198 SCRA 73 (1991) that to grant Code).
0000000c7 Agreement. The Voting Trust Agreement
to the corporation concerned the right of
254524300of XL Foods merely conveys to the trustee the right to
2) The Board
withdrawing or dismissing of Directors
the suit, at the
00043c000 vote the shares of grantor/s. The
instance of the declared and paid cashand
majority 0080c6754
stockholders consequence of foreclosure of the mortgaged
directors whowithout
are theof thepersons
stockholders. 43c000008 properties would be alien to the Voting Trust
alleged to have 0c6254524 Agreement and its effects.
Mercantile Law Bar Examination Q & A (1990-2006) Page 35 of 103
nullify the questioned investments. Would
Sometime in April 2004, Malyn learned about her action prosper? Why?
Fort Patio Cafe located in Taguig City and SUGGESTED ANSWER:
that its development was undertaken by a Yes, she is already a stockholder at the time
new corporation known as Fort Patio, Inc., the alleged misappropriation of corporate
where both Schiera and Jaz are directors. funds. And that filing such action as a
Malyn also found that Schiera and Jaz, on derivative suit even by a lone stockholder is
behalf of Patio Investments, had obtained a one of the protections extended by law to
loan of P500,000.00 from PBCom Bank, for minority stockholders against abuses of the
the purpose of opening Fort Patio Cafe. This majority. Nevertheless, Gina must first
loan was secured by the assets of Patio exhaust any administrative remedies before
her suit be considerDe facto in court. Corporation
Investments and personally guaranteed by
Malyn vs. Corporation by Estoppel (2004)
Jaz. a corporate derivative action
before the Regional Trial Court of Makati City Is there a difference between a de facto
against Schiera and Jaz, alleging that the two corporation and a corporation by estoppel?
directors had breached their fiduciary duties Explain briefly.
by misappropriating money and assets of
actually exists for all practical purposes as a
Patio Investments in the operation of Fort
corporation but which has no legal right to
Patio Cafe. (5%) 1) Did Schiera and Jaz violate
corporate existence as against the State. It is
the corporate opportunity? Explain.
principle of
SUGGESTED ANSWER: essential to the existence of a de facto
Yes. Although Malyn refused the business corporation that there be (1) a valid law
before, nevertheless, using the resources and under which a corporation might be
credit standing of the company, Schiera and (3) actual use (2)
incorporated, or exercise
a bona in fidegood faith of
attempt to
Jaz clearly demonstrated that the business corporate
organize as powers conferred upon
a corporation underit such
by law. law,
could have been successfully pursued in the and
name of the close corporation. More A CORPORATION BY ESTOPPEL exists when
importantly, Schiera and Jaz are guilty of persons assume to act as a corporation
diverting the resources of the close knowingANSWER:
SUGGESTED it to be without authority to do so. In
corporation to another entity, equivalent to 1) this
As acase, thoserule,
general personsA cannotwill be liable
bring a as
2) Was it proper
fraud and bad faith. for Malyn to file a general
derivative partners
suit in for all
the debts,
name liabilities
of the and
derivative suit with a prayer for injunctive damages concerning
corporation incurred or an arising
act as that a result
took of
relief? Explain.
place actions.he became a stockholder.
Although it is a close corporation, However,
if the Dividends
act complained vs. Profit:
of is a
nevertheless the principles of separate 2) Cash Dividend vs.
continuing one, A may do so. the
No. In a derivative Stock
suit, Dividend
action is
juridical personality still apply. The business instituted/
Distinguish dividend
brought in the from name profit;of cash a
of the corporation is still separate and distinct corporation
dividend from stock dividend.
and reliefs are prayed (2%)
for therein
from the proprietary interests of its for SUGGESTED ANSWER:
the corporation, by a minority stockholder.
stockholders and directors. Consequently, ThePROFITS are residual amounts representing
law does not qualify the term minority
since the business opportunity and the in terms return of capital after deducting all corporate
of the number of shares owned by a
resource's used pertain to the close stockholder costs and expenses from revenues. The
bringing the action in behalf of
corporation, the standing to sue and to theaccumulated profits, from year to year,
corporation. (SMC v Khan 176 SCRA 448)
recover remains with the close corporation 3) No. WATERED SHARES the corporate areretained
those sold earnings
from which the dividends
and not with Malyn. Therefore, it is still the corporation for less than the par/book can be declared.
CASH DIVIDENDS represent an actual
necessary to file a derivative suit on behalf of value. In the instant case, it will depend upon
distribution of accumulated profits to the
the close corporation, although the the value of services rendered in relation to
3) Assuming that a derivative suit is proper; stockholders as a return on their
proceedings would be governed under the the total par value of the shares.
the continue if the corporation is dissolved investments. Declaration of cash dividends
Interim Rules of Procedure for Intra-Corporate Derivative Suit; Close
the pendency of the suit? Explain.
during requires only the approval
Corporation; Corporateof the majority of
Malyn, Schieraof(2005)
and Jaz are in a proper resolution.
the directors of
Yes, for in spite of the dissolution of any STOCK DIVIDENDS are corporation
simply transfers
Patio Investments, a close formedof
corporation, it remains a juridical person for retained earnings to alcapital
to run the Patio Cafe, an frescostock,
purpose of dissolution for three years from increasing the number of shares of stocks
in Makati City. In 2000, Patio Cafe beganof
the date of dissolution, precisely one of the each stockholderfinancial with no required cash
experiencing reverses,
purposes is to allow the winding-up of its contribution. A two-thirds vote of the
consequently, some of the checks it issued to
affairs, including the termination of pending
Derivative Suit; Minority its beverage distributors and employeesof
stockholders, coupled with a majority vote
suits. In the Board 2003,
October of Directors,
Schierais informed
needed toMalyn declare
Gina Sevilla, a(2003)
minority stockholder of Bayan bounced.
Distinction; Privatefor vs. Public
that she dividends.
found a location a second cafe in
Corporation, felt that various investments of Corporation
Distinguish (2004)
clearly a privatebecause
corporation from
Taguig City. Malyn objected of the
the companys capital were ultra vires if not, a public corporation
dire financial condition of the corporation.
indeed, made in violation of law. She filed a SUGGESTED ANSWER:
derivative suit seeking to
Mercantile Law Bar Examination Q & A (1990-2006) Page 36 of 103
A PRIVATE CORPORATION is one formed for
some private purpose, benefit or end, while a Dividends; Declaration of
PUBLIC CORPORATION is formed for the Dividends
At least 2/3 (1990)
of the stockholders of Solar
government of a portion of the State for the Corporation, meeting upon the
general good or welfare. The true test is the recommendation of the BOD, declared a 50%
purpose of the corporation. If the corporation stock dividend during their annual meeting.
is created for political or public purpose The notice of the annual stockholders
connected with the administration of meeting did not mention anything about a
government, then it is a public corporation. If stock dividend declaration. The matter was
not, it is a private corporation although the taken up only under the item other
whole or substantially the whole interest in business in the agenda of the meeting. C.K.
the corporation belongs to the State. A public Senwa, a stockholder, who received his copy
corporation is created by special legislation of the notice but did not attend the meeting,
or act of Congress. A private corporation subsequently learned about the 50% stock
Distinction; Stock vs. Non-Stock
must be organized under the Corporation dividend declaration. He desires to have the
Distinguish (2004)
clearly a stock corporation from SUGGESTED ANSWER:
Code. stock dividend
I will not acceptdeclaration cancelled
the case. Sec andCorp
43 of the set
a non-stock corporation.
aside, and wishes
Code states to retain
that no stock your services
dividend shallasbe
A stock corporation is one that has capital lawyer for the purpose. Will
issued without the approval of theyou accept the
stock divided into shares and is authorized to case? Discussrepresenting
stockholders with reasons.not less than 2/3
distribute to the holders of such shares of the outstanding capital stock at a regular
dividends or allotments of the surplus profits or special meeting duly called for that
on the basis of the shares held. All other purpose. Conformably with Sec 50 of the
corporations are non-stock corporations. Corp Code, a written notice of the holding of
Dividends: Declaration of ALTERNATIVE ANSWER:
the regular meeting sent to the shareholders
Under what (2005)
circumstances may a corporation Yes, I will accept the case. The problem does
will suffice. The notice itself specified the
declare dividends? (2%)' not indicate that there is action by the BOD
said subject matter.
SUGGESTED ANSWER: which is also necessary for the declaration of
No form of dividends can be declared and 50% stock dividend.
paid by the corporation except from Dividends; Declaration of
unrestricted retained earnings appearing on Dividends
During the(1991)
annual stockholders meeting,
its books. Dividends must be paid in amounts Riza, a stockholder proposed to the body that
proportional to all stockholders on the basis a part of the corporations unreserved earned
of outstanding stock held by them. Cash or surplus be capitalized and stock dividends be
property dividends, can be declared from distributed to the stockholders, arguing that
such unrestricted retained earnings by a as owners of the company, the stockholders,
proper resolution of the Board of Directors. by a majority vote, can do anything. As
Stock dividends, however, must be declared chairman of the meeting, how would you rule
by a proper resolution of the Board of on the motion to declare stock dividends?
As the chairman of the meeting, I would rule
Directors from existing unrestricted retained
against the motion considering that a
earnings and ratified by stockholders
declaration of stock dividends should initially
representing at least two-thirds (2/8) of the
be taken by the BOD and thereafter to be
outstanding capital stock of the corporation,
Dividends: Sources of Dividends; concurred in by a 2/3 vote of the
obtained in a meeting duly called for the
Trust Fund Doctrine (2005) stockholders (Sec 43 Corp Code). There is no
purpose. (Sec. 43, Corporation Code)
From what funds are cash and stock prohibition, however, against the
dividends sourced? Explain why. (2%) stockholders resolving to recommend to the
SUGGESTED ANSWER: BOD that it consider a declaration of stock
All cash and stock dividends are always paid Dividends; Declarationthereafter
dividends for concurrence of by the
out of the unrestricted retained earnings Dividends
For the past
stockholders. (2001)
three years of its commercial
(also called surplus profit) of the corporation. operation, X, an oil company, has been
If the corporation has no unrestricted earning tremendously in excess of 100% of
retained earnings, the dividends would have the corporations paid-in capital. All of the
to be sourced from the capital stock. This is stockholders have been claiming that they
illegal. It violates the "TRUST FUND share in the profits of the corporation by way
DOCTRINE" that provides that the capital of dividends but the Board of Directors failed
stock of the corporation is a trust fund to be to lift its finger. a) Is Corporation X guilty of
kept intact during the life of the corporation violating a law? If in the affirmative, state
Corporation X is guilty of violating Section 43
for the benefit of the creditors of the the basis (2%)
G.R. No. 77860, November 22, 1988; and of the Corp Code. This provision prohibits
corporation. (Commissioner of Internal- Revenue
Steinberg v. Velasco, G.R. No. 30460, March stock corporations
v. Court of Appeal, G.R. No. 108576, January 20,
1999; Boman Environmental Development Corp.
v. Court of Appeals,
Mercantile Law Bar Examination Q & A (1990-2006)
from retaining surplus profits in excess of
100% of their paid-in capital.

b) Are there instances when a corporation

shall not be held liable for not declaring
The instances when a corporation shall not
be held liable for not declaring dividends

roved by the BOD; or

inancial institution or creditor, whether local or foreign, from declaring dividends without its or his consent, and such conse

cial circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.
Mercantile Law Bar Examination Q & A (1990-2006) Page 38 37
Page of 103
of 103 Code. acquires,
As shortened,in violation the of his
No. There is no need for the absorbed corporation
duty, an interestcontinued adverse to 435f50524f4
its business the84943435f
corporation to undertake dissolution and until
in May
respect 30, of 1997,any the matter last which
of has
94c450001 been
winding up procedure. As a result of the corporate
in him in confidence,
Prior to said hedate,
84c696e6f02 shall
0100000c4 therebe
merger, the absorbed corporation is wereliable
a number
as a trustee of pending for thecivil 1000006d6e
84c696e6f ofand
automatically dissolved and its assets and varying
must natureaccount but formostly
the profits money which claims
liabilities are acquired and assumed by the by would
creditors, have none
accrued of which to the was corporation.
474220585 to
surviving Pending
corporation. approval of the merger by be Equity
completed imposes or resolved
liability within upon0900060031
five not
95a2007ce years to deal
the SEC, may the surviving corporation fromforMayhis own benefit. (Sec. 31,0000616373
30, 1997. Corporation
already institute suits to collect all If the
Code) creditors
Sec. 34 had of sought
the Corporationyour704d534654
Code where
receivables due to the absorbed corporation helpa director,
at that time by virtue
about of whether
his office, or
their for
from its customers? Explain your answer. cases
coulda be business
pursued opportunity
00000000430, should
(3%)The merger does not become effective 1997,
belongwhattowould the corporation,
have been your thereby advice?
945432073 obtaining
until and unless approved by the SEC. Before SUGGESTED
(2%)profits to ANSWER:
the prejudice of such 0000000000
approval by the SEC of the merger, the Thehe cases
mustcan accountbe pursued to the even latter beyond
for all suchMay
1997, by therefunding
last day of the 0000000d32
surviving corporation has no legal personality the same, unless his act
existence of ratified
GHQ Corp. 0000000f6
with respect to receivables due to the has been by aThe vote Corporation
of the
absorbed corporation. notstockholders
actually dissolved upon
owning or representing the expiration
00000d32d at of least
3) A case was filed against a customer to its two-thirds
corporate term. There is still the
0000000000 period
485020200 for
(2/8) of the outstanding 0000000000 capital
collect on the promissory note issued by him Effect:
liquidation Expiration
or winding up.of 000000000
stock. 0000000000
after the date of the merger agreement. The NOTE: Under
XYZ Section
Corporation Term 122entered
(2004) into 000000000
the C orporation C ode, a of
a contract
corporation whose corporate existence0000000000 is000000000
terminated in
customer raised the defense that while the lease with ABC, Inc., over a piece of
any manner continues to be a body corporate 0000000000
000000000 forreal
receivables as of the date of the merger (3) years afterits dissolution forpurposes ofprosecutingfor
estate for a term of 20 years, 0000000000
agreement Right;
was transferred Managing
to the surviving andanother
defending20 suitsyears,
by andprovided
that XYZ'sitto se
to enable
ABC Management (1991) Inc. presented to the DEF 0001163707
corporation, those receivables which were corporate term is extended 2740000015 in000000000
Mining Co, the draft of its proposed 000000000
created after the merger agreement remained with law. Four years after the term of XYZ
to Management
be owned byContract. the absorbedAs an incentive,
corporation. ABC Corporation expired, but still4657363000 within
000000000 the period
These in the would
receivables terms be of distributed
compensation to the that The allowed
termination by ofthe the lease
life of contract
a corporate 0018400000
entity for
does the
notby itself
ABC wouldconformably
stockholders be entitled with to 10% the of any stock
dissolution cause the extinction
extension oforthe
dim inution
leaseofperiod,the rights 727400000
and liabilities
4000001f000 Corp.
ofsuch entity. 27 If the three-yearextended life 150000000 has expired
liquidation whichprocedures
DEF may declare under the during New the notified
without a trusteeABC, Inc.,having
or receiver thatbeen it isexpressly
lifetime ANSWER:
the Management Contract. Would 7074000002
Corporation Discuss
Whether the receivable was incurred by the the merits of this option
by the to extend
corporation, the lease.
within thatperiod, ABC,
the board Inc., (or
of directors
you approve 0400000014
absorbed (3%) of suchbefore
provision? If not, what
or after the objected
trustees) itself, mtoay bethe proposed extension,
permi 0000006c7
would you ANSWER: suggest as an alternative? that since the corporate life 0002180000 of774707400
XYZ Corp. had
I would
merger not approve
agreement, ora before
proposed or stipulation
after the in 0001f0000
the management
approval thereof by contract
the SEC, that the themanaging
said expired, it could no longer opt to
0014675859 renew the
receivable wouldasstill anbelong
additional to the compensation
surviving lease. XYZ Corp. countered that withstanding
the lapse of its corporate term 204000000
it still has the
to it, should
corporation under be Sec
80 of to the
10%Corp.of any Code stock 58595a0000
right toCorporation;
renew the lease Doingbecause 147258595
0240000000 no quo
which does that not may makebeany declared.
as to a00000218
warranto in the Philippines
proceedings for 14646d6e64
theare the only
assets and ones entitled
liabilities to receive
of the absorbed stock SUGGESTED ANSWER: 000000146
When isCorporation's
dissolutiona foreign of XYZ corporation
Corp. hasdeemed
0000025400to be
been instituted
dividends that
corporation (Nielsen the& surviving
Co v Lepanto corporation
Mining 26 s XYZ contention is not
Effects; doing business in the
the Solicitor
Philippines? (3%)Is the
would I Winding
569)inherit. would add Up thatPeriod the of a
unsubscribed by the
OfficeBased of on the ruling 00022c000
6464000002 of
The corporation,
capital stock (1997)ofonce dissolved, may
a corporation thereafter
only be contention
Supreme of XYZ
Court in Corp. meritorious?
Philippine c400000088
National Explain
A foreign corporation is deemed to be Bank
7675656400 doing vs.
issued for to be cash a body corporate
or property or for
for three
services briefly.
CFI of (5%)
Rizal, 209 SCRA (1992). XYZ Corp.
240000000 was
business in the Philippines if it00034c0000 is continuing
years for rendered
of prosecuting and
thedissolved ipso facto of uponthe the expiration or of its
already a demandable 14646d6e6
body or substance business
defending suits by and against
debt (Sec 62 Corp Code). As an alternative, it and of I original term. It ceased to be 400000254
a body
enterprise for which it was organized. 000000706 It is
enabling it to settle and close its affairs, of000000246c
would suggest that the managing corporation thecorporate
intention for of an theentity
purpose to continue continuing
756d690000 the the
culminating in the be finalgiven disposition
a net and business for whichinitthe was organized,
should instead profit body of its business country. The except
03f80000001 grant
distribution of its remaining
participation and, if it later so desires, assets. If the 3
to then only for purposes connected 000887675
46d6561730 its winding
Doctrine of Corporate and extension of 90day credit terms of a
year extended life expires
convert the amount that may be due thereby without a trustee up orcorporation Extending the656400000
lease is not
Opportunity (2005) foreign a domestic
or Briefly
equity or being
the doctrine of by
shares designated
of stock at no lessthe
than an act to for wind up or liquidateshows
XYZ Corp.'s
opportunity. (2%) corporation
Effects; every purchase 867669657 an
It Merger of to
corporation within that period and by that 3680000043
the par value
SUGGESTED thereof.
intention to is contrary
continue Doing
the idea
transacting of winding
00000000c7 the
time (expiry of the 3 year extended term), Corporations
up the corporations
in the
affairs of(1999) agreed
the to merge.
corporation. 000000246 They then
In brief,ANSWER:
SUGGESTED the doctrine disqualifies a director, latter.
executed an agreement
specifying the
the corporate
liquidation liquidation
canfrom is not with
continue yet over, the Acts at
Give orleast
three (3) (2002)
examples c756d6900
of the acts or
or officer appropriating for his surviving corporation and the 0003f8000
winding if at all,
up. benefit can
The membersa final settlement
of theorBOD of can
the activities that are specifically 80c6754524
identified under
personal a transaction opportunity corporation. Under the agreement 000146d65
30000043c0 of merger
continue affairs
with the bewinding
made? of the corporate our foreign investment laws as000080c625 constituting
that pertains to the corporation, and which dated November 5, 1998, the surviving
under until
of loyalty he They can act
should firstas bring doing business in the Philippines 4524300000(3%)
SUGGESTED ANSWER: acquired all the 43c0000080 rights,
247465636 properties
trustees or receivers for this purpose.
to the corporation for its use or exploitation. 800000430
Effects; Winding Up Period of a Anyand three liabilities
(3) of the of the following
absorbed acts corporation.
c746578740 1)
What Must the happen
would absorbed doingto corporation
thebusiness 0000000c7
absorbed undertake
in the
TheThe SEC doctrine
of corporate
the amendment opportunity of the is an dissolution and foreign
the winding 254524300
up procedures?
enforcementof Incorporation
of the duty of of GHQ loyalty
Corp of Philippines
corporation? under our investment
laws: your
Explain answer.
Soliciting orders(3%) 0080c6754
corporate its directors
corporate and life to officers.
only 25 When years a 2920313939
in accordance
director, trustee with Secor120officer of the Corp
attempts to 43c000008
acquire or 0c6254524
Mercantile Law Bar Examination Q & A (1990-2006)
2. Opening offices by
name in the management,
supervision or control of any domestic entity
4. Entering into
contracts representatives or
distributors, operating under the control of
the foreign entity, who is domiciled in the
Philippines or who stays in the country for a
period or periods totaling at least 180 days in
any calendar year.
Mercantile Law Bar Examination Q & A (1990-2006) Page 39 of 103 5) When Pagehe40 of 103 by a
is made,
substantial amount of damages. It would Whatspecific
is theprovision
doctrine of law, to
"piercing the veil of
thus be difficult for Pablo to convincingly corporate personally
entity?" answer Explain. for the corporate action.
assert that the incorporation of the family SUGGESTED Mercantile
(TramatANSWER: Inc v CA GR 111008, Nov 7, 94
corporation was intended merely as a case The doctrine
238s14) of "piercing the veil of corporate
of estate tax planning. (Tan Boon Bee v entity," is
Liabilities;the doctrine
Stockholders,that allows the courts
Jarencio 41337the30June88)
Corporate to look
A, B,behind
Officers and(1997)Ctheareseparate
shareholdersjuridical of XYZ Co. A
E Co (1996)
sold its assets to M Inc after complying personality
has an unpaid of a corporationsubscription and treat the
of P100th, Bs
with the requirements of the Bulk Sales Law. corporation
shares are as fully
an association
paid up, while of persons
C owns andonly
Subsequently, one of the creditors of E Co thereby
nominal make butthe individual
fully paid up actors
shares personally
and is a
tried to collect the amount due it, but found liable for
director corporate
and liabilities.
officer. XYZ The
becomes fiction of
Foreign Corporation;
out that E Co had no more assets left. The Doing corporate
and it identity
is establishedis disregarded
that the and the
insolvency is
creditor then sued in the M IncPhilippines;
on the theory that individuals
the result comprising
of fraudulent it canpractices
be treated within the
M Inc is a(2002)
the legal
altertestegofor of E determining
Co. Will theif an identically.
company. The stockholders
If you were counsel can be forheld
a creditor
SUGGESTED 108734, ANSWER: Mayadvise29, 1996).
prosper? foreign corporation is doing
Explain. directlyXYZ, liable
would for you
corporate obligations,
legal actioneven against
suit will in nottheprosper.
Philippines? The sale(2%)by E Co of a) As to Aan action can be brought against
to the
A, B,extent
and C? of their personal assets
assets to ANSWER: M Inc does not result in the To Awhat
for P100th
circumstances which is the amount of unpaid
(Concept Builders v. NLRC,will the doctrine
Marabe, et al,
The test
transfer of theis whether
liabilities or not
of thethelatter
to, nor subscription.
apply? (2.5%) Since the corporation is
in the corporation
assumption thereof has by,
the former. an act Theor Theinsolvent,
doctrine isthe applicable
limit of when thethestockholders
acts that imply a continuity
facts given do not indicate that such transfer of commercial of legal entity
liability to is
theused to
creditor 1) isDefeat
only public
up to the
or dealings
assumption or arrangements,
took place or and wascontemplate
stipulated convenience.
extent of his 2) unpaid
Justify wrong.
subscription.3) Protect
uponto that
by extent
the partiesthe performance of acts or
in their agreement. b) As
fraud. to Bthere
4) Defend crime (PNB is no cause of action
v. Andrada
works, or the
Furthermore, theexercise
sale by of E Cosome of itsof the
assets is against
Electric, G.R. No.B because he has already fully paid
a sale of its normally
property. incidentIt does not to, and in the
involve for his subscription. As stated earlier, the
of the shares prosecution
of stock of, commercial
of the corporation gain limit
142936, of the
April stockholders
17, 2002) . liability to the
or of the purpose
belonging to its and object of the
stockholders. business
There is 5) creditorShield of athe violation of the proscription
corporation, when the latter
Joint Venture;
therefore no merger or consolidation that against
becomes forum shopping
insolvent, is
(First the extent of his
May a the Corporate
corporation (1996) enter into a joint c) As to Can
subscription. Bank v.action Court of can be filed
Appeals, G.R.against
No. C,
took place. E Co continues to exist and
Veil (2001)
SUGGESTED filed to a the
ANSWER: collection action against X 6) not
137537, Work
January inequities
24, 1996). among
because members
he has of
remains liable
A corporation may creditor.
enter intoofa joint venture.
Corporation. Upon execution the courts thepaid
up the internally,
shares, but involving
in his no rights as
decision, X inasmuch
Corporation as the
wasterm foundjointto be of the public or
director and thirdofficer
persons because
(Secosa v. Heirs of the
without has no
assets. precise legal
Thereafter definition,
plaintiffs filed it an ofErwin Suarez Francisco,
corporations insolvency G.R. No. being156104,the Juneresult of
may take
action againstvariousitsforms. It couldand
present take the past 7) Evade the
2004). lawful obligations
practices within the of the
form of a simple
stockholder pooling of resources
Y Corporation which owned (not corporation like a judgment credit
Directors are liable jointly and severally for (Sibagat
involving incorporation) G.R.
112546, December 11, 1992). 8)
v. sustained
substantially all of thebetween stockstwoofor more X damages by the corporation,
corporations for a specific project, purpose or Escape liability arising from a debt (Arcilla v.
Corporation. The two corporations have the stockholders or other persons resulting from
Court of Appeals, G.R. No. 88113, October 23,
board of or for a limited time. It may
directors and Y Corporation 9) gross
Piercing inclusion
or of
bad faith in assets
corporate directing as the
involve the
financed the creation
operations of aof more formal
X Corporation. affairs ofestate
the corporation. (Sec 31 Corpv.Code)
Yes, Y Corporation may be held liable of forathe part of the
Mr. (1994) of the decedent (Cease
a rich merchant in his early forties,
May structure and, hence,
Y Corporation be the held formation
liable for the Court of Appeals, G.R. No.inL-35861, October 18, could
debts of
corporation. X Corporation.
If the joint The
venture doctrine of was a defendant a lawsuit which
debts of X Corporation? Why? (5%)would involve 10)
1979). To promote or to shield unfair objectives
piercing the veilofofa corporation
the creation partnership,fiction as the applies
term is subject him to substantial damages. A year
(Villanueva v. Adre, G.R. No. 80863, April 27,
to Liabilities;
this case. BOD;
The two Corporate
understood under the Civil Code, then a have the before the court rendered1989). judgment, Pablo
When (1996)
boardmay a
of corporate
directors director,
and Y trustee,
Corporation or sought his lawyers advice on how to plan his
corporation cannot be a party to it. Pre-emptive
owned be held personally
substantially all of liablethe stockswith the of X estate to avoid taxes. His lawyer suggested
Suppose that X Corporation has already
Corporation, which facts justify the conclusion that he should form a corporation with
A corporate director, trustee or officer may issued the 1000 originally authorized shares
that the latter is merely an extension of the himself, his wife and his children (all students
be held personally liableand with thethecorporation of the corporation so that its BOD and
personality of the former, that former and still unemployed) as stockholders and
under the the following circumstances: 1) When stockholders wish to increase Xs authorized
controls policies of the latter. Added to then transfer all his assets and liabilities to
capital stock. After complying with the
the factto a patently
that Y Corporation unlawful act of the
controls the
this corporation. Mr Pablo followed the
corporation; 2) When he acts in bad faith or requirements of the law on increase of
finances of X Corporation which is merely an recommendation of his lawyer. 1 year later,
with gross negligence in capital stock, X issued an additional 1000
adjunct, business
directing conduit or alter ego of
the affairs of the corporation, or in shares Y the court rendered judgment against Pablo
Piercing the Corporate of the same value. a) Assume that the
with the (CIR v Norton & Harrison Co 11 S and the plaintiff sought to enforce this
Veil conflict
How (2004)
does oneinterest
pierce of thetheveilcorporation
of corporate resulting instockholder A presently holds 200 out of the
714 (1964)) or judgment. The sheriff, however, could not
SUGGESTED ANSWER: to the corporation, its stockholders 1000 original ANSWER:
SUGGESTED shares. Would A have a pre-
veil persons;
of corporate 3) When fiction hemayconsentsbe pierced
to the b) locate
When any
The plaintiff property
stockholder inhimself
the A name
exercise of the
Pablo and
emptive right tocan 200avail of the new of the
issue of doctrine
by issuance
proving in court that
of watered the notion of legal
stocks therefore
of piercing returned
right? (2%) the writ of execution
shares? Why? the (3%)veil of corporate fiction which
entity oriswho, beinghaving usedknowledge
to defeat thereof, public unsatisfied.
can be invoked What whenremedy, if any, isis available
a corporation formed
convenience, file with
justify wrong, the corporate
protect fraud, secretary
or hisa) Yes,
to the A would
plaintiff? have a pre-emptive
or used in avoiding a just obligation. rightWhile
to it
defend written
crime thereto;
or the 4) When entity he agrees
is justto an hold 200 of the new issue of
is true that a family corporation may 1000 shares. A is a be
himself personally
instrument or alter ego and or adjunct of another stockholder
organizedoftorecord pursue holding
an estate 200 shares in
tax; planning,
entity or the
solidarily Corporate
person.liable with the corporation; X Corpo. According to the Corp
which is not per se illegal or unlawful (Delpher Code, each
Veil (2006)
or stockholder has the pre-emptive right to all
Trades Corp v IAC 157 SCRA 349) the factual
issues of shares
settings, however, madeindicate
by the corporation
the existence in of a
proportion to
lawsuit that could subject Pablo to a
Mercantile Law Bar Examination Q & A (1990-2006) Page 41 of 103
the number of shares he holds on record in SUGGESTED ANSWER:
the corporation. d. No, the stockholder may not exercise
appraisal right because the matter that he
b) Pre-emptive right must be exercised in dissented from is not one of those where
accordance with the Articles of Incorporation right of appraisal is available under the
or the By-Laws. When the Articles of corporation code.
Incorporation and the By-Laws are silent, the SEC; Jurisdiction; Transferred
BOD may fix a reasonable time within which Jurisdiction
What (1996)and exclusive jurisdiction
is the original
the stockholders may exercise the right. of the SEC?
Pre-Emptive Right vs. SUGGESTED ANSWER:
ABC Righthas
Corporation (1999)
an authorized capital The SEC has original and exclusive
stock of P1M divided into 50,000 common jurisdiction over cases involving: a) Devices
shares and 50,000 preferred shares. At its or schemes amounting to fraud and
misrepresentation; b) Controversies arising
inception, the Corporation offered for
out of intra-corporate or partnership
subscription all the common shares.
relations; c) Controversies in the election or
However, only 40,000 shares were
appointment of directors, officers, etc; d)
subscribed. Recently, the directors thought
Petitions to be declared in a state of
of raising additional capital and decided to
suspension of payments (Sec 5 PD 902-A)
offer to the public all the authorized shares
of thepre-emptive
Corporation rights to market
at their the remaining
value. a)
10,000 shares? (2%) b) Would
Would Mr. X, a stockholder holdingMr. X4,000
TAKE NOTE: The RTC has jurisdiction over the
shares, rights to the 50,000 preferred
cases which involves intra-corporate
shares? (2%)
c) Assuming that the existing controversy. As of 2006, the applicable rule is
stockholders are entitled to pre-emptive that there is a TRANSFERRED JURISDICTION
rights, at what price will the shares be under Sec. 5.2 of the SRC, the Commissions
offered? Assuming
(2%) a stockholder disagrees jurisdiction over all cases enumerated under
with the issuance of new shares and the PD 902-A sec. 5 has been transferred to the
pricing for the shares, may the stockholder Courts of general jurisdiction or the
invoke his appraisal rights and demand appropriate Regional Trial Court.
SUGGESTED ANSWER: Stockholder; Delinquent; Unpaid
payment for his shareholdings? (2%)
a. Yes. Mr. X, a stockholder holding 4,000 Subscription
The (1997)
BOD of a corporation, by a vote of ten in
shares, has pre-emptive right to the favor of one against, declared due and
remaining 10,000 shares. All stockholders of payable all unpaid subscription to the capital
a stock corporation shall enjoy preemptive stock. The lone dissenting director failed to
right to subscribe to all issues or disposition pay on due date, i.e., 19 Sept 1997, his
of shares of any class, in proportion to their unpaid subscription. Other than the shares
respective shareholdings. wherein he was unable to complete payment,
a. No, Mr X does not have pre-emptive right he did not own any share in the corporation.
over the remaining 10,000 shares because On 23 Sept 1997, he was informed by the
these shares have already been offered at BOD that, unless due payment is meanwhile
incorporation and he chose not to subscribe corporation
received, he: a) forthwith:
could no longer serve as a
to them. He, therefore, has waived his right b)
director of thenot be entitled to the cash and
thereto and the corporation may offer them stock dividends which were declared and
to anyone.ANSWER: payable on 24 Sep 1997; and
b. Yes. Mr. X would have pre-emptive rights c) could not vote in the stockholders
to the 50,000 preferred shares. All meeting scheduled to take place on 26 Sept
stockholders of a stock corporation shall 1997.
enjoy pre-emptive right to subscribe to all Was the action of the BOD on each of the
issues or disposition of shares of any class, in foregoing matters valid?
proportion toANSWER:
their respective shareholdings. SUGGESTED ANSWER:
b. Yes, Mr. X has preemptive right over the a) No. The period of 30 days within which the
50,000 preferred shares because they were stockholder can pay the unpaid subscription
not offered before by the corporation for had not yet expired.
SUGGESTED ANSWER: b) No. The delinquency did not deprive the
c. The shares will be offered to existing stockholder of his right to receive dividends
stockholders, who are entitled to preemptive declared. However, the cash dividend
right, at a price fixed by the BOD, which shall declared may be applied by the corporation
not be less than the par value of such to the unpaid subscription. (Sec 71 Corp
shares. Code)
Mercantile Law Bar Examination Q & A (1990-2006)
c) No. The period of 30 days within which the
stockholder can pay the unpaid subscription
had not yet expired.

Stockholders: Preemptive
The (2004)of Directors of ABC, Inc., a
domestic corporation, passed a resolution
authorizing additional issuance of shares of
stocks without notice nor approval of the
stockholders. DX, a stockholder, objected to
the issuance, contending that it violated his
right of preemption to the unissued shares. Is
his contention tenable? Explain briefly. (5%)
Yes. DX's contention is tenable. Under
Section 39 of the Corporation Code, all
stockholders of ABC, Inc. enjoy preemptive
right to subscribe to all issues of shares of
any class, including the reissuance of
treasury shares in proportion to their
Stockholders; Appraisal
respective shareholdings.
In what(2003)
instances may the right of appraisal
be availed of under the Corporation Code?
SECTION 81. Instances of Appraisal Right.
Any stockholder of a corporation shall have
the right to dissent and demand payment of
the fair value of his shares in the following
1In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholders or class
of shares, or of authorizing preferences in any
respect superior to those of outstanding shares of
any class, or of extending or shortening the term
of corporate existence;
2In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code; and
3In case of merger or consolidation. (n)
Mercantile Law Bar Examination Q & A (1990-2006) Page 43 of 103 children. Page They42 ofthen103brought the
2) to have more shares with which to pay for the thedeed
majorityof assignment
stockholders to the
can proper
acquisition of more assets like acquisitionaof2/3 officers
vote, for wouldregistration
you allowwith thethe request for
company car, stocks, house, machinery orstockholders the transfer toin the corporation's
remove the one director stock and
business; and transferANSWER:
representing books of the assigned shares, the
the minority?
3) to have extra share with which to cover or No.cancellation I will not allow of thethestock
majority stockholders
certificates in PX's
meet the requirement for declaration of stock to remove name, and thethe director.
issuance While the stock
of new
dividend. stockholders
certificatesmay, in the bynames
a 2/3 vote, of hisremove
wife and a his
children theaslaw thealsonewprovides,
owners. however,The officers of
Stocks; Sale, Transfer of thatthehisCorporation
right may not, deniedwithout just cause,
the request on thebe
Arnold has in ofhisStock (1996)
name 1,000 shares of the exercised so as to deprive
ground that another heir is contesting thethe minority of
capital stock of ABC Co as evidenced by a representation
validity of the in deed
the BOD (Sec 28 CorpMay
of assignment. code;the
stock certificate. Arnold delivered the stock Stockholders;
Govt vs Agoncillo 50p348)
Rights are (1996) be compelled
rights of a by mandamus to
certificate to Steven who now claims to be SUGGESTED
ANSWER: shares of stock in the names of
the real owner of the shares, having paid for Yes. The corporation may be compelled by
Thethe assignees?
rights of a Explain briefly.
mandamus to register the shares are as (5%)
of stock1) in
Arnolds subscription. ABC refused to Thethe right to vote, including the right to
recognize and register Stevens ownership. Is name of the assignee. The only legal
SUGGESTED ANSWER: appoint a proxy;
limitation imposed 2) The byright
Section to share
63 ofin thethe
the refusal justified? Explain. profits of the corporation, including the right
ABCs refusal to recognize and register Corporation Code is when the Corporation
Stevens ownership is justified. The facts to declare
holds any stock
unpaid dividends;
claim against3) The right to a
the shares
indicate that the stock certificate for the proportionate
intended toshare of the assets
be transferred. Theofalleged claim
1,000 shares in question is in the name of the corporation upon liquidation; 4) The
of another heir of PX is not sufficient to deny
Arnold. Although the certificate was delivered right of appraisal; 5) The pre-emptive right
the issuance of new certificates of stock to his
by Arnold to Steven, the facts do not indicate to shares; 6) The right to inspect corporate
wife and children. It would be otherwise if the
that the certificate was duly endorsed by books and records; 7) The right to elect
transferee's title to the shares has no prima
Arnold at the time it was delivered to Steven directors;
Trust 8) Such other rights as may
facie validity or is uncertain.
or that the procedure for the effective contractually
A Corporation be granted
(1992) executed toa promissory note
the stockholders
binding itself to payby its
corporation or by
transfer of shares of stock set out in the by- special law.
laws of ABC Co, if any, was observed. Since who had tendered his resignation, a certain
the certificate was not endorsed in favor of sum in payment of the latters shares and
Stockholders; Voting Power of
Steven (or anybody else for that matter), the interests in the company. The corporation
Mercy subscribed (1990)
to 1,000 shares of stock of
only conclusion could be no defaulted in paying the full amount so that
Stocks; Sale, Transfer of other than that Rosario Corporation. She paid
said former President filed suit for collection 25% of said
theis shares
A in question
the registeredof Stock ownerstill
(2001) Stock to Arnold.
Certificate subscription. During the stockholders
(Razon v IAC GR 74306 Mar 16,92 207s234) of the balance before the SEC. a) Under what
No. 000011. He entrusted the possession of meeting, can Mercy vote all her subscribed
ANSWER: a stock corporation empowered
said certificate to his best friend B who shares? Explain.
to acquire its own shares?
Yes, Mercy can vote all her subscribed b) Is the
borrowed the said endorsed certificate to arrangement between the corporation and its
shares. Section 72 of the Corporation Code
support Bs application for passport (or for a President covered by the trust fund doctrine?
states that holders
SUGGESTED ANSWER: of subscribed shares not
purpose other than transfer). But B sold the Explain your answers briefly.
a) paid
A which
stock are not delinquent
corporation may only shall acquire haveits
certificate to X, a bona fide purchaser who
all own
the rights
shares of a
of stockholder.
stock if the trust fund doctrine
relied on the endorsed certificates and Stocks;
believed him to beRemoval the owner thereof. of a) Can is not Increase
impaired. This of Capital
is to say, for instance,
In 1999, & BOD (2001)
Corporation A passed a board Stock
that (2001)
it XmayCorporation
purchase has
its ownan authorized
shares of stock
A claim the shares of stock from X? Explain capital stock of P1M divided into profits
(3%) b) Would
removing yourXanswer
from his position
be the same as if A by utilizing merely its surplus over
manager No. Assuming that the shares were shares of
and abovestock with
the par
subscribed value of P10of
capital each.
the a)
lost theofstocksaidcertificate
corporation. The by-laws
in question of
or if it Givea) (an answer
two ways whereby enumerating the instances or
said authorized
already transferred
A corporation provides to B, A thecannot claimarethe corporation.
was stolen from him? that
(2%) officers
capital under
stock may the beCorporation
increased Code
to aboutwhere the
theshares of stock
president, from X. The certificate
vice-president, treasurer of and
stock covering said shares have been duly Corp
P1.5M. allows
(3%) b) the
Give acquisition
three of
practical shares such as
secretary. Upon complaint filed with the SEC,
endorsed by A and entrusted by him to B. By for in
a the stockholders
corporation to exercise
increase its of appraisal
capital stock
it held that a manager could be removed by SUGGESTED ANSWER:
his resolution
said acts, A (2%)right, failure of bids in the sale of delinquent
mere ofisthe
now estopped
board from
of directors. On a) Two ways of increasing the Authorized
claiming said shares from X, a bona fide shares, etc.)
motion for reconsideration, X alleged that he Capital Stock ANSWER:
SUGGESTED of X corporation to P1.5M are:
could onlyIn be who relied onby
removed thethe endorsement
affirmative by 1)The arrangement
Increase the between number of shares
b) Yes. the case where the certificate of b) the corporation
voteA ofof the
stockholders of stock.
representing 2/3 of from 100,000 to 150,000 shares with the for
stock was
SUGGESTED lost or stole from A, A has a right
and its President to the extent that it calls
the outstanding
No.toStockholders capital
approval stock. Is Xs same
the par
payment valueof of
the P10.00
latters each.
shares is covered
claim the certificate ofisstock
from the only
for who
the has legally
removal oftenable.
the Why? (5%)
members 2) the trust
by Increase
fund par value The
doctrine. of 100,000
no right or title to the of the BOD.
same. One
Forwhothehas removal shares
exceptions to P15.00
from each.
the trust fund doctrine are
lost anyofmovable
a corporateor has officer
been or
unlawfully the vote ofthereof,
deprived the BOD is sufficient
may recover it the redemption of redeemable shares and, in
b) Three
the case practical
of close reasons
corporation,for a corporation
when there
for from
the purpose.
the person in possession of the same.
Stockholders; Sale,Removal;
Transfer of Minority to increase
should beitsa capitaldeadlock stockandare: the SEC1) toorders the
(Art 559 NCC)
Assuming months
(1991) of Stock
that the his (2004)
minority death,
the XYZ generate more working
payment of the appraised value of a capital;
100 sharesisofable
Corporation stock toregistered
elect onlyin 1hisdirector
name in Trust Fund Doctrine;
stockholders share. Intra-Corporate
andfavor of his wife and his
therefore, Controversy (1991)
Mercantile Law Bar Examination Q & A (1990-2006) Page 44 of 103
On December 6, 1988, A, an incorporator and
the General Manager of the Paje Multi Farms Chattel Mortgage vs. After-Incurred
Co, resigned as GM and sold to the Obligations
On December(1999)
1, 1996, Borrower executed a
corporation his shares of stocks in the chattel mortgage in favor of the Bank to
corporation for P300th, the book value secure a loan of P3M. In due time the loan
thereof, payable as follows: a) P100th as was paid. On December 1, 1997, Borrower
down payment; b) P100th on or before 31 obtained another loan for P2M which the
July1989; and c) the remaining balance of Bank granted under the same security as
P100th on or before 30 Sep 1989. A that which secured the first loan.
promissory note, with an acceleration clause, For the second loan, Borrower merely
was corporation
executed byfailed to pay the first
the corporation for the delivered a promissory note; no new chattel
installment on
unpaid balance. due date. A then sued Paje on mortgage agreement was executed as the
the promissory note in the RTC. a) Does the parties relied on a provision in the 1996
court have jurisdiction over the case? b) chattel mortgage agreement which included
Would your answer be the same if A instead future debts as among the obligations
sold his shares to his friend Mabel and the In case
secured bythe
mortgage.executes subsequent
The provision
latter filed a case with the RTC against the promissory
reads: note or notes either as a
corporation to compel it to register the sale renewal, as an extension, or as a new loan,
and to issue new certificates of stock in her this mortgage shall also stand as security
SUGGESTED ANSWER: for the payment of said promissory note or
a) The RTC has jurisdiction over the case. notes without necessity of executing a new
The SC said that a corporation may only buy contract and this mortgage shall have the
its own shares of stock if it has enough same force and effect as if the said
surplus profits therefore. promissory note or notes were existing on
b) My answer would be the same. An action Asdate
Borrower failed to pay the second loan,
to compel a corporation to register a sale the Bank proceeded to foreclose the Chattel
and to issue new certificates of stock is itself Mortgage.Borrower sued the Bank claiming
an intra-corporate matter that exclusively that the mortgage was no longer in force.
lies with the RTC. Borrower claimed that a fresh chattel
TAKE NOTE: The RTC has jurisdiction over the
mortgage should have been executed when
cases which involves intra-corporate the second loan was granted. a) Decide the
controversy. As of 2006, the applicable rule is case and ratiocinate. (4%) b) Suppose the
that there is a TRANSFERRED JURISDICTION would
chattel its validity
mortgage wasand
registered, be
under Sec. 5.2 of the SRC, the Commissions impaired? Explain. (4%)
jurisdiction over all cases enumerated under SUGGESTED ANSWER:
PD 902-A sec. 5 has been transferred to the The foreclosure of the chattel mortgage
Courts of general jurisdiction or the regarding the second loan is not valid. A
appropriate Regional Trial Court. chattel mortgage cannot validly secure after
incurred obligations. The affidavit of good
Credit Transactions faith required under the chattel mortgage law
expressly provides that the foregoing
Chattel Mortgage vs. After-Incurred mortgage is made for securing the obligation
Obligations specified in the conditions hereof, and for no
To secure the(1991)
payment of an earlier loan of
other purpose. The after-incurred obligation
P20,000 as well as subsequent loans which
not being specified in the affidavit, is not
her friend Noreen, would extend to her,
secured by mortgage.
Karen executed in favor of Noreen a chattel
Yes. The chattel mortgage is not valid as
mortgage over her (Karen) car. Is the
SUGGESTED ANSWER: against any person, except the mortgagor,
mortgage valid?
A chattel mortgage cannot effectively secure his executors and administrators.
after-incurred obligations. While a stipulation
to include after-incurred obligations in a
chattel mortgage is itself not invalid, the
obligation cannot, however, be deemed
automatically secured by that mortgage until
after a new chattel mortgage or an addendum
to the original chattel mortgage is executed
to cover the obligation after it has been
actually incurred. Accordingly, unless such
supplements are made, the chattel mortgage
in the problem given would be deemed to
secure only the loan of P20,000 (Sec 5 Act
1505; Belgian Catholic Missionaries v Magallanes
Press 49p647)
Mercantile Law Bar Examination Q & A (1990-2006) Page 45 of 103
Would the seller-mortgagee be legally situated as well as the LTO where the vehicle
justified in foreclosing on this second chattel is registered. (Sec 4 Chattel Mortgage Law)
No. The two mortgages were executed to Credit
secure the payment of the unpaid Transactions
Various buyers of lots in a subdivision
installments for the purchase of a new car. (1999) actions to compel either or both the
When the mortgage on the old car was developer and the bank to lease and deliver
foreclosed, the seller-mortgagee is deemed free and clear the titles to their respective
to have renounced all other rights. A lots.
foreclosure of additional property, that is, the The problem arose because notwithstanding
new car covered by the second mortgage prior sales mostly on installments made by
would beMortgage;
a nullity. Ownership of Thing the developer to buyers, developer had
Zonee, (1990)
who lives in Bulacan, bought a 1988 mortgaged the whole subdivision to a
model Toyota Corolla sedan on July 1, 1989 commercial bank. The mortgage was duly
from Anadelaida, who lives in Quezon City, executed and registered with the appropriate
for P300th, paying P150th as downpayment governmental agencies. However, as the lot
and promising to pay the balance in 3 equal buyers were completely unaware of the
quarterly installments beginning October 1, mortgage lien of the bank, they religiously
1989. Anadelaida executed a deed of sale of As
paidthe developer
the failed
installments dueto under
pay itstheir
the vehicle in favor of Zonee and, to secure mortgage
contracts. was foreclosed and the whole
the unpaid balance of the purchase price, subdivision was acquired by the bank as the
had Zonee execute a deed of chattel highest bidder. a) May the bank dispossess
Ten days after
mortgage thevehicle
on the execution of the
in Anadelaidas priorindividual lotsofor, alternatively, require
favor. documents, Zonee had the them to pay again for the paid lots?
car transferred and registered in her name. b) Discuss
are the rights of the bank vis--
Contemporaneously, Anadelaida had the vis those buyers with remaining unpaid
chattel mortgage on the car registered in the installments? Discuss. (3%)
Chattel Mortgage Registry of the Office of Recommendation: Since the subject matter
the Register of Deeds of Quezon City. of these two (2) questions is not included
In Sep 1989, Zonee sold the sedan to Jimbo within the scope of the Bar Questions in
without telling the latter that the car was Mercantile Law, as it is within Civil Law, it is
mortgaged to Anadelaida. When Zonee failed suggested that whatever answer is given by
to pay the first installment on October 1, the examinee, or the lack of answer should
1989, Anadelaida went to see Zonee and be given full credit. If the examinee gives a
discovered that the latter had sold the car to good answer, he should be given additional
Jimbo. a) Jimbo refused to give up the car on SUGGESTED ANSWER:
the ground that the chattel mortgage No. The bank may not dispossess the prior
executed by Zonee in favor of Anadelaida is purchasers of the individual lots, much less
not valid because it was executed before the require them to pay for the said lots. The
car was registered in Zonees name, i.e., bank has to respect the rights of the prior
before Zonee became the registered owner of purchasers of the individual lots. The
the car. Is the said argument meritorious? purchasers have the option to pay the
b) Jimbo also argued that even if the chattel installments of the mortgagee.
Explain your answer.
mortgage is valid, it cannot affect him The bank has to respect the rights of the
because it was not properly registered with buyers with remaining unpaid installments.
the government offices where it should be The purchaser has the option to pay the
registered. What government office is Jimbo installments to the mortgagee who should
referring to?ANSWER:
a) Jimbos argument is not meritorious. apply the payments to the mortgage
Zonee became the owner of the property indebtedness.
Chattel Mortgage;
upon delivery; registration is not essential to Foreclosure
Ritz bought a (1997)
new car on installments which
vest that ownership in the buyer. The provided for an acceleration clause in the
execution of the chattel mortgage by the event of default. To secure payment of the
buyer in favor of the seller, in fact, can unpaid installments, as and when due, he
demonstrate the vesting of such ownership constituted two chattel mortgages, i.e., one
b) Jimbo
to the was referring to the Register of
mortgagor. over his very old car and the other covering
Deeds of Bulacan where Zonee was a the new car that he had just bought as
resident. The Chattel Mortgage Law requires aforesaid, on installments. After Ritz
the registration to be made in the Office of defaulted on three installments, the seller-
the Register of Deeds of the province where mortgagee foreclosed on the old car. The
the mortgagor resides and also in which the proceeds of the foreclosure were not enough
property is to satisfy the due obligation; hence, he
similarly sought to foreclose on the new car.
Mercantile Law Bar Examination Q & A (1990-2006)
Five years later after completing payment of
the purchase price, debtor obtained title to
the lot. And even as the chattel mortgage on
the house was still subsisting, debtor
mortgaged to a bank the lot and
improvement thereon to secure a loan. This
real estate mortgage was duly registered and
Due to business
annotated reverses,
at the back of the debtor
title. failed to
pay his creditors. The chattel mortgage was
foreclosed when the debtor failed to
reimburse the surety company for payments
made on the bond. In the foreclosure sale,
the surety company was awarded the house
as the highest bidder.
Only after the foreclosure sale did the surety
company learn of the real estate mortgage in
favor of the lending investor on the lot and
the improvement thereon. Immediately, it
filed a complaint praying for the exclusion of
the house from the real estate mortgage. It
was submitted that as the chattel mortgage
was executed and registered ahead, it was
superior to the real estate mortgage.
On the suggestion that a chattel mortgage on
a house- a real property- was a nullity, the
surety company countered that when the
chattel mortgage was executed, debtor was
not yet the owner of the lot on which the
house was built. Accordingly, the house was a
Discuss the
personal validityand
property of the position
a proper taken by
subject the
of a
Who has a better claim to the house, the surety
company or the lending investor? Explain (3%)
Would the position of the surety company be
bolstered by the fact that it acquired title in a
foreclosure sale conducted by the Provincial
Sheriff. Explain (3%)

Debtor purchased a parcel of land from a
realty company payable in five yearly
installments. Under the contract of sale, title
to the lot would be transferred upon full
payment of the purchase price.
But even before full payment, debtor
constructed a house on the lot. Sometime
thereafter, debtor mortgaged the house to
secure his obligation arising from the
issuance of a bond needed in the conduct of
his business. The mortgage was duly
registered with the proper chattel mortgage
Page 46 of 103
Mercantile Law Bar Examination Q & A (1990-2006) pay47
ToPage forofher103loan obtained
b. Stela,
The Liza constituted
lease rentalsin Stelas belong favor to a the
LDC countered that it had built on the chattel mortgage
mortgagor. over anthe
However, electricmortgagegenerator.extends
mortgaged property with the prior Cecil,
to arentals
creditor not of Liza, yetleviedreceivedon attachment
when the
knowledge of mortgagee which had received theobligation
generator.becomesStela filed due a third
and party claim.
the mortgagee
formal notice of the lease. a) How would you Cecil
may opposed
ran afterthe claim.
the Rule said onrentalstheir for the
resolve the and LDC?
dispute (3%) b)the
between Is the SUGGESTED
payment ANSWER:
of the mortgage debt.
mortgagee entitled to the lease rentals due Mortgage; Foreclosure; Effect of mere
from LDC under the lease agreement? (3%) Mortgage;
taking by Extrajudicial
creditor-mortgagor of
Recommendation: Since the subject matterA Foreclose
of estate
X (2006)
& Co obtained mortgage
(1992) a loanmay frombea local foreclosed
bank in
(2) questions
these two is not included within the judicially
the amount or extrajudicially.
of P500th, In what instance as
scope of the Bar Questions in Mercantile may a mortgagee
security thereforeextrajudicially
its realforeclose
Law, as it is within Civil Law, it is SUGGESTED
mortgage? (5%)
the company applied with the
suggested that whatever answer is given When a sale is made under a special power
same bank for a Letter of Credit (LC) for
by the examinee, or the lack of answer inserted or attached to any real-estate
$200th in favor of a foreign bank to cover the
should be given full credit. If the mortgage, thereafter given as security for the
examinee gives a good answer, he should importation of machinery. To guarantee
payment of money or the fulfillment of any
a. The be mortgagee has
given additional credit.a better right than payment of the obligation under the LC, the
other obligation, then the mortgagee may
LDC. The mortgage extends to the company and its President and Treasurer
The machinery foreclose
arrived the was
and realreleased
estate to
improvements introduced on the land, with Mortgage; executed a surety agreement in the local
the (Sec.
company 1, Act No. 3135,
under a trust receiptas amended).
the declarations, amplifications, and May banks
the salefavor.(2003)
at public auction bydefaulted a bank ofinathe
limitations established by law, whether the property agreement. As the company
of its obligations, the because
to it be nullified
estate remains in the possession of the thepayment price was extremely low? Why?
bank took
mortgagor or passes into the hands of a third SUGGESTED possession of
the imported machinery. At the
person (Art 2127 NCC). The notice given by same time, it sought to foreclose the
LDC to the mortgagee was not enough to Mortgage; mortgaged property and to hold the company
remove the building from coverage of the Because as wellofasfailure
Foreclosure its President
(2003) of Janette andand Treasurer,
Jeanne liable
under the
the takingAgreement.
Surety of possession of the
mortgage considering that the building was pay their loan to X Bank, the latter foreclosed
machinery by the bank result in the 1) full
built after the mortgage was constituted and on the mortgage constituted on their
payment of the obligations of the company
the notice was only as regards the lease and property which was put up by them as
and its officers, and 2) foreclosure of the
not as to the construction of the building. security SUGGESTEDfor the payment of the loan. The
Since the mortgagee was informed of the price paidtaking
1) The for theofproperty
possession at the of theforeclosure
lease and did not object to it, the mortgagee sale was not enough to
by the bank did not result in full payment liquidate the of
became bound by the terms of the lease obligation. the obligations owing from the company In
The bank sued for deficiency. and
when it acquired the property as the highest their itsanswer,
officers.Janette and Jeanne
The taking of such did not deny
bidder. Hence, the mortgagee steps into the themust existence of the loan
be considered nor the
merely as fact of their in
a measure
shoes of the mortgagor and acquires the default. order to They,
protect however,
or further interposed
rights of
SUGGESTED the lessor under Art 1768 of the defenses
ANSWER: banks thatsecuritythe interest.
price at Dacion the auctionen pago was can
a) 1st
NCC. house is alwaysgives
This provision
Answer: a real the property
lessor the evenright extremely
only be low and thatastheir
considered having loan, despite
taken place
though Theit mortgagee
was constructed
to appropriate
a. the condominium
has a betteron a right land
to but the(PNB
loanv Pineda
when 197 s accepts
creditor 1)was a and long-term loan
after paying
building. toUnderthe
the Artbuilder.
lessee2127 However,
halfof ofthe theNCC, the
valuethe which
the had
of Mortgage; not yet
ownership ofmatured.
the goods
Foreclosure If in
you ofwere the
payment of a
parties may treat
the building
mortgage at it
extends thatastotime.
a all
improvements the lessoron 2) how
judge, The wouldmereyou taking
rule onoftheagainst
case? Why? of
due obligation.
Borrower obtained (1999) a loan the
refuse a
to reimburse
mortgaged chattel mortgage
said amount,
property regardless thereon.
who mortgaged
(6%) assets does not amount to
security of a mortgage on arequiresparcel of
and mortgage
when shall
remove thebe
the valid
improvement and binding
improvements but
even thoughwere foreclosure. Foreclosure a land.
sale at
While the mortgage was subsisting, borrower
theon the
land parties.
will suffer It will
damage not
introduced. LDC cannot complain otherwise, bind
thereby. or affect public auction. The foreclosure, therefore,
b) The lending investor hasthe a better claimit towas leased for fifty years the mortgaged property
third parties.
because it knew that property has not as yet been effected.
the2nd house. The real estate to Land
Mortgage;Development Redemption (LDC).
Company Period; The
leasing wasAnswer:
mortgaged when mortgage
it built the mortgagee was duly advised of the lease.
a. Assuming
covering the thathouse the office
and lot condominium
was dulywas Foreclosed Property (2002)
condominium. Thereafter, LDC constructed on the
duly constituted
registered and binds under the partiesthe Condominium
and third Primetime Corporation (the Borrower)
Law, before
persons. On the LDCother
could hand,validly the constitute
chattelthe mortgaged property an office
obtained a P10 Million, five-year term loan condominium.
Borrower defaulted on his loan and
same asona the
mortgage condominium,
house securing it should cause to
the credit from Universal Bank (the Bank) in 1996. As
mortgagee foreclosed the mortgage. At the
of be
therecorded in the register
surety company did not of affect
deeds the of the security for the loan and as required by the
foreclosure sale, the mortgagee was awarded
province or city where the
rights of third parties such as the lending land is situated an Bank, the Borrower gave the following
c) No. The chattel mortgage over the house the property as the highest bidder. The
enabling or master deed
investor despite registration of the chattel showing, among collateral security in favor of the Bank: 1) a
owned Certificate
by mortgage
the Borrower ofandSale was in
which was a
mortgage. foreclosed
certificate didofnottheaffect the rights
registered owner real estate over the landlocated
of and
thirdofparties like theholders lending executed
Quezon and after
City; the
2) lapse
the of
joint one andyear, title
all registered of investor.
any lien or was
consolidated inofthe
Since the third parties
encumbrance on the are property
not boundthat by thethey Timbol,
promissory the note
of theof
Primo mortgagee.
Borrower; and
Mortgagee then applied with the RTC for the
chattel mortgage, they are not
consent to the registration of the deed. (Secalso bound by 3) a real estate mortgage over the
issuancelot of a writby
owned of possession not only over
any4. enforcement
RA 4726). If oftheitsmortgagee provisions.gave The its residential houseMr. andTimbol, also located in Quezon
the land but
City. also the condominium building.
foreclosure of such chattel
consent thereto, then LDC mortgage
should did not If
prevail. The mortgagee contended that the
bolster or addANSWER:
anything tothe
position of thewas
no consent was given, mortgage included all accessions,
surety company. vs.
included in the mortgage. improvements and accessories found on the
Levy (2003)
mortgaged property.
Mercantile Law Bar Examination Q & A (1990-2006) Page 48 of 103
Because of business reverses, neither the (5) Integrity Bank which granted Edzo a
Borrower nor Mr. Timbol was able to pay the loan in 2001 in the amount of P500,000. The
loan. In June 2001, the Bank extrajudicially loan was not secured by any asset of Edzo,
foreclosed the two real estate mortgages, but it was guaranteed unconditionally and
with the Bank as the only bidder in the solidarily by Edzos President and controlling
foreclosure sale. On September 16, 2001, the stockholder, Eduardo Z. Ong, as
certificates of sale of the two properties in accommodation surety.
favor of the Bank were registered with the The loan due to Integrity Bank fell due on
Ten months
Register later, of
of Deeds both the Borrower
Quezon City. and Mr. June 15, 2002. Despite pleas for extension of
Timbol were able to raise sufficient funds to payment by Edzo, the bank demanded
redeem their respective properties from the immediate payment. Because the bank
Bank, but the Bank refused to permit threatened to proceed against the surety,
redemption on the ground that the period for Eduardo Z. Ong, Edzo decided to pay up all
redemption had already expired, so that the its obligations to Integrity Bank. On June 20,
Bank now has absolute ownership of both 2002, Edzo paid to Integrity Bank the full
properties. The Borrower and Mr. Timbol principal amount of P500,000, plus accrued
came to you today, September 15, 2002, to interests amounting to P55,000. As a result,
find out if the position of the Bank is correct. Edzo had hardly any cash left for operations
What would be your answer? State your and decided to close its business. After
reasons (5%).
1With respect to the real estate mortgage over the paying the unpaid salaries of its employees,
How would you, as judge in the insolvency
land and building owned by the Borrower, Edzo filed a petition for insolvency on July 1,
proceedings, rank the respective credits or
Primetime Corporation, a juridical body, the period claims of the five (5) creditors mentioned
of redemption is only three (3) months, which above in terms of preference or priority
period already expired. SUGGESTED
against eachANSWER:
other? (5%)
2As to the real estate mortgage over the The claim of Handyman Garage for P10,000
residential house and lot owned by Mr. Timbol, the has a specific lien on the car repaired.
period of redemption is one (1) year from the date
of registration of the certificate of sale, which The remaining four (4) claims have
period has not yet expired in this case. preference or priority against each other in
(1) No. 4 order:
the following claim of the BIR for unpaid
value added taxes
(2) No. 3 claim of Joselyn Reyes for
Mortgage; Unlawful termination
Remedies (2003)
Carmakers, Inc., sold a motor vehicle on (3) No. 1 claim of Ace equipment
installment basis to Chari Paredes. The Supplies as an unpaid seller; and
transaction was reflected on a promissory (4) No. 5 claim of
note executed by Chari in favor of Carmakers. Integrity Bank.
The note was secured by a mortgage over the
car. Contemporaneous with the execution of
the note and the mortgage deed, Carmakers,
Inc., assigned the instruments sans recourse
to Adelantado Finance Corporation. Chari
defaulted in her obligations. Could
Preference Finance ofcorporation take action
Credits both Carmakers Inc., and Chari? Why?
As of (2002)
June 1, 2002, Edzo Systems
Corporation (Edzo) was indebted to the
(1) Ace
following Equipment Supplies for various
personal computers and accessories sold to
Edzo on credit amounting to P300,000.
(2) Handyman Garage for mechanical
repairs (parts and service) performed on
Edzos company car amounting to P10,000.
(3) Joselyn Reyes former employee of
Edzo who sued Edzo for unlawful termination
of employment and was able to obtain a
final judgment against Edzo for P100,000.
(4) Bureau of Internal Revenue for
unpaid value-added taxes amounting to
Mercantile Law Bar Examination Q & A (1990-2006) Page 49 of 103 Upon his failure to pay the loan
over the vehicle in favor of IOU. When Anjo on due date, the bank foreclosed the
defaulted, IOU foreclosed the chattel mortgage on the 3 lots, which were
mortgage, and sought to recover the subsequently sold for only P99th at the
deficiency. May IOU still recover the foreclosure sale. Thereafter, the bank filed an
Explain. ordinary action for the collection of the
IOU may no longer recover the deficiency. deficiency. A contended that the mortgage
Under Art 1484 of the NCC, in a contract of contract he executed was indivisible and
sale of personal property the price of which consequently, the bank had no legal right to
is payable in installments, the vendor may, foreclose only the real estate mortgage and
among several options, foreclose the chattel leave out the chattel mortgage, and then sue
mortgage on the thing sold, if one has been him for a supposed deficiency judgment. If
constituted, should the vendees failure to you were the Judge, would you sustain the
pay cover two or more installments. In such SUGGESTED ANSWER:
contention of A?
case, however, the vendor shall have no If I were the Judge, I would dismiss the action
further action against the purchaser to as being premature since the proper remedy
recover any unpaid balance of the price and would be to complete the foreclosure of the
any agreement to the contrary is void. While mortgages and only thereafter can there by
the given facts did not explicitly state that an action for collection of any deficiency. In
Anjos failure to pay covered 2 or more Caltex v IAC (GR 74730, 25 Aug 89), the
installments, this may safely be presumed remedies on a secured debt, said the court,
because the right of IOU Co to foreclose the are either an action to collect or to foreclose
chattel mortgage under the circumstances is a contract of real security. These remedies
premised on Anjos failure to pay 2 or more are alternative remedies, although an action
installments. The foreclosure would not have for any deficiency is not precluded, subject to
been valid if it were not so. (The given facts certain exceptions such as those stated in Art
did not also state explicitly whether Anjos 1484 of the Civil Code, by a foreclosure on
default was a payment default or a default the mortgages. While the factual settings in
arising from a breach of a negative pledge or the case of Suria v IAC (30 June 87) are not
breach of a warranty. In such case, however, similar to the facts given in the problem, the
IOU Company would not have been able to SC implied
The that foreclosure
indivisibility of a contract as of
a remedy in
real security,
Remedies; the chattel mortgage validly
Available to as secured
such as aobligations
real estatemust first be
mortgage oravailed of
a chattel
such foreclosure,
Mortgagee-Creditor under the
(2001) circumstances
Debtor A issued a promissory note in the by a creditor
mortgage, in preference
only means that to other remedies
a division or a
amount of P10M byin the
favorlaw, could onlybank
of commercial be that
paymentalso beof invoked
a secured byobligation
him. does
Y secured for by
a payment
mortgage default covering
of his two
properties not warrant a corresponding division or
or moreP30M.
worth installments)
When (Luis Ridadtov Filipinas
A failed pay his proportionate reduction of the security given.
Investment and
indebtedness, Finance
despite Co GR made
demands L-39806
by A creditor in such secured debts may pursue
bank 120s246)
Y, the latter instituted a collection suit the remedy of foreclosure, in part or in full, or
to enforce payment of the P10M account. file an ordinary action for collection on any
Subsequently, bank Y also filed foreclosure Promissory
amount due. A favorable Note: judgment can
proceedings against A for security given for Liability
X, Y and Z(2001)
warrant signed
an a promissory
issuance of a writ note in favoron
of execution
the account. If you were the judge, how of any
A stating:
property,We promisefrom
not exempt to execution,
pay A on
The case for collection will be allowed to December
belonging 31,to 2001 the sumdebtor.
the judgment of P5,000.00
would you resolve the two cases? (5%)
proceed. But the foreclosure proceedings When the be
should noteno fell due,
legal A suedforX aand
obstacle Y whoto
have to be dismissed. In instituting Z.
putIs the
up defense
waive, the
in full orvalid?
defense Why?
in part, should
right to have
foreclosure proceedings, after filing a SUGGESTED
Insurance Law
on contracts of real security.
collection case involving the same account or The defense is not valid. The liability of X, Y,
transaction, bank Y is guilty of splitting a and Z under the promissory note is joint.
Such being the Effects:
Z is not an
cause of action. The loan of P10M is the
What are the (2005)
indispensable party. Theeffects of fact
an irrevocable
that A did not
principal obligation while the mortgage
implead Z will of
nota beneficiary
prevent A undercollecting
from the
securing the same is merely an accessory to SUGGESTED ANSWER:
theTheproportionateCode? Explain. (2%)
share of X givesand Y
said loan obligation. The collection of the loan irrevocable designation thein the
and the foreclosure of the mortgage securing payment (Observation:
of the loan. Even if the liability of
beneficiary a vested right over Life
said loan constitute one and the same cause X, Y, and Z is solidary, the defense
Remedies; Secured Insurance. The Insured cannot act to divest
of action. The filing of the collection case bars would still not be valid)
To (1991) the irrevocable beneficiary, in whole or in
the subsequent filingof of
secure the payment his loan
the of P200th,
foreclosure part, without theAvailable
beneficiary's consent. To
A executed in favor of the Angeles Banking Remedies; to
proceedings. (1) The beneficiary designated in a life
be specific:
Co in 1 document, a real estate mortgage Mortgagee-Creditor
Finding a 24-month payment (1996) plan attractive,
insurance contract cannot be changed
over 3 lots registered in his name and a Anjo purchased a Tamaraw FX from Toyota
without the consent of the beneficiary
chattel mortgage over his 3 cars and 1 Isuzu QC. He paid a down-payment of P100th and
because he has a vested interest in the policy
cargo truck. obtained financing for the balance from IOU
(Philamlife v. Pineda, G.R. No. 54216, July 19,
Co. He executed a chattel mortgage
Mercantile Law Bar Examination Q & A (1990-2006)
1989, citing Gcrcio v. Sun Life, G.R. No.
23703, September 28, 1925; and Go v.
Redfern, G.R. No. 47705, April 25, 1841);
(2) Neither can the Insured take the cash
surrender value, assign or even borrow on
said policy without the beneficiary's consent
(Nario v. Philamlife, G.R. No. 22796, June 26,
(3) The Insured cannot add another
beneficiary because that would reduce the
amount which the first beneficiary may
recover and therefore adversely affect his
vested right (Go v. Redfem, G.R. No. 47705, April
25, 1941);
(4) Unless the policy allows, the Insured
cannot even designate another beneficiary
should the original beneficiary predecease
him. His estate acquires the beneficiary's
vested right upon his death; and
(5) The Insured cannot allow his creditors
to attach or execute on the policy. (Philamlife
v. Pineda, G.R. No. 54216, July 19, 1989)
Mercantile Law Bar Examination Q & A (1990-2006) Page 50 of 103 relation, Purita Page 51 of 103
cannot be a
Will Petras suit prosper? Explain. donee of the deceased. Hence, she cannot
SUGGESTED ANSWER: alsoConcealment;
be his beneficiary. Material Concealment;
No, Petras suit will not prosper (assuming Incontestability Clause (1991)
that the policy of life insurance has been in Concealment;
Atty Roberto took outMaterial a life insurance policy
force for a period of less than 2 years from Concealment
A applied
from thefor Dana a(2001)
Ins Co (DIC)life oninsurance.
1 Sep 1989.
the date of its issue). The matters which Juan TheOninsured
31 Augdid not inform
1990, Robertothe died. insurer that
DIC refused
failed to disclose was material and relevant to oneto payweek his prior
beneficiariesto hisbecause application for
it discovered
the approval and issuance of the insurance insurance,
that Robert he washad examined and confinedcertain
misrepresented at
policy. They would have affected Good Lifes St. material
Lukes Hospital facts where in his he was diagnosedThe
action on his application, either by approving for beneficiaries
lung cancer. sued The insured
on the basis soon thereafter
that DIC can
it with the corresponding adjustment for a died in a plane
contest the validitycrash. of Is the insurerinsurance liable
higher premium or rejecting the same. considering
only within that 2 the
years fact fromconcealed
the date had of no
Moreover, a disclosure may have warranted a SUGGESTED
and duringwith the thelifetime
cause ofofthe death
insured. of Decide
medical examination of Juan by Good Life in No.I Thewould concealed
rule in fact favor is material
of the insurance to the
the case. Why? (5%)
order for it to reasonably assess the risk approval
company. and The issuance of the insurance
incontestability clause,
involved in accepting the application. In any policy.
appliesIt is only
well if settled
the policythat the hadinsured
been in need
case, good faith is no defense in notfordieat of least
the disease2 years. he failed
The 2toyear discloseperiodto is
concealment. The waiver of a medical thecounted
insurer.from It is the sufficient
time thethat his
examination in the non-medical life nondisclosure
becomes effective misled the until insurer
the death in forming of the
insurance from Good Life makes it even more hisinsured
estimate andofnotthe risks of(Tan
thereafter thev proposed
CA GR 48044
I would rule
Concealment; in favor of the insurance
necessary that Juan supply complete insurance
29Jun1989) policyMaterial
or in making Concealment:
company. Although
Incontestability Clause (1994) an insurer may not
information about his previous hospitalization Onrescind
September the 23,contract 1990, Tan on took ground a life of
for such Rights;
of lifeIrrevocable
information constitutes an important misrepresentation after The an policy action
If the policy insurance has been in insurance policy from Philam. was is
factorobtained (2005)
a life insurance
force for a period of 2 years or takes
which Good policy
Life for P1from into commenced for recovery under the policy,
more issued on November 6, 1990. He died on Aprilthe
Million designating
consideration in irrevocably
the date of its issue (on which point the Diwata,
whether to aissue the 26,insurer
1992 is of not hepatoma.
precluded from The invokinginsurancethe
policy as his
or beneficiary.
not. (See Jacob,
given facts are vague) then Good Life can noof
Sunlife however,
Assurance Co ground denied
company of misrepresentation
the beneficiaries as aclaim defense
and in
Canada v CA
provemindGR thatandthe
105135, wants
policy isand
22, 1995
void Jojo,
ab his
245 sinitio
268) the action for recovery.
rescinded the policy by reason of alleged This is alright since
or is friends,
rescindibleto be included
by reason asofbeneficiaries
the fraudulent the bar
misrepresentation problem is
and not covered
concealment yet by the
concealment that the or proceeds of the policy
misrepresentation of Juan Concealment;
incontestability Material
clause. Concealment; of
material facts made Clause
Incontestability by Tan in his application.
( sufficient
Sec 48 Ins for the
Code) Material Concealment:
three friends. Can Jacob It returned the premiums paid.
add Yob and Jojo Clause (1997)
as his beneficiaries? TheRenato was issued
beneficiaries contend a life thatinsurance
the company policy on
No,The Jacob can noanswers longer add NoYob andquestion
Jojo as in
(2%) to the had no right to rescind the contract as fact that
January 2, 1990. He concealed the
application for a life policy: AreAs
in addition to Diwata. the 3 yearsmust prior
you rescission be todone theduring
issuance of his life
the lifetime
irrevocable beneficiary, Diwata
suffering from any form of heart illness? In has acquired insurance policy, he had been seeing a
of the insured within two years and prior to
a-vested right over Jacob's lifeainsurance
fact, the assured has been heart patient for thedoctor about his heart
commencement of theailment.
action. Is the
many years. On 7 Sep 1991, the will
Any additional beneficiaries assured is On March
SUGGESTED ANSWER:1, beneficiaries
1992, Renato died of heart
contention of the tenable?
killedthe in a amount
plane crash. which The Diwata, as the first
insurance No.failure. May the heirs file
The incontestability clause a claimdoes on notthe
company may denies recover,
the claim whichfor will
insurance proceeds
apply. The insuredof thedies lifewithin
less than policy
two of
adversely affect her vested
proceeds and returns the premiums right. (Go v.paid. Is SUGGESTED
years from (5%) ANSWER:
the issuance of the policy on
the decisionLife No.
ANSWER:47705, April
of the insurance company 25, 1941) September 23, insurance
Yes. The life 1990. The policy
insured in question
died onwas
Assuming that Insurance; the incontestability clause issued on January 9, 1990. More than 2 years
justified? Beneficiaries (1998) April 26, 1992, or less than 2 years from
does not apply because the policy has not had elapsed when Renato, the insured, died
September 23, 1990.
Juanbeen de lainCruz
force was forissued
2 years,PolicyfromNo.the8888 dateof of Theonright
March 1, 1992.
of the insurer The to incontestability
rescind is only lost clause
Midland Life Insurance Co on
during the lifetime of the insured, the a whole life applies.
if the beneficiary has commenced an action
plan for P20,000
decision of theon August 19,
insurance 1989. Juan
company not to is pay on INCONTESTABILITY
the policy. There isCLAUSE no such action in this
is to Cynthia
justified. with
There whom he
was has three
fraudulent The insurer has two years from the date of
case. (Tan v CA 174 s 143)
concealment. children. It He,is however,
not material designatedthat the issuance of the
Concealment; insurance
Material contract or of its
insured his common-law
died of a different wife, as thecause revocable
than the last reinstatement
Incontestability Clause (1996) within which to contest
fact concealed. Juan referred The fact to Purita in his that is
concealed, Juan procured a non-medical life insurancestill
the policy, whether or not, the insured
heart and policy as
ailment, is thematerial
legal wife. to 3 the fromlives
Good within
Lifesuch period. He
Insurance. After two years,
designated histhe
years later, Juan died.
determination by Purita filed her claim
the insurance company wife, Petra, as the beneficiary. Earlier, in his or
defenses of concealment
for However,
the proceeds
whether orif not
theof toincontestability
policy theas the clause which
application for misrepresentation,
application in response notomatter
the how patent
question as to or
applies to the insurance policy covering the Insurable
well founded, Interest:
no longer Bank
designated beneficiary
insurance and to require the therein. The widow, medical whether or not he had ever been
Cynthia, ofalso
the filedinsured a claimhadasbeen in force
the legal wife. for 2 Deposit
BD has a (2000)
bank deposit of half a million pesos.
SUGGESTED ANSWER: of the insured. hospitalized, he answered in the negative. He
To years
whom from
should issuance
the thereof,
proceeds of thethe insurance Since the limit of the insurance coverage of
The proceeds of the insurance policy shall be forgot to mention his confinement at the
company would
insurance not be justified in denying theJuan
After Philippine
died inDeposita plane Insurance
crash, Petra Corp (PDIC)
filed a
awarded topolicy be awarded?
the ESTATE of Juan(5%)de la Cruz. Kidney
3591) is only one tenth of BDs deposit,
the claim for proceeds of the insurance and claim with Good Life. Discovering Juans
Purita, the commonlaw-wife, is disqualified he would like some protection for rejected
the excess
in returning the premium paid. In that case, previous hospitalization, Good Life
as the beneficiary of the deceased because by taking
the insurer cannot prove the policy void ab Petras claim out on the an insurance
ground of against concealment all risks
of illicit relation between the deceased and
initio or rescindible by reason of fraudulent andormisrepresentation.
contingencies of Petra loss sued arising Good fromLife,any
Purita, the designated beneficiary. Due to unsound or unsafe banking practices
concealment or misrepresentation of the invoking good faith on part of Juan.
such illicit including unforeseen adverse effects of
Mercantile Law Bar Examination Q & A (1990-2006) Page 52 of 103 Moreover, in the problem at
the continuing crisis involving the banking hand, there is no double insurance because
and financial sector in the Asian region. the insured with the First Insurance is
Does BD have an insurable interest within different from the insured with the Second
the meaning of the Insurance Code of the Insurance Company. The same is true with
Philippines ANSWER:
(PD1460)? (2%) respect to the interests insured in the two
Yes. BD has insurable interest in his bank policies.
deposit. In case of loss of said deposit, more c) As Judge, I would allow the businessman to
particularly to the extent of the amount in recover his total loss of P5M representing the
excess of the limit covered by the PDIC Act, full value of his goods which were lost through
PBD will be damnified. He will suffer fire. As to the creditor, I would allow him to
pecuniary loss of P300,000.00, that is, his recover the amount to the extent of or
bank deposit of half a million pesos minus equivalent to the value of the credit he
P200,000.00 which is the maximum amount extended to the businessman for the stocks-
from the Public
PDIC. in-trade which were mortgaged by the
May (2000) of the MILF or its breakaway
a member Insurable Interest; Equitable
group, the Abu Sayyaf, be insured with a Interest
A piece of(1991)
machinery was shipped to Mr
company licensed to do business under the Pablo on the basis of C&F Manila. Pablo
Insurance Code of the Phils (PD 1460)? insured said machinery with the Talaga
Explain. (3%) Merchants Ins Co (Tamic) for loss or damage
A member of the MILF or the Abu Sayyaf may
during the voyage. The vessel sank en route
be insured with a company licensed to do
to Manila. Pablo then filed a claim with
business under the Insurance Code of the
Tamic which was denied for the reason that
Phils. What is prohibited to be insured is a SUGGESTED ANSWER:
prior to deliver, Pablo had no insurable
public enemy. A public enemy is a citizen or Pablo had an existing insurable interest on
interest. Decide the case.
national of a country with which the the piece of machinery he bought. The
Philippines is at war. Such member of the purchase of goods under a perfected
MILF or the Abu Sayyaf is not a citizen or contract of sale already vests equitable
national of another country, but of the interest on the property in favor of the buyer
Philippines.Interest: Separate even while it is pending delivery (Filipino
A Interest
businessman in the(1999)
grocery business Merchants Ins Co v CA GR 85144 28Nov1989)
obtained from First Insurance an insurance Insurable Interest; Life vs. Property
policy for P5M to fully cover his stocks-in- Insurance
a) A obtains(1997)
a fire insurance on his house and as a
trade from the risk of fire. generous gesture names his neighbor as the
Three months thereafter, a fire of accidental beneficiary. If As house is destroyed by fire, can
origin broke out and completely destroyed successfully
B claim against the policy? b) A
the grocery including his stocks-in-trade. This obtains insurance over his life and names his
prompted the businessman to file with First neighbor B the beneficiary because of As secret
Insurance a claim for five million pesos for B. If A dies, can B successfully claim against
representing the full value of his goods. policy?
First Insurance denied the claim because it SUGGESTED ANSWER:
discovered that at the time of the loss, the a) No. In property insurance, the beneficiary
stocks-in-trade were mortgaged to a creditor must have insurable interest in the property
who likewise obtained from Second Insurance insured. (Sec 18 Ins Code). B does not have
Company fire insurance coverage for the insurable interest in the house insured.
stocks at their full value of P5M. a) May the
separate insurance
businessman coverages
and the creditor over the same
obtain b) Yes. In life insurance, it is not required
stocks-Explain (3%) b) First Insurance that the beneficiary must have insurable
refused to pay claiming that double interest in the life of the insured. It was the
insurance is contrary to law. Is this contention insured himself who took the policy on his
tenable? (3%) c) Suppose you are the Judge, own life.
how much would you Insurable Interest; Life vs. Property
allow the businessman and the creditor to Insurance
IS, (2000)bachelor with no known
an elderly
from their respective insurers. Explain
recover relatives, obtained life insurance coverage for
(3%) ANSWER: P250,000.00 from Starbrite Insurance
a) Yes. The businessman, as owner, and the Corporation, an entity licensed to engage in
creditor, as mortgagee, have separate the insurable business under the Insurance
insurable interests in the same stocks-in- Code of the Philippines (PD1460). He also
trade. Each may insure such interest to insured his residential house for twice that
protect his own separate interest. b) The amount within the same corporation. He
contention of First Insurance that double immediately assigned all his rights to the
insurance is contrary to law is untenable. insurance proceeds to BX, a friend-companion
There is no law providing that double living with him. Three years later, IS died in a
insurance is illegal per se. fire that gutted his insured house two days
after he had sold it. There is
Mercantile Law Bar Examination Q & A (1990-2006) Page 53 of 103 On March 19, 1993, a fire razed
no evidence of suicide or arson or the building to the ground. Garapal Insurance
involvement of BX in these events. BX refused to make good its obligation to Benjie
demanded payment of the insurance under the insurance contract. 1) Is Garapal
proceeds from the two policies, the Insurance legally justified in refusing
premiums for which IS had been faithfully payment to Benjie? 2) Is Nat entitled to
paying during all the time he was alive. collect on the insurance policy?
Starbrite refused payment, contending that
BX had no insurable interest and therefore 1)Yes. At the time of the loss, Benjie was no
was not entitled to receive the proceeds longer the owner of the property insured as
from ISs insurance coverage on his life and he failed to redeem the property. The law
Starbrite is correct with respect to the requires in property insurance that a person
also on his property. Is Starbrites contention
insurance coverage on the property of IS. can recover the proceeds of the policy if he
valid? Explain? (5%)
The beneficiary in the property insurance has insurable interest at the time of the
policy or the assignee thereof must have issuance of the policy and also at the time
insurable interest in the property insured. BX, when the loss occurs. At the time of fire,
a mere friend-companion of IS, has no Benjie no longer had insurable interest in the
insurable interest in the residential house of 2) No. While
property at the time of the loss he had
IS. BX is not entitled to receive the proceeds insurable interest in the building, as he was
from toISs
insuranceoncoverage on the life of
his property. the owner thereof, Nat did not have any
IS, BX is entitled to receive the proceeds. interest in the policy. There was no
There is no requirement that BX should have automatic transfer clause in the policy that
insurable interest in the life of IS. It was IS would give him such interest in the policy.
himself who took the insurance on his own Insurable Interest; Property
life. Interest; Life vs. Property Insurance
JQ, owner of(2001)
a condominium unit, insured the
Insurance (2002)
Distinguish insurable interest in property same against fire with the XYZ Insurance
insurance from insurable interest in life Co., and made the loss payable to his
insurance. (5%) brother, MLQ. In case of loss by fire of the
a) In property insurance, the expectation said condominium unit, who may recover on
of benefit must have a legal basis. In life the fire insurance policy? State the reason(s)
insurance, the expectation of benefit to be SUGGESTED ANSWER:
for your answer. (5%)
derived from the continued existence of a life JQ can recover on the fire insurance policy for
need not have any legal basis. the loss of said condominium unit. He has the
insurable interest as owner-insured. As
b) In property insurance, the actual beneficiary in the fire insurance policy, MLQ
value of the interest therein is the limit of cannot recover on the fire insurance policy.
the insurance that can validly be placed For the beneficiary to recover on the fire or
thereon. In life insurance, there is no limit to property insurance policy, it is required that
the amount of insurance that may be taken he must have insurable interest in the
upon life. property insured. In this case, MLQ does not
c) In property insurance, an interest have insurable interest in the condominium
insured must exist when the insurance takes Insurance;
unit. Cash & Carry
effect and when the loss occurs but need not Basis is
What (2003)
meant by cash and carry in the
exist in the meantime. In life insurance, it is business of insurance?
enough that insurable interest exists at the SUGGESTED ANSWER:
time when the contract is made but it need
not exist at the time of loss. Insurance; Co-Insurance vs. Re-
Insurable Interest; Property Insurance (1994)
Distinguish co-insurance from re-
Insurance (1994) SUGGESTED
insurance. ANSWER:
In a civil suit, the Court ordered Benjie to pay
Nat P500,000.00. To execute the judgment, CO-INSURANCE is the percentage in the
the sheriff levied upon Benjies registered value of the insured property which the
property (a parcel of land and the building insured himself assumes or undertakes to act
thereon),and sold the same at public auction as insurer to the extent of the deficiency in
to Nat, the highest bidder. The latter, on the insurance of the insured property. In case
March 18, 1992, registered with the Register of loss or damage, the insurer will be liable
of Deeds the certificate of sale issued to him only for such proportion of the loss or
by the sheriff. Meanwhile, on January 27, damage as the amount of insurance bears to
1993, Benjie insured with Garapal Insurance the designated percentage of the full value of
REINSURANCE is where the insurer procures
the property insured.
for P1,000,000.00 the same building that a third party, called the reinsurer, to insure
was sold at public auction to Nat. Benjie him against liability by reason of such original
failed to redeem the property by March 18, insurance. Basically, a
Mercantile Law Bar Examination Q & A (1990-2006) Page 54 of 103 Yes, when insured and insurer
reinsurance is an insurance against liability have agreed to the payment of premium by
which the original insurer may incur in favor installments and partial payment has been
of the original insured. made at the time of loss, then the insurer
Insurance; Double becomes liable. When the car loss happened
When does (2005)
double insurance exist? on the 5th month, the six months agreed
(2%) period of payment had not yet elapsed (UCPB
Under Section 93 of the Insurance Code, General Insurance v. Masagana Telamart, G.R. No.
there is double insurance when there is over- 137172, April 4, 2001). Francis can recover
insurance with two or more companies, from Peninsula Insurance Company, but the
covering the same property, the same latter has the right to deduct the amount of
insurable interest and the same risk. Double unpaid premium from the insurance
insurance exists where the same person is Insurance;
proceeds. Life Insurance;
insured by several insurers separately in Assignment
The of Policy upon
policy of insurance (1991)his life, with a
respect of the same subject matter and face value of P100th was assigned by Jose, a
interests. (Geagonia v. Court of Appeals, G.R. No. married man with 2 legitimate children, to
Insurance; Double Insurance; his nephew Y as security for a loan of P50th.
114427, February 6, 1995)
Julie and(1993)
Alma formed a business He did not give the insurer any written notice
partnership. Under the business name Pino of such assignment despite the explicit
Shop, the partnership engaged in a sale of provision to that effect in the policy. Jose
construction materials. Julie insured the died. Upon the claim on the policy by the
stocks in trade of Pino Shop with WGC assignee, the insurer refused to pay on the
Insurance Co for P350th. Subsequently, she ground that it was not notified of the
again got an insurance contract with RSI for assignment. Upon the other hand, the heirs
P1m and then from EIC for P200th. A fire of of Jose contended that Y is not entitled to
unknown origin gutted the store of the SUGGESTED ANSWER:
A lifeamount under
insurance the policy because
is assignable. the
A provision,
partnership. Julie filed her claims with the assignment without due notice to the insurer
three insurance companies. However, her however, in the policy stating that written
noticevoid. Resolve
of such the issues. should be given
an assignment
claims were denied separately for breach of
policy condition which required the insured to to the insurer is valid (Secs 181-182 Ins
give notice of any insurance effected Code). The failure of the notice of assignment
covering the stocks in trade. Julie went to would thus preclude the assignee from
court and contended that she should not be claiming rights under the policy. The failure
blamed for the omission, alleging that the of notice did not, however, avoid the policy;
insurance agents for WGC, RSI and EIC knew hence, upon the death of Jose, the proceeds
of the existence of the additional insurance would, in the absence of a designated
coverages and
SUGGESTED that she was not informed
beneficiary, go to the estate of the insured.
1) No. the requirement
An insured that such
is required other orthe
to disclose The estate, in turn, would be liable for the
Insurance; Perfection of Insurance
additional insurance
other insurances shouldthe
covering besubject
stated in the
matter loan of P50,000 owing in favor of Y.
Josie (2003)
Gatbonton obtained from Warranty
policy. Is the contention of Julie tenable?
of the insurance being applied for. (New Life Insurance Corporation a comprehensive
Ent v CAMay 207 she recover on her fire
s 669) motor vehicle insurance to cover her brand
2) No, because
insurance she Explain.
policies? is guilty of violation of a new automobile. She paid, and the insurer
warranty/ condition. accepted payment in check. Before the check
could be encashed, Josie was involved in a
Insurance; Effects; Payment of
motor vehicle accident where her car
Premiums by Installment (2006)
became a total wreck. She sought payment
The Peninsula Insurance Company offered to SUGGESTED ANSWER:
from the insurer. Could the insurer be made
insure Francis' brand new car against all risks (per Dondee) Yes, because there was a
liable under the insurance coverage? (6%)
in the sum of PI Million for 1 year. The policy perfected contract of insurance the moment
was issued with the premium fixed at there is a meeting of the minds with respect
160,000.00 payable in 6 months. Francis only to the object and the cause of payment. The
paid the first two months installments. payment of check is a valid payment unless
Despite demands, he failed to pay the upon encashment the check bounced.
subsequent installments. Five months after Insurance; Property Insurance;
the issuance of the policy, the vehicle was Prescription of Claims (1996)
carnapped. Francis filed with the insurance Robin insured his building against fire with
company a claim for its value. However, the EFG Assurance. The insurance policy
company denied his claim on the ground that contained the usual stipulation that any
he failed to pay the premium resulting in the action or suit must be filed within one year
cancellation of the policy. Can Francis after the rejection of the claim.
recover from the Peninsula Insurance
Company? (5%)
Mercantile Law Bar Examination Q & A (1990-2006)
After his building burned down, Robin filed his
claim for fire loss with EFG. On Feb 28, 1994,
EFG denied Robins claim. On April 3, 1994,
Robin sought reconsideration of the denial,
but EFG reiterated its position. On March 20,
1995, Robin commenced judicial action
against EFG. Should Robins action be given
due course? Explain.
No, Robins action should not be given due
course. Is filing of the request for
reconsideration did not suspend the running
of the prescriptive period of one year
stipulated in the insurance policy. Thus, when
robin commenced judicial action against EFG
Assurance on March 20, 1995, his ability to
do so had already prescribed. The one-year
period is counted from Feb 28, 1994 when
EFG denied Robins claim, not from the date
(presumably after April 3, 1994) when EFG
reiterated its position denying Robins claim.
The reason for this rule is to insure that
claims against insurance companies are
promptly settled and that insurance suits are
brought by the insured
Insurance; Return whileofthe evidence as
to the origin
Premiums and
(2000)cause of
Name at least three instancesthe destruction
when hasan
not yet disappeared.
insured is entitled (See
to aSunreturn
Ins Office
of Ltd
CA gr 89741,
premium Mar 13 91 195s193)
Three instances when an insured is entitled
to a return of premium paid are:
1To the WHOLE PREMIUM, if no part of his interest
in the thing insured be exposed to any of the
perils insured against.
2Where the insurance is made for a definite
period of time and the insured surrenders his
policy, to such portion of the premium as
corresponds with the unexpired time at a pro rata
rate, unless a short period rate has been agreed
upon and appears on the face of the policy, after
deducting from the whole premium any claim for
loss or damage under the policy which has
previously accrued.
3When the contract is voidable on account of the
fraud or misrepresentation of the insurer or of his
agent or on account of facts the existence of
which the insured was ignorant without his fault;
or when, by any default of the insured other than
actual fraud, the insurer never incurred any
liability under the policy.
Mercantile Law Bar Examination Q & A (1990-2006)Page 55 of 103 56 ofBOY,
Pageson, 103 injured 3 children of
or willful a neighbor, who peril
to needless suedwhich
SAMare forexcepted
Insured; Accident vs. risks. The insureds
SAM's lawyeractwas was purely
ATT, whoan act
was of paid
for his
which is covered by the policy and for which the insured
S (1993)
Insurance Co issued a personal accident got services by for
the insurance thehisinsurer for In
protection. reporting
fact, he removed
policy to Bob Tan with a face value of the periodically
magazine fromon thethe
gun case to CNI.
and when In one
he pointed thereport,
P500th. In the evening of Sep 5, 1992, after gunATT
to hisdisclosed to CNI
temple he did that after
so because his that it
he thought
his birthday party, Tan was in a happy mood wasinvestigations,
safe for him to do he
so. He did so to assure his to
found the injuries the 3
that the gun was harmless. There is none in the policy
but not drunk. He was playing with his hand children not accidental but intentional.
that would relieve the insurer of liability for the death of
gun, from which he previously removed the the insured since the death was an accident.
magazine. As his secretary was watching SAM lost the case in court, and POS was
television, he stood in front of her and awarded one million pesos in damages which
pointed the gun at her. She pushed it aside he sought to collect from the insurer. But CNI
and said that it may be loaded. He assured Insurer:
used ATTs Effects:
report to Several deny the claim on the
her that it was not and then pointed it at his Insurers
ground is the (2005)
thatnaturethe injuries of the liability
to POS's of the
3 children
temple. The next moment, there was an several insurers hence
were intentional, in double excluded insurance?
from the
The wife of and
the deceased soughttopayment on SUGGESTED
Explain. (2%) ANSWER:
explosion Tan slumped the floor policy's coverage. POS countered that CNI
the policy but her claim was rejected. The Thewas nature
estopped of the fromliability
using ATTs of report
the several
lifeless. insurers in double insurance is that each
insurance company agreed that there was no because it was unethical for ATT to provide
suicide. However, it was the submission of insurer is bound to the
prejudicial information against his client tocontribute ratably to
the insurance company that there was no thethe
loss in proportion to
insurer, CNI. Who should prevail: thethe amount for which
accident. In support thereof, it contended a) he SUGGESTED
is liable under
POS; histhe
or contract
insurer, as provided for
that there was no accident when a deliberate by CNI
Sec is
94 notof estopped
ICP par. from
The usingCNI?
ratable ATT's Decide
with reasons briefly. (5%)
act was performed unless some additional, of because
each of CNI, eachin insurer
the first place,
will be determined
unexpected, independent and unforeseen commissioned
based on the following it and paid ATT for
formula: AMOUNTit. On the OF
happening occur which produces or brings otherdivided
POLICY hand, ATT by has TOTAL no conflict
INSURANCE of interest
because SAM ANSWER: and CNI
about the injury or death; and b) that the multiplied by LOSS = are on the same
their is bound,
interests being ascongruent
between with himself
insured willfully exposed himself to needless INSURER.
othernamely, insurers, to contribute
to oppose ratablyIt to
POS's claim.
peril and thus removed himself from the thecannot
loss in
coverage be said that ATT has used the for
proportion to the amount
No. Theseoftwo the contentions
insurance policy. Aretenable.
are not the two which
information is in liable
to the underGeneral his Assurance
disadvantage contract. (Sec.v.
or prejudice
contentions of the insurance company
The insurer is liable for injury or death even 94,Court
Insuranceof Appeals,Code) 213 SCRA 493 (1992), it was
tenable? Explain. of SAM.
due to the insureds gross negligence. The Insurer;
explained3rd that there Party is no "accident" in the
fact that the insured removed the magazine Liability
While driving
context (1996)
of anhis accident
car alongpolicy, EDSA,ifCesarit is the
from the hand gun means that the insured sideswiped Roberto,
natural result of the insured's causing injuries to the act,
did not willfully expose himself to needless latter, Roberto sued Cesar
unaccompanied by anything unforeseen and the third party
peril. At most, the insured is only guilty of liability insurer for damages
except the injury. There is no accident when a and/or insurance
negligence (Sun Ins v CA 211 s 554) proceeds.
deliberate Theact insurance
is performed, company unlessmoved some to
Insured; Accident vs. dismiss
additionalthe complaint,
and unforeseen contending that the
happening occurs
Suicide (1995)
Sun-Moon Insurance issued a Personal liability of Cesar
that brings abouthas the not injury.
yet been Thisdetermined
element of
Accident Policy to Henry Dy with a face value with finality. a) Is the
deliberateness is notcontention
clearly shown of thefrom the
of P500th. A provision in the policy states insurer
of the Explain.
case, b) Mayconsidering
especially the insurer the
that the company shall not be liable in be fact
heldthat liable BOY with is Cesar?
a minor, and the injured
respect of bodily injury consequent upon No, the contention of the insurer is not
correct. are
There also children.
is no vs. need to wait forit is
Accordingly, the
the insured person attempting to commit Insured; Accident
decision ofthat CNI
theholder may not
court prosper. ATT's
suicide or willfully exposing himself to Suicide
Luis was (1990)
the of determining
an accident insurance Cesars
liability is notfinality
conclusive on POS or the court.
needless peril except in an attempt to save policy effective Novbefore1, 1988the to Oct third 31,party
human life. Six months later Henry Dy died liability insurer could be
At a boxing contest held on Jan 1, 1989 and sued. The occurrence
of a bullet wound in his head. Investigation of the injury to
sponsored byRoberto
his employer, immediatelyhe slipped gaveand rise
showed that one evening Henry was in a to was
the liability of the insurer
hit on the fact by his opponent so he fell under its policy.
happy mood although he was not drunk. He In and
other hiswords,
head hitwhere one ofan theinsurance
posts of the policy
was playing with his handgun from which he insures directly against
boxing ring. He was rendered unconscious liability, the insurers
previously INSTANCE:
removed its magazine. He liability
and was accrues
dead on immediately
arrival at the hospital upon due the
pointed the of
gunan at over
his sister who gotbyscared. occurrence of the
to intra-cranial hemorrhage. injury or event upon which
In case insurance several
He insurers,
assured the her insured
it was not loaded.toHe then theCan his father
liability depends who is a beneficiary
(Sherman Shaferunder v Judge
Henrys wife Beverly, as the designated ratable
is entitled a The insurer cannot be held solidarily liable
RTCsaid insurance
Olongapo City policy
75 GR l-78848, claimNov 14
return the
of gun
the at his temple
premium, and pulledto
proportioned the
the with Cesar. The liability of the insurer is
beneficiary, sought to collect under the indemnity from the insurance company?
88 167s386)
amount Thebygun fired
which and
the Henry slumped
aggregate sum on
insured based
SUGGESTEDon contract ANSWER: while that of Cesar is
policy. Sun-Moon Insurance rejected her Explain.
theinfloor. based
Yes, on thetort. If who
the insurer were solidarily
ground exceeds
that the thedeathinsurable
of Henry value father is a beneficiary under
of the thing at risk.
was not accidental. Beverly sued the liable
the with
accidental Cesar,insuranceit could can be madesuccessfullyto pay
SUGGESTED Accident more
claim than the amount
indemnity for the stated
deathinofthe thepolicy.
insurer. Decide and Discuss fully.
Beverly can (2004)
insure SAM
recover the under
proceeds a ofhomeowner's policy
the policy from the This would,
Clearly, thehowever,
proximatebe contrary
cause of death to was
insurer. The death
against of the for
claims insured was not due injuries
accidental to suicide by
the boxing underlying
Death sustained contracts. in aOn
neighbors. SAM's minor theboxing
other hand, contestif is theaninsurer
accident were
. (Desolidarily
la Cruz v
liable withInsCesar
Capital & Surety andCo it 17s559)
is made to pay only
up to the amount
Mercantile Law Bar Examination Q & A (1990-2006)
stated in the insurance policy, the principles
underlying solidary obligations would be
violated. (Malayan Ins Co v CA GR L-36413 Sep
26, 88 165s536; Figuracion vda de Maglana v
Consolacion GR 60506 Aug 6, 92 212s268)
Insurer; 3rd Party
X (2000)
was riding a suburban utility vehicle (SUV)
covered by a comprehensive motor vehicle
liability insurance (CMVLI) underwritten by
FastPay Insurance Company when it collided
with a speeding bus owned by RM Travel Inc.
The collision resulted in serious injuries to X;
Y, a passenger of the bus; and Z, a pedestrian
waiting for a ride at the scene of the collision.
The police report established that the bus
was the offending vehicle. The bus had CMVLI
policy issued by Dragon Ins Co. X, Y, and Z
jointly sued RM Travel and Dragon Ins for
indemnity under the Insurance Code of the
Phils (PD1460). The lower court applied the
no fault indemnity policy of the statute,
SUGGESTED the suit against RM Travel, and
No. The cause of Ins
Dragon to pay
action of Y indemnity
is based ontothe
three plaintiffs. Do you agree with the
contract of carriage, while that of X and Z is courts
based Explain
on torts. (2%)
The court should not have
dismissed the suit against RM Travel. The
court should have ordered Dragon Ins to pay
each of X, Y , and Z to the extent of the
insurance coverage, but whatever amount is
agreed upon in the policy should be
answered first by RM Travel and the
succeeding amount should be paid by
Dragon Insurance up to the amount of the
insurance coverage. The excess of the claims
of X, Y, and Z, over and above such
Insurer; 3rd Party Liability; No Fault
insurance coverage, if any, should be
What is your(1994)
understanding of a no fault
answered or paid by RM Travel.
indemnity clause found in an insurance
policy? ANSWER:
Under the NO FAULT INDEMNITY clause,
any claim for death or injury of any
passenger or third party shall be paid
without the necessity of proving fault or
negligence of any kind. The indemnity in
respect of any one person shall not exceed
1. police
P5,000.00, report of
provided theare under oath, the
proofs shall beand evidence
sufficient to establish the proper payee; or
3. medical report and evidence of
medical or hospital disbursement in respect
of which Claim
refundmay be made against one
is claimed.
motor vehicle only.
Mercantile Law Bar Examination Q & A (1990-2006) Page 58 57
Page of 103of 103 unpaid
Luz P4,500
balancefor onthethedamage to
figured in an accident resulting in the death promissory
the car as note evidenced
should be by paid
a release
and not of claim
of a passenger. At the time of the accident, theexecuted
installments by Luz duedischarging
and payable Raul.
before the
Jay Cruz was licensed to drive but it was loss of the car.
confiscated by an LTO agent who issued him So Cala demanded reimbursement from Luz,
a Traffic Violation Report (TVR) just minutes Insurer;
who refused GrouptoInsurance;pay, sayingEmployer- that the total
before the accident. Could Asiatic Insurers, Policy
X company
damage Holder to (2000)
the car a group
was accident
P9,500.00 Since Cala
paid P5,000 policyonly, for itsLuzconstruction
contends that she was
Inc., be made liable under its policy? Why?
(6%) Insurers, Inc., should be made liable employees
entitled to variously
go afterassignedRaul to claim to its the
under the policy. The fact that the driver was provincial
additional infrastructure
P4,500.00 1) projects.
Is Cala,Yas Insurance
merely holding a TVR does not violate the Company
of Luz, underwrote the coverage, the
entitled to reimbursement from Raul?
condition that the driver should have a valid premiums
2) May Cala of which recover were whatpaiditfor has entirely
paid Luz? by
and existing drivers license. SUGGESTED ANSWER:
X Company without any employee
Besides, such a condition should be 1) No. Luz executed a release in favor of
contributions. While the policy was in effect,
disregarded because what is involved is a Raul (Manila Mahogany Mfg Corp v CA GR
five of the covered employees perished at
passenger jeepney, and what is involved 52756, 12 Oct 1987)
sea2)on their
Yes. Cala way to its
lost theirrightprovincial
against Raul
here is not own damage insurance but third
because of Their
the wives
release sued
executed Y Insurance
by Luz.
party liability where the injured party is a
Since thefor payment
release was of death
made benefitsthe
third party not privy to the contract of
Insurer; under the policy. WhileCalathe suit was pending,
insurance.Authorized Driver Clause; consent of Cala, may recover the
vehicle is stolen (1993) the wives signed a power
amount of P5,000 form Luz (Manila Mahogany of attorney
HL insured his brand new car with P Ins Co designating
Mfg Corp vXCA Company
GR 52756, executive,
12 Oct 1987). PJ, as
for comprehensive coverage wherein the their authorized
Insurer; representative
Authorized Driver to enter into
insurance company undertook to indemnify a settlement
Sheryl insured with
(1991) the
her insurance
newly company.
acquired car, a
him against loss or damage to the car a) by When Nissana settlement
Maxima was
against reached,
any loss PJ or damage
accidental collision ... b) by fire, external instructed
for P50th
against company3rd party to issue for
explosion, burglary, or theft, and c) malicious the
Yes. settlement
P20th withwill
The suit check
the XYZto
prosper. Ins theCo. order
Y Ins Co of
Under X
is the policy,
liable. X
After a month, the car was carnapped while
act. Company,
Co,the car must
through which bewill
its executive, undertake
driven only the
PJ, acted an payment
as authorized
parked in the parking space in front of the to
of Ythe Insindividual
driver Co.who The claimants
is latter
either: is1)thus of bound
the their
by orthe2) any
Intercontinental Hotel in Makati. HLs wife shares.
person PJ misappropriated
driving on the
misconduct of its agent. It is the usual the
insureds settlement
order or with
who was driving said car before it was amount and
his permission:
practice in the thegroup
provided pursued
insurance thattheir casethat
the person
carnapped reported immediately the against
the driving Y Insurance
is permitted
employer-policy Co. inWill
holder isthe
accordance agentprosper?
withof the
incident to various government agencies in Insurer;
the (3%)
insurer. Liability
or other oflawstheor regulations to drive
compliance with the insurance requirements. Insurers
a) Suppose
the motor (1990)
that Fortune
vehicle andowns is notadisqualified
house from
Because the car could not be recovered, HL During
driving the
valued at sucheffectivity
P600th and insured
motor of theby
vehicle policy,
the same
order the
of acar,
filed a claim for the loss of the car with the then
against driven with by3Sheryl
insurance herself, who had
companies asno
insurance company but it was denied on the drivers
follows: X license,
P400th met an accident
Y P200th Z P600thand was
ground that his wife who was driving the car extensively damaged. The estimated cost of
when it was carnapped was in the possession repair was P40th. Sheryl immediately
of an expired drivers license, a violation of notified XYZ, but the latter refused to pay on
the authorized driver clause of the In the
the absence
policy alleging of any that stipulation
Sheryl in violated
the the
indemnify HL for the loss of
insurance company. 1) May the insurance the insured vehicle? terms
policies thereof
from which when she
insurance drove it
company without or a
Explain. 2) Supposing that the car was The insurer was not correct in denying the
company be held liable to companies
drivers license.
may Fortune
Is the recover
insurer in
case fire
brought by HL on claim since
SUGGESTED ANSWER:the proviso that the person
should destroy his house completely?
installment basis and there were installments driving
Fortune may is permitted
recover in accordance
from the insurers with
in the
and payable before the loss of the car as well assuch
due licensing,
order asetc. he may qualified
selectonly up to a person
installments not yet payable. Because of the loss driving the
concurrent vehicle
liability (Sec other
94 Ins than the insured at
the car, the vendor demanded from HL the
of the time of the accident (Palermo v Pyramid Ins
balance of the promissory note. HL resisted the Valued
unpaid Co GR 36480 31 May 88)
Policyis correct. The clause authorized
The insurer
demand and claimed that he was only liable for b) If each of the fire insurance policies
driver in the policy evidently applies to both
installments due and payable before the loss of obtained
the by Fortune in the problem (a) is a
the insured and any other person driving the
car but no longer liable for other installments valued
the policy and the value of his house was
vehicle at the time of the accident. The term
due at the time of the loss of the car.
not yet fixed in each of the policies at P1m, how
authorized driver should be construed as a
Decide. ANSWER: much would Fortune recover from X if he has
Insurer; 3rd Party Liability;
1) Yes. The car was lost due to theft. What person who is authorized by law to driver the
already obtained full payment on the
Rauls truck(1994)
bumped the car owned
applies in this case is the theft clause, and by Luz. vehicle (Peza
SUGGESTED ANSWER: v Alikpala 160s31)
Insurer; policies
Authorized issued by Y and Z?
The car was insured by Cala
not the authorized driver clause. It is Insurance. For Fortune may still recover Driver only the balance of
the damage caused, Cala paid Luz P5,000.00 Clause
P200,000 de (2003)
from CruzX insured
insurance his passenger
company since
immaterial that HLs wife was driving the car
in amicable settlement. Luz executed a the jeepney
insured with
may Asiatic
only Insurers,
recover up Inc.
to The policy
with an expired drivers license at the time it
release of claim, provided
extent of histhat loss.the authorized driver of the
was carnapped . (Perlasubrogating
Compania deCala to all
Seguros v her
2) vehicle should have a valid and existing
CA The
208 promissory
against Raul.
s 487) note isWhen
not affected
Cala demanded
befalls thefrom
the latter
of the
refused drivers license. The passenger jeepney of
saying that
he hadThe already paid Rick de la Cruz which was at the time driven
by Jay Cruz,
Mercantile Law Bar Examination Q & A (1990-2006) Page 59 of 103 hired professionals to afloat
Having already obtained full payment on the the vessel for P900,000.00. When re-floated,
insurance policies issued by Y and Z, Fortune the vessel needed repairs estimated at
may no longer recover from X insurance P2,000,000.00. The insurance company
policy. refused to pay the claim of the ship owner,
Open Policy stating that there was no constructive total
c) If each of the policies obtained by Fortune loss. a) Was there constructive total loss
in the problem (a) above is an open policy ownerthe
to entitle to recover
ship from the insurance company?
and it was immediately determined after the Explain. b) Was it proper for the ship owner
fire that the value of Fortunes house was to send a notice of
P2.4m, how much may he collect from X,Y abandonment to the insurance company?
and Z?
In an open policy, the insured may recover SUGGESTED ANSWER:
his total loss up to the amount of the No, there was no "constructive total loss"
insurance cover. Thus, the extent of recovery because the vessel was refloated and the
would be P400th from X, P200th from Y, and costs of refloating plus the needed repairs (P
P600th from Z. 2.9 Million) will not be more than three-
d) In problem (a), what is the extent of the fourths of the value of the vessel. A
liability of the insurance companies among constructive total loss is one which gives to a
themselves? person insured a right to abandon. (Sec, 131,
In problem (a), the insurance companies Insurance Code) There would have been a
among themselves would be liable, viz: X constructive total loss had the vessel MN
4/12 of P600th = P200th Y 2/12 of P600th = Pearly Shells suffer loss or needed refloating
P100th Z 6/12 of P600th = P300th and repairs of more than the required three-
fourths of its value, i.e., more than P30.0
e) Supposing in problem (a) above, Fortune Million
the139, Insurance
insurance Code, cited
company in pay
Oriental Assurance
for the total costsv.ofCourt of Appeals
refloating and and
was able to collect from both Y and Z, may
Panama Saw Mill, G.R. No. 94052, August 9,
he keep the entire amount he was able to repairs (P2.9 Million).
c) Was it proper for the ship owner to
collect from the said 2 insurance companies?
SUGGESTED ANSWER: send a notice of abandonment to the
No, he can only be indemnified for his loss, SUGGESTED ANSWER: Explain.
insurance company?
not profit thereby; hence he must return No, it was not proper for the ship owner to
P200th of the P800th he was able to collect. send a notice of abandonment to the
insurance company because abandonment
Loss: Actual Total can only be availed of when, in a marine
Loss (1996)
RC Corporation purchased rice from insurance contract, the amount to be
Thailand, which it intended to sell locally. expended to recover the vessel would have
Due to stormy weather, the ship carrying the been more than three-fourths of its value.
rice became submerged in sea water, and Vessel MN Pearly Shells needed only P2.9
with it the rice cargo. When the cargo arrived Million, which does not meet the required
in Manila, RC filed a claim for total loss with three-fourths of its value to merit
the insurer, because the rice was no longer abandonment. (Section 139, Insurance Code,
fit for human consumption. Admittedly, the Loss: Total Loss
cited in Oriental Assurance v. Court of Appeals
rice could still be used as animal feed. Is Only
An (1992) company issued a marine
and Panama Saiv Mill, G.R. No. 94052, August 9,
Yes, RCs claim for total loss is justified. The insurance policy covering a shipment by sea
RCs claim for total loss justified? Explain. 1991)
rice, which was imported from Thailand for from Mindoro to Batangas of 1,000 pieces of
sale locally, is obviously intended for Mindoro garden stones against total loss
consumption by the public. The complete only. The stones were loaded in two lighters,
physical destruction of the rice is not the first with 600 pieces and the second with
essential to constitute an actual total loss. 400 pieces. Because of rough seas, damage
Such a loss exists in this case since the rice, was caused the second lighter resulting in
having been soaked in sea water and thereby the loss of 325 out of the 400 pieces. The
rendered unfit for human consumption, has owner of the shipment filed claims against
become totally useless for the purpose for the insurance company on the ground of
which itConstructive Total
was imported (Pan Malayan Ins Co v CA constructive total loss inasmuch as more
M/V (2005)
Pearly Shells,
gr 95070 Sep 5, 1991) a passenger and cargo SUGGESTED ANSWER:
The insurance value
of the of the
company is stones had
not liable beenits
vessel, was insured for P40,000,000.00
lost in one of the lighters. Is the insurance
policy covering against total loss only the
against constructive total loss. Due to a
shipment liable under
of 1,000 its policy?
pieces Why?
of Mindoro garden
typhoon, it sank near Palawan. Luckily, there
were no casualties, only injured passengers. stones. There is no constructive total loss that
The ship owner sent a notice of can claimed since the rule is to be
abandonment of his interest over the vessel computed on the total 1,000 pieces of
to the insurance company which then Mindoro
Mercantile Law Bar Examination Q & A (1990-2006)
garden stones covered by the single policy
coverage (see Oriental Assurance Co v CA 200 s
Marine Insurance; Implied
What (2000)are implied in marine
insurance? ANSWER:
The following warranties are implied in
marine insurance: 1) That the ship is
t, publish, copy,
and/or distribute,
seaworthy to take multiply,
to make certain sell and make
the voyage 2) Thatphotographs,
the photo engravings, and pictorial illustrations of the works;
ship shall not deviate from the voyage
er version orinsured;
arrangements or adaptation
the ship shall carry the thereof; to dramatize if it be a non-dramatic work; to convert it into a
necessary documents to
show nationality
produce or reproduce the work in orany
mannerand that
or by it will
any not whatever for profit or otherwise; if not reproduced in copi
carry any document which will cast reasonable
osition of thesuspicion thereon;with
work consistent 4) That the ship
the laws shall
of the landnot
carry contraband, especially if
it is making a voyage through belligerent
Marine Insurance; Peril of the Ship
vs. Peril of the Sea (1998)
A marine insurance policy on a cargo states
that the insurer shall be liable for losses
incident to perils of the sea. During the
voyage, seawater entered the compartment
where the cargo was stored due to the
defective drainpipe of the ship. The insured
filed an action on the policy for recovery of
the damages caused to the cargo. May the
No. The proximate cause of the damage to
insured recover damages? (5%)
the cargo insured was the defective
drainpipe of the ship. This is peril of the ship,
and not peril of the sea. The defect in the
drainpipe was the result of the ordinary use
of the ship. To recover under a marine
insurance policy, the proximate cause of the
loss or damage must be peril of the sea.
Mutual Insurance Company; Nature &
What is a(2006)
mutual insurance company or
A mutual life insurance corporation is a
cooperative that promotes the welfare of its
own members, with the money collected
from among themselves and solely for their
own protection and not for profit. Members
are both the insurer and insured. A mutual
life insurance company has no capital stock
and relies solely upon its contributions or
premiums to meet unexpected losses,
contingencies and expenses (Republic v.
Sunlife, G.R. No 158085, October 14, 2005).
Intellectual Property
What intellectual property rights are
protected by copyright?
Sec 5 of PD 49 provides that Copyright shall
consist in the exclusive right:
Mercantile Law Bar Examination Q & A (1990-2006) Page 61 of 103 Liza cannot be held liable for
The Victoria Hotel chain reproduces infringement of copyright since under the
videotapes, distributes the copies thereof to Intellectual Property Code, one of the
its hotels and makes them available to hotel limitations to the copyright is the making of
guests for viewing in the hotel guest rooms. It quotations from a published work for purpose
charges a separate nominal fee for the use of of any judicial proceedings or for giving of
the videotape player. 1) Can the Victoria professorial advice by legal practitioner,
Hotel be enjoined for infringing copyrights provided that the source and name of the
and held liable for damages? 2) Would it author are identified (See Section 184.1[k] of
make any difference if Victoria Hotel does not the Intellectual Property Code of the
charge any fee for the use of the videotape? Copyright;
Philippines). Photocopy; when
1) Yes. Victoria Hotel has no right to use allowed
May (1998)
a person have photocopies of some
such video tapes in its hotel business pages of the book of Professor Rosario made
without the consent of the creator/ owner of without violating the copyright law? (3%)
the copyright. SUGGESTED ANSWER:
2) No. The use of the videotapes is for Yes. The private reproduction of a published
business and not merely for home work in a single copy, where the
consumption. (Filipino Society of Composers, reproduction is made by a natural person
Authors Publishers v Tan 148 s 461; pd 1988) exclusively for research and private study, is
Copyright; permitted, without the authorization of the
In an action for (1997)
damages on account of an Copyright;
owner of theCommissioned
copyright in the work.
infringement of a copyright, the defendant Infringement
Solid (1995)
Investment vs. Unfair
House commissioned Mon
(the alleged pirate) raised the defense that Competition
Blanco is the
and son (1996)
his distinction
Steve, between
both noted infringement
he was unaware that what he had copied and unfair
to paint a mural competition?
for the Main Lobby of the
was a copyright material. Would this defense SUGGESTED ANSWER:
No. An intention to pirate is not an element new building of Solid for a contract price of
be valid? The distinction between infringement
of infringement. Hence, an honest intention P2m. a) who owns the mural? Explain b)
(presumably trademark) and unfair
is no defense to an action for infringement. Who owns the copyright of the mural?
SUGGESTED are as follows: 1) Infringement of
ALTERNATIVE ANSWER: Explain. of owns
a trademark, whereas
a) trademark
Solid isthe
the mural. Solidunfair
unauthorized use the
was competition
one is
Yes. The owner of the copyright must make passing off ofthe ones goods
who commissioned artists to as
the work of
others aware that the material in question is another;
and paid for the work in the sum of P2m
under or covered by a copyright. This is done 2) Fraudulent intent is unnecessary in
by the giving of such notice at a prominent b)Unless there isofawhereas
infringement stipulation fraudulent intent is
to the contrary
portion of the copyright material. When the unfair
in the contract, the copyright shall belong in
alleged pirate is thus made aware thereof, joint ownership to Solid and Mon and Steve.
his act of pirating the copy material will 3) The prior registration of the trademark
constitute infringement. is a prerequisite to an action for infringement
Copyright; Commissioned
Juan Xavier wrote(1998)
and published a story of trademark, whereas registration of the
BR and (2004)
CT are noted artists whose paintings
similar to an unpublished copyrighted story trademark is not necessary in unfair
are highly prized by collectors. Dr. DL
of Manoling Santiago. It was, however, competition.them (Del Monte Corpav mural
CA 78325
commissioned to paint at Jan
conclusively proven that Juan Xavier was not 25,90 181s410)
main lobby of his new hospital for children.
aware that the story of Manoling Santiago Infringement vs. Unfair
Both agreed to collaborate on the project for
was protected by copyright. Manoling Competition
In what is (2003)
fee way an infringement
a total of two million pesos to of bea equally
Santiago sued Juan Xavier for infringement of trademark similar to that which pertains to
SUGGESTED ANSWER: divided between
SUGGESTED ANSWER: them. It was also agreed
copyright. Is Juan Xavier liable? (2%) unfair competition?
Yes. Juan Xavier is liable for infringement of that Dr. DL had to provide all the materials
copyright. It is not necessary that Juan for Infringement;
the painting and pay for the wages of
Xavier is aware that the story of Manoling technicians
K-9 and (2003)
Corporation, laborers needed
a foreign for the work
on alleging that the project
the project. is corporation
completed and
Santiago was protected by copyright. The itself to be thepaid
registered ownerof of
both BR and CT are fully the amount
work of Manoling Santiago is protected at trademark K-9 and logo K, filed an Inter
P2M as artists' fee by DL. Under the law on
the time of its creation. Partes case with the Intellectual
Copyright; intellectual property, who will Property own the
Office against Kanin
mural? Who will own the copyright Corporation for in
In a written legal(2006)
opinion for a client on the cancellation of the latters mark K-9 and
difference between apprenticeship and mural? Why? Explain. (5%)
logo K.
Under SectionDuring the pendency
178.4 of the ofIntellectual
the case
learnership, Liza quoted without permission a before the
Property Code,IPO, in Kanin
case Corporation
of commissioned brought
labor law expert's comment appearing in his suitthe
work, against
creator K-9(in Corporation
the absence before
of a the RTC
book entitled "Annotations on the Labor SUGGESTED ANSWER:
for infringement
stipulation to the andcontrary)
damages. Could owns the the
Code." Can the labor law expert hold Liza action
copyright, before
but thethe RTC
work prosper?
itself Why?
belongs to the
liable for infringement of copyright for Patent; Non-Patentable
Supposing who Albertcommissioned
(2006) Einstein were itsalive creation.
quoting a portion of his book without his Accordingly, the mural belongs to DL.
SUGGESTED ANSWER: and he filed with the Intellectual Property
permission? (5%) However, BR and CT own the for copyright, since
Office (IPO)
Copyright; an application patent for his
there is
theory no ofstipulation
relativity to the
expressed contrary.
in the
Infringement (1994)
Mercantile Law Bar Examination Q & A (1990-2006) Page 62 of 103 invention did not fall within
formula E=mc2. The IPO disapproved their regular duties. What prevails is the
Einstein's application on the ground that his provision of the Intellectual Property Code
theory of relativity is not patentable. Is the that holds that the invention belongs to the
IPO's action correct? (5%) employee, if the inventive activity is not a
SUGGESTED ANSWER: part of his regular duties, even if he uses the
Yes, the IPO is correct because under the time, facilities and materials of the
Intellectual Property Code, discoveries, employer.
scientific theories and mathematical Patents: Infringement; Remedies &
methods, are classified to be as "non- Defenses (1993)owner of a certain
Ferdie is a patent
patentable inventions." Eintein's theory of invention. He discovered that his invention is
relativity falls within the category of being a being infringed by Johann. 1) What areJohann.
non-patentable "scientific theory." remedies available to Ferdie against Johann?a.
Patents: Gas-Saving Device: first 2) If youseize
lawyer of Johann in the
to fileworks
Cezar rule (2005)
in a car manufacturing company infringement suit, what are the defenses that
owned by Joab. Cezar is quite innovative and b.
your client can assert?
loves to tinker with things. With the SUGGESTED ANSWER:
materials and parts of the car, he was able to c.
1) The following remedies are available to Ferdie
invent a gas-saving device that will enable againstdamages in such amount may have
cars to consume less gas. Francis, a co- been
worker, saw how Cezar created the device
and likewise, came up with a similar gadget, obtained from the use of the invention
also using scrap materials and spare parts of if
the company. Thereafter, Francis filed an
application for registration of his device with properly transacted which can be more
the Bureau of Patents. Eighteen months than
later, Is the filed
Cezar gas-saving device patentable?
his application for the
Explain. ANSWER: 2) These are the defenses that can be asserted in
registration of his device with the Bureau
Yes, the gas-saving device is patentable of what the infringer (Johann ) received.
an infringement suit:
because it provides a technical solution to a Patent is invalid (Sec 45 RA 165, as amended)
problem in a field of human activity. It is new Patent is not new or patentable
and involves an inventive step, and certainly Specification of the invention does not comply d.
industrially applicable. It therefore fulfills the with Attorneys
Sec 14 fees and cost
requisites mandated by the intellectual Patent was issued not to the true and actual
Property Code for what is patentable. inventor, designer or author of the utility model
2) Assuming that it is patentable, who is or the plaintiff did not derive his rights from the
entitled What, if any, is the remedy of the losing
to the true and actual inventor, designer or author of
party? the utility model (Sec 28 RA 165 as amended)
Cezar is entitled to the patent because he was
the real inventor. Francis, copying from the
work of Cezar, cannot claim the essential
criteria of an inventor, who must possess
essential elements of novelty, originality and
precedence to be entitled to protection.
Nevertheless, under the "first to file rule,"
Francis application would have to be given
priority. Cezar, however, has within three
months from the decision, to have it cancelled
as the rightful inventor; or within one year
from publication, to file an action to prove his
priority to the invention, which has been taken
3) Supposing Joab got wind of the
from him and fraudulently registered by
inventions of his employees and also laid
claim to the patents, asserting that Cezar
and Francis were using his materials and
company time in making the devices, will his
claim prevail over those of his employees?
No, Joab's claim cannot prevail over those of
his employees. In the first place, Joab did not
commission any of the two employees to
invent the device, and its
Mercantile Law Bar Examination Q & A (1990-2006) Page63 of 103 deception could be rather
3) There is no need of exact duplication remote. Since it cannot really be said that
of the patentees existing patent such as physicians can be so easily deceived by such
when the improvement made by another is trademark as Axilon, it may be hard to
merely minor (Frank v Benito, 51p713). To be expect an opposition thereto to succeed.
independently patentable, an improvement of ANOTHER ANSWER:
an existing patented invention must be a The application for registration of Turbo
major improvement (Aquas v de Leon L-32160 Corporation may be contested. The factual
30Jan82) settings do not indicate that there had been
Patents; Rights over the prior use for at least 2 months of the
Cheche (1990)
invented a device that can convert trademark Axilon.
rainwater into automobile fuel. She asked Trademark
Macon, a lawyer, to assist in getting her (1994)
Laberge, Inc., manufactures and markets
invention patented. Macon suggested that after-shave lotion, shaving cream, deodorant,
they form a corporation with other friends talcum powder and toilet soap, using the
and have the corporation apply for the trademark PRUT, which is registered with
patent, 80% of the shares of stock thereof to the Phil Patent Office. Laberge does not
be subscribed by Cheche and 5% by Macon. manufacture briefs and underwear and these
The corporation was formed and the patent items are not specified in the certificate of
application was filed. However, Cheche died JG who manufactures briefs and underwear,
3 months the estranged
later husband
of a heart attack.of Cheche, wants to know whether, under our laws, he
contested the application of the corporation can use and register the trademark PRUTE
and filed his own patent application as the for his merchandise. What is your advice?
sole surviving heir of Cheche. Decide the
issue with reasons. Yes. The trademark registered in the name of
The estranged husband of Checke cannot Laberge Inc covers only after-shave lotion,
successfully contest the application. The shaving cream, deodorant, talcum powder
right over inventions accrue from the and toilet soap. It does not cover briefs and
moment of creation and as a right it can underwear.
lawfully be assigned. Once the title thereto is The limit of the trademark is stated in the
vested in the transferee, the latter has the certificate issued to Laberge Inc. It does not
right to apply for its registration. The include briefs and underwear which are
estranged husband of Cheche, if not different products protected by Larberges
Note: to
disqualified Aninherit,
examinee who answers
merely on the
would succeed trademark.
basis of the issue of validity of the
to the interest of Cheche. JG can register the trademark PRUTE to
transfer of patent as a valid consideration cover its briefs and underwear (Faberge Inc v
for subscription of the shares of stocks IAC 215 s 316)
should be given due credit. Trademark, Test of
In 1988, the Food and Drug Administration Dominancy
What is the test(1996) of dominancy?
approved the labels submitted by Turbo SUGGESTED ANSWER:
Corporation for its new drug brand name, The test of
In an action fordominancy
infringement requires that the
of patent, if the
Axilon. Turbo is now applying with the (1992) infringer defended himself by stating or
alleged trademark contains the main
Bureau of Patents, Trademarks and essential
1) that features
the patent issuedof another
by the Patent and confusion
Technology Transfer for the registration of and deception is likely
was not really an invention which to result, infringement
said brand name. It was subsequently takes place.
patentable; 2) Duplication
that he had or noimitation
intent istonot
confirmed that Accilonne is a generic term necessary;
infringe so that not thereiswas it nonecessary
actionable that
for a class of anti-fungal drugs and is used as for infringement; and 3) that there was no to
infringing label should suggest an effort
such by the medical profession and the imitate.
exact Similarity
duplication of thein size,
patenteesform and color,
pharmaceutical industry, and that it is used while
patent relevant, is not
but only a minor improvement. With conclusive. (Asia
as a generic chemical name in various Brewery
those vANSWER:
CA GR 103543
defenses, would Jul5,93
you 224s437) the
I would not is exempt (1991)
a registered
the alleged trademark for TV,
violator from
scientific and professional publications. A
SUGGESTED ANSWER: alleged violator from liability? Why? and other
stereo, radio, cameras, betamax
liability for the following reasons: 1) A patent
competing drug for
The application manufacturer
registrationasks you to
by Turbo electronic
once issued byproducts.
the Patent A Office
local raises
company, a Best
Corporation may be contested. The name
the registration of the brand
presumption Inc thatproduced the electric is
article fans
Trademark by Law
Turbo. What
would notwill youthe
allow advice be?
patentable;it soldit under the trademark
can, however be shown Sony
registration of a trademark which, when without
otherwise the consent
(Sec 45ofRA Sony. SonyAsued
165). mere Best
applied to or used in connection with his SUGGESTED ANSWER:
statement or for infringement.
allegation is not Decidetothe
products, is merely descriptive or deceptively There
case. is no infringement. In order that a case
destroy that presumption. (Aquas v de
misdescriptive of them. Confusion can result for infringement of trademark can prosper,
ALTERNATIVE ANSWER: Leon 30 Jan 82 L32160)
from the use of Axilon as the generic
Medical drugs may be procured only upon 2) the products
An intention on which to the trademark
infringe is isnotused
product itself. must be of the same
necessary nor an element in a case for kind. The electric fans
prescription made by a duly licensed produced by Best Manufacturing cannot
physician. The possibility of infringement of a patent.
Mercantile Law Bar Examination Q & A (1990-2006) Page 64 of 103
be said to be similar to such products as TV, the law are conferred by the fact of
stereo and radio sets or cameras or betamax registration and not by use. Although
products of Sony. Shangrila Corporation's parent had used the
There is infringement. If the owner of a tradename and logo long before, the
trademark which manufactures certain types protection of the laws will be for S
of goods could reasonably be expected to Development Corporation because it was the
engage in the manufacture of another first entity to register the intellectual
product using the same trademark, another How does the international affiliation of
party who uses the trademark for that Shangrila Corporation affect the
product can be held liable for using that outcome of the dispute? Explain. (5%)
trademark. Using this standard, infringement SUGGESTED ANSWER:
exists because Sony can be reasonably The international affiliation of Shangrila
expected to use Test of
such trademark on electric Corporation may be critical in the event that
fans.Corporation (1996)
manufactures rubber shoes its affiliates or parent company abroad had
under the trademark Jordann which hit the registered in a foreign jurisdiction the
Phil market in 1985, and registered its tradename and the logo. A well-known mark
trademark with the Bureau of Patents, and tradename is subject to protection under
Trademarks and Technology (BPTTT) in 1990. Treaty of Paris for the Protection of
PK Company also manufactures rubber shoes Intellectual Property to which the Philippines
with the trademark Javorski which it is a member.
registered with BPTTT in 1978. Insolvency & Corporate
In 1992, PK Co adopted and copied the
design of N Corporations Jordann rubber Recovery
shoes, both as to shape and color, but
retained the trademark Javorski on its Insolvency vs. Suspension of
products. Payment (1998)
Distinguish insolvency from suspension of
May PK Company be held liable to N Co? payments. (3%)
PK Co may be liable for unfairly competing a) In insolvency, the liabilities of the
against N Co. By copying the design, shape debtor are more than his assets, while in
and color of N Corporations Jordann rubber suspension of payments, assets of the
shoes and using the same in its rubber shoes debtor are more than his liabilities.
trademarked Javorski, PK is obviously trying b) In insolvency, the assets of the debtor
to pass off its shoes for those of N. It is of no are to be converted into cash for distribution
moment that he trademark Javorski was among his creditors, while in suspension of
registered ahead of the trademark Jordann. payments, the debtor is only asking for time
Priority in registration is not material in an within which to convert his frozen assets into
action for unfair competition as distinguished liquid cash with which to pay his obligations
from an action for infringement of trademark. when the latter fall due.
The basis of an action for unfair competition Insolvency: Voluntary
(Converse Rubber Co v Jacinto Rubber & Plastics Insolvency (2005) architect, is suffering
Aaron, a well-known
is confusing and misleading similarity in
Co GR 27425 and 30505, Apr28,80 97s158) from financial reverses. He has four creditors
general appearance, not similarity of
Tradename: International with a total claim of P26 Million. Despite his
S Development(2005) Corporation sued Shangrila intention to pay these obligations, his
Corporation for using the S logo and the current assets are insufficient to cover all of
tradename Shangrila. The former claims them. His creditors are about to sue him.
that it was the first to register the logo and the Consequently, he was constrained to file a
petition the court
for insolvency. (5%)toa) Since
Aaron him
tradename in the Philippines and that it had insolvent, can the judge properly treat the
been using the same in its restaurant was merely forced by circumstances to
petition as one for involuntary insolvency?
business. Shangrila Corporation counters that SUGGESTED
it is an affiliate of an international organization No. This is a case for voluntary insolvency
which has been using such logo and because this was filed by an insolvent debtor
tradename Shangrila for over 20 years. owing debts exceeding the amount of
However, Shangrila Corporation registered the P1,000.00 under Section 14 of the Insolvency
tradename and logo in the Philippines only Law. Under Section 20 of the Insolvency Law,
after theof suit
the was
two filed.
corporations has a better
the petition must be filed by three or more
right to use the logo and the tradename?
SUGGESTED ANSWER: creditors. In the case at bar, it is Aaron, the
S Development Corporation has a better debtor, who filed the insolvency proceedings.
right to use the logo and the tradename,
since the protective benefits of
Mercantile Law Bar Examination Q & A (1990-2006) Page 65 of 103
b) If Aaron is declared an insolvent by petition. In the meantime, the case filed by
the court, what would be the effect, if any, of Vicente proceeded and resulted in a
such declaration on his creditors? Explain. judgment award in favor of Vicente. May the
SUGGESTED ANSWER: judgment obtained by Vicente be enforced
A declaration by the court that the petitioner independently of the insolvency
is insolvent will have the following effects: SUGGESTED ANSWER:
proceedings? Explain.
1) The sheriff shall take possession The judgment obtained by Vicente can be
of all assets of the debtor until the enforced independently of the insolvency
appointment of a receiver or assignee; proceedings. Under Sec 32 of the Insolvency
2) Payment to the debtor of any Law, the assignment to the assignee of all
debts due to him and the delivery to the the real and personal property, estate and
debtor of any property belonging to him, effects of the debtor made by the clerk of the
and the transfer of any property by him court shall vacate and set aside any
3) All civil proceedings pending
are forbidden; judgment entered in any action commenced
against the insolvent shall be stayed; and with 30 days immediately prior to the
4) Mortgages and pledges are not commencement of insolvency proceedings.
affected by the order declaring a person In this case, however, the action filed by
insolvent. (Sec. 59, Insolvency Law) Vicente against Carlito was commenced by
Vicente not later than June 16, 1995 (the
c) Assuming that, Aaron has guarantors
facts on this point are not clear) when
for his debts, are the guarantors released
Vicente obtained a writ of preliminary
from their obligations once Aaron is
SUGGESTED attachment
Effect;Carlito or moreof
Declaration than 30
discharged ANSWER:
from his debts? Explain.
No, precisely under the principle of days before
Insolvency the petition for involuntary
What are the(1991)
effects of a judgment in
excussion, the liability of the guarantors insolvency was filed against Carlito by his
insolvency in Voluntary Insolvency cases?
arises only after the exhaustion of the assets other creditors.
SUGGESTED (i.e. on July 29, 1995)
of the principal obligor. The effect of (Radiola-Toshiba
The adjudicationPhilor vdeclaration
IAC GR 75222 of July18,91
discharge merely confirms exhaustion of the 199s373)
by the court, after hearing or default, shall
ALTERNATIVE ANSWER: have the following effects: a) Forbid the
assets of the obligor available to his
Yes. Article
creditors. 2076 of the Civil Code provides: payment to the debtor of any debt due to
The obligation of the guarantor is him and the delivery to him of any property
extinguished at the same time as that of the belonging to him; b) Forbid the transfer of
debtor, and for the same causes as all other any property by him; and c) Stay of all civil
obligations. proceedings against the insolvent but
d) What remedies are available to the foreclosure may be allowed (Secs 18 & 24
guarantors in case they are made to pay the Insolvency Law)
creditors? Explain.
Under Article 2081, the guarantor may set up Insolvency; Fraudulent
against the creditor all the defenses that Payment
As (2002)
of June 1, 2002, Edzo Systems
pertain to the principal debtor. The discharge Corporation (Edzo) was indebted to the
obtained by Aaron on the principal obligation following creditors: a) Ace Equipment
can now be used as a defense by the computers
Supplies and accessories
for various personal sold to Edzo
guarantors against the creditors. The on credit amounting to P300,000.
guarantors are also entitled to indemnity b) Handyman Garage for mechanical
under Article 2066 Assets vs.Code.
of the Civil repairs (parts and service) performed on
Horacio opened (1998)
a coffee shop using money
Edzos company car amounting to P10,000.
borrowed from financial institutions. After 3 c) Joselyn Reyes former employee of
months, Horacio left for the US with the Edzo who sued Edzo for unlawful termination
intent of defrauding his creditors. While his of employment and was able to obtain a
liabilities are worth P1.2m, his assets, final judgment against Edzo for P100,000.
however are worth P1.5m. May Horacio be d) Bureau of Internal Revenue for
declared insolvent? (2%) unpaid value-added taxes amounting to
No. Horacio may not be declared insolvent.
P30,000. Integrity Bank which granted Edzo a
His assets worth P1.5m are more than his
loan in 2001 in the amount of P500,000. The
liabilities worth P1.2m.
Insolvency; loan was not secured by any asset of Edzo,
On June 16, (1996)
1995, Vicente obtained a writ of but it was guaranteed unconditionally and
preliminary attachment against Carlito. The solidarily by Edzos President and controlling
levy on Carlitos property occurred on June stockholder, Eduardo Z. Ong, as
25, 1995. On July 29, 1995, another creditor accommodation surety.
The loan due to Integrity Bank fell due on
filed a petition for involuntary insolvency
June 15, 2002. Despite pleas for extension of
against Carlito. The insolvency court gave payment by Edzo, the
due course to the
Mercantile Law Bar Examination Q & A (1990-2006) Page 66 of 103 An insolvent debtor, after
bank demanded immediate payment. lawful discharge following an adjudication of
Because the bank threatened to proceed insolvency, is released from, generally, all
against the surety, Eduardo Z. Ong, Edzo debts, claims, liabilities and demands which
decided to pay up all its obligations to are or have been proved against his estate.
Integrity Bank. On June 20, 2002, Edzo paid Give 5 obligations of the insolvent debtor to
survive. ANSWER:
to Integrity Bank the full principal amount of
P500,000, plus accrued interests amounting The 5 obligations of the insolvent debtor
to P55,000. As a result, Edzo had hardly any that survive are as follows:
1Taxes and assessments due the
cash left for operations and decided to close
government, national or local;
its business. After paying the unpaid salaries
2Obligations arising from embezzlement or
of its employees, Edzo filed a petition for
In the insolvency fraud;
insolvency on Julyproceedings
1, 2002. in court, the
assignee in insolvency sought to invalidate 3Obligation of any person liable with the
the payment made by Edzo to Integrity Bank insolvent debtor for the same debt, either as
for being a fraudulent transfer because it was a solidary codebtor, surety, guarantor,
made within 30 days before the filing of the partner, indorser or otherwise.
insolvency petition. In defense, Integrity Bank 4Alimony or claim for support; and
asserted that the payment to it was for a 5Debts not provable against the estate (such
legitimate debt that was not covered by the as after-incurred obligations) of, or not
prohibition because it was a valuable included in the schedule submitted by, the
Insolvency; Voluntary Insolvency
pecuniary consideration made in good faith, insolvent debtor.
Is the issuance(1991)
of an order, declaring a
thus falling within the exception specified in
petition in a Voluntary Insolvency proceeding
the Insolvency Law. As judge in the pending
insolvent, mandatory upon the court?
insolvency case, how would you decide the
respective contentions of the assignee
The contention of the assignee in
in insolvency Assuming that the petition was in due form
insolvency and of Integrity Bank?
is correct. The payment made by Edzo toExplain and substance and that the assets of the
Integrity Bank was a fraudulent preference or petitioner are less than his liabilities, the
payment, being made within thirty (30) days court must adjudicate the insolvency (Sec 18
before the filing of the insolvency petition. Insolvency Law)
Insolvency; Voluntary vs. Involuntary
Insolvency; Jurisdiction; Sole Solvency (1995)
Distinguish between voluntary insolvency and
One day Jerry Haw, (1990)
doing business under the involuntary insolvency.
name Starlight Enterprise, a sole
proprietorship, finds himself short on cash In voluntary insolvency, it is the debtor
and unable to pay his debts as they fall due himself who files the petition for insolvency,
although he has sufficient property to cover while in involuntary insolvency, at least 3
such debts. He asks you, as his retained creditors are the ones who file the petition for
insolvency against the insolvent debtor.
counsel, for advice on the following queries: The following are the distinctions:
a) Should he file a petition with the SEC to be 1In involuntary insolvency, 3 or more creditors
declared in a state of suspension of are required, whereas in voluntary insolvency,
payments in view of the said financial one creditor may be sufficient;
condition he faces? Explain your answer. b) 2In involuntary insolvency, the creditors must
Should he sell profit participation certificates
SUGGESTED ANSWER: be residents of the Philippines, whose credits
a) I wouldbrothers
his 10 counsel and
to file in order
the to raise
Petition for or demand accrued in the Philippines, and
cash for his business? Explain.
Suspension of Payment with the ordinary none of the creditors has become a creditor
courts, rather than the SEC. SECs jurisdiction by assignment within 30 days prior to the
over such cases is confined only to petitions filing of the petition, whereas in voluntary
filed by corporations and partnerships under insolvency, these are not required.
its regulatory powers. 3In involuntary insolvency, the debtor must
b) Instead of selling profit participation have done any of the acts of insolvency as
certificates, I would urge Jerry to enter into a enumerated by Sec 20, whereas in voluntary
partnership or to incorporate in order to raise insolvency, the debtor must not have done
cash for his business. any of said acts.
b) Jerry may sell profit participation 4In involuntary insolvency, the amount of
certificates to his brothers and sisters indebtedness must not be less than P1,000
without registering the same with the SEC whereas in voluntary insolvency, it must
because his sale is an exempted transaction exceed P1,000.
being isolated and not a sale to the public. 5In involuntary insolvency, the petition must
Insolvency; obligations that
be accompanied by a bond, whereas such is
survive (1997)
not required in voluntary insolvency.
Mercantile Law Bar Examination Q & A (1990-2006) Page 67 of 103
Law on Corporate 1In suspension of payments, the debtor has
X (2003)
Corporation applied for its rehabilitation sufficient property to cover all his debts but
and submitted a rehabilitation plan which foresees the impossibility of meeting them
called for the entry by it into a joint venture when they respectively fall due, whereas, in
agreement with Y Corporation. Under the insolvency, the debtor does not have
agreement, Y Corporation was to lend to X sufficient property to pay all his debts in full;
Corporation its credit facilities with certain 2In suspension of payments, the purpose is to
banks to obtain funds not only to operate X suspend or delay payment of debts which
Corporation but also for a part thereof in the remain unaffected although a postponement
amount of P1 million as initial deposit in a of payment is declared, whereas, in
sinking fund to be augmented annually in insolvency, the object is to obtain discharge
amounts equivalent to 10% of the yearly from all debts and liability;
income from its operation of the business of X 3In suspension of payments, no limit for the
Corporation. From this fund the creditors of X amount of indebtedness is required, whereas,
Corporation were to be paid annually, starting in insolvency, the debts must exceed P1,000
from the second year of operations, with the in case of voluntary insolvency, or must not
entire indebtedness to be liquidated in 15 be less than P1,000 in case of involuntary
years. The creditors of X Corporation objected insolvency.
to the plan because Y Corporation would be
taking over the business and assets of X
Corporation. Could the court approve the plan
despite theANSWER:
SUGGESTED objections of the creditors of X
Corporation and could the creditors be
compelled to follow Staythe plan? Could Y
The (2006)
Blue in managing
Star Corporation thefiled
with oftheX
Regional TrialinCourt
the meantime,
a petition forberehabilitation
deemed to
ground that it foresaw the
X Corporation impossibility
itself? (6%)
of paying its obligations as they fall due.
Finding the petition sufficient in form and
substance, the court issued an Order
appointing a rehabilitation receiver and staying
the enforcement
What of all for
is the rationale claims against
the Stay the
(5%) ANSWER:
The purpose of the stay order is intended to
give the management committee or
rehabilitation receiver the leeway to make
the business viable again, without having to
divert attention and resources to litigation in
various fora (Philippine Airlines v. Spouses
G.R. Nos. 76879
Kurangking, et al, & 77143,
G.R. OctoberSeptember
No. 146698, 3, 1990;
24, 2002; BF Homes, Inc. v. Court of Appeals, No.
[Phils.] Inc. v. NLRC, G.R.
126773, April 14, 1999; Sobrejuanite v. ASB Dev.
Corp., G.R. No. 165675, September 30, 2005). It
also prevents a creditor from obtaining an
advantage or preference over another with
respect to actions against the corporation
(Finasia Investments and Finance Corp v. Court of
Appeals, G. R. No. 107002, October 7,1994).
Suspension of Payment vs.
Distinguish (1995) suspension of payments
and insolvency.
In suspension of payments, the debtor is not
insolvent. He only needs time within which
to convert his asset/s into cash with which to
pay his obligations when they fall due. In the
case of insolvency, the debtor is insolvent,
that is, his assets are less than his liabilities.
The following are the distinctions:
Mercantile Law Bar Examination Q & A (1990-2006) Page 68 of 103
b) Discuss the effects of the SEC order rehabilitation in accordance with a
of suspension on the judicial foreclosure rehabilitation plan approved by the SEC.
proceedings initiated by First Bank. (2%)
c) Would the order of suspension have SUGGESTED ANSWER:
any effect on the foreclosure proceedings f. To preserve the assets of the Debtor
initiated by Second Bank? Explain (2%) Corporation, the receiver may take custody
d) Would the order of suspension have of, and control over, all the existing assets
any effect on the suit filed by Third Bank? and property of the corporation; evaluate
(2%)are the legal consequences of a existing assets and liabilities, earnings and
rehabilitation receivership? (2%) operations of the corporation; and determine
f) What measures may the receiver the best way to salvage and protect the
take to preserve the assets of Debtor Suspension of
interest of the investors Payments;
and creditors.
Corporation? (2%) Remedies
When is the(2003)
remedy of declaration in a state
SUGGESTED ANSWER: of suspension of payments available to a
a. The SEC order of suspension of payment is SUGGESTED
corporation? ANSWER:
valid with respect to the debtor corporation, (per dondee) This remedy is available to a
but not with respect to the principal corporation when it experiences inability to
stockholders. The SEC has jurisdiction to paySuspension
one's debts and of liabilities,
Payments and where
vs. the
declare suspension of payments with respect 1has sufficient
petitioning property
Stay Order (2003)
Distinguish to cover
either: all its
the stay order in corporate debts
to corporations, partnership or associations, butrehabilitation
foresees the from
impossibility of meeting
a declaration in a state of
but not with respect to individuals. them when they
suspension of fall due (solvent
payments? (4%) but illiquid)
b. The SEC order of suspension of payment 2has no sufficient property (insolvent) but is
suspended the judicial proceedings initiated Suspension
under the management of Payments;
of a rehabilitation
by the First Bank. According to the Supreme Rehabilitation
receiver Receiver
or a Corporation
management (1999)
and its the
committee, principal
Court in a line of cases, the suspension order stockholders
applicable law is filed with
P.D. No. the pursuant
902-A Securities to and
applies to secured creditors and to the action Exchange
Sec. 5 par. Commission (SEC) a petition for
to enforce the security against the rehabilitation and declaration of a state of
corporation regardless of the stage thereof. suspension of payments under PD 902-A. The
c. The order of suspension of payments objective was for SEC to take control of the
suspended the foreclosure proceedings corporation and all its assets and liabilities,
initiated by the Second Bank. While the earnings and operations, and to determine
foreclosure is against the property of a third the feasibility of continuing operations and
party, it is in reality an action to collect the rehabilitating the company for the benefit of
investors andthe unsecured creditors had
principal obligation owned by the
manifested willingness to cooperate with
corporation. During the time that the
Debtor Corporation. The secured creditors,
payment of the principal obligation is
however, expressed serious objections and
suspended, the debtor corporation is
considered to be not in default and, First Bank had already initiated judicial
therefore, even the right to enforce the foreclosure proceedings on the mortgage
c. The suspension order does not apply to a
security, whether owned by the debtor- constituted on the factory of Debtor
third party mortgage because in such a case,
corporation or of a third party, has not yet Corporation.
the credit is not yet being enforced against
arisen. Second Bank had already initiated foreclosure
the corporation but against the third party
mortgagors property. proceedings on a third-party mortgage
SUGGESTED ANSWER: constituted on certain assets of the principal
d. For the same reason as in (c), the order of stockholders.
suspension of payments suspended the suit Third Bank had already filed a suit against
filed by Third Bank against the principal the principal stockholders who had held
stockholders.ANSWER: themselves liable jointly and severally for
d. The action against the principal the loans of Debtor Corporation with said
stockholders surety in favor of the Bank.
corporation is not suspended as it is not an After hearing, the SEC directed the
action against the corporation but against the appointment of a rehabilitation receiver and
stockholders whose personality is separate ordered the suspension of all actions and
from that of the corporation. claims against the Debtor corporation as well
as against the principal stockholders. a)
e. Under PD 902A, the appointment of a (2%)the validity of the SEC order or
rehabilitation receiver will suspend all
actions for claims against the corporation
and the corporation will be placed under
Mercantile Law Bar Examination Q & A (1990-2006) Page 69 of 103
BV agreed to sell to AC, a Ship and SUGGESTED ANSWER:
Merchandise Broker, 2,500 cubic meters of It incurs no liability unless it is also the negotiating
logs at $27 per cubic meter FOB. After bank
inspecting the logs, CD issued a purchase b) Bravo Bank received from Cisco Bank
On the arrangements made upon instruction
order. by registered mail an irrevocable letter of
of the consignee, H&T Corporation of LA, credit issued by Delta Bank for the account of
California, the SP Bank of LA issued an Y Company in the amount of US$10,000,000
irrevocable letter of credit available at sight to cover the sale of canned fruit juices. The
in favor of BV for the total purchase price of beneficiary of the letter of credit was X
the logs. The letter of credit was mailed to FE Corporation which later on partially availed
Bank with the instruction to forward it to the itself of the letter of credit by submitting to
beneficiary. The letter of credit provided Bravo Bank all documents relative to the
that the draft to be drawn is on SP Bank and shipment of the cans of fruit juices. Bravo
that it be accompanied by, among other Bank paid X Corporation for its partial
things, a certification from AC, stating that availment. Later, however, it refused further
the logs have been approved prior shipment availment because of suspicions of fraud
Before loading with
in accordance on thethevessel
termschartered by AC,
and conditions being practiced upon it and, instead , sued X
the logs were inspected
of the purchase order. by custom inspectors Corporation to recover what it had paid the
and representatives of the Bureau of Forestry, latter. How would you rule if you were the
who certified to the good condition and judge to decide the controversy?
Letters of Credit; Three (6%) Distinct
exportability of the logs. After the loading was
Contract Relationships (2002)
completed, the Chief Mate of the vessel
Explain the three (3) distinct but intertwined
issued a mate receipt of the cargo which
contract relationships that are indispensable
stated that the logs are in good condition.
in a letter of credit transaction.
However, AC refused to issue the required SUGGESTED ANSWER:
certification in the letter of credit. Because of The three (3) distinct but intertwined contract
the absence of certification, FE Bank refused
to advance payment on the letter of credit. 1)
Letters of Credit
relationships that are indispensable in a letter of
transaction are:
May Fe Bank be held liable under the letter of 1) Between the applicant/buyer/importer and
credit? Explain. 2) Under the facts above, the Letter
the of Credit:
beneficiary/seller/exporter The
seller, BV, argued that FE Bank, by accepting Mortgage
Ricardo (2005) his fishpond
applicant/buyer/importer is the to one
AC Bank
who procures
the obligation to notify him that the to the
letter a of
Millionandloan. In ahimself
obliges separateto reimburse
irrevocable letter of credit has been transaction,
the issuing hebank
opened upona letter
receipt of of
the with
documents of
transmitted to it on his behalf, has confirmed
same bank
while thefor $500,000.00 in favor ofis the one
the letter of credit.
1) No. The letter of Consequently,
credit providesFE as Bank
a is HS whoBank, a foreign
in compliance with bank,the to purchase
contract of sale ships
liable under the letter of credit. Is the
condition a certification of AC. Without such outboard
the goodsmotors.
to theLikewise,
buyer andRicardo executed
delivers the documents
argument tenable?
certification, there isExplain.
no obligation on the a Surety
of titleAgreement
and draftinto favor
the ofissuing
AC Bank. bank to recover
part of FE Bank to advance payment of the Thepayment
outboard for motors thearrived
goods. andTheir
were relationship is
governed to Ricardo, but he was
by the contract not able to
of sale.
letter of credit. (Feati Bank v CA 196 S 576)
2) No. FE Bank may have confirmed the letter pay the purchase price thereof. a) Can AC
of credit when it notified BV, that an 2) takeBetween
Bank possessionthe issuing
of the outboard bank and the
irrevocable letter of credit has been beneficiary/seller/exporter
motors? Why? b) Can AC Bank also The foreclose
issuing bank is
transmitted to it on its behalf. But the thethe one that
mortgage overissues the letter
the fishpond? of credit and
conditions in the letter of credit must first be undertakes to pay the seller upon receipt of the
draft and ANSWER:
proper documents of title and to
complied with, namely that the draft be a) surrender
No, forthe AC Bank has no to legal
accompanied by a certification from AC. documents thestanding,
buyer upon
reimbursement. Their relationship motors.
less a lien, on the outboard is governed
Further, confirmation of a letter of credit Insofar as AC Bank
must be of Credit; Liability
expressed. (Feati Bankofv a
CA 196 s 576) by the terms of isthe
letter of itcredit
has privity
issued by
confirming and notifying bank (1994) with the
the bank.person of Ricardo under the Surety
In letters of credit in banking transactions, Agreement,
3) and a lien
Between theonissuing
the fishpondbank basedand the
distinguish the liability of a confirming bank on applicant/buyer/importer
the real estate mortgage Theirconstituted
relationship is
from a notifying bank. therein.
governed by the terms of the application and
In case anything wrong happens to the letter b) agreement
Yes, butfor onlytheto issuance
enforce payment
of the letter of of
of credit, a confirming bank incurs liability thecredit
principal loan
by the bank.of P1million secured by the
for the amount of the letter of credit, while a real estate mortgage on the fishpond
notifying bank does not incur any liability.
Maritime Commerce
Letter of Credit; Certification from
Letters of Credit; Liability of a
a) WhatBank (2003)
liability, if any is incurred by an Average;(1993)
Consignee Particular Average vs.
advising or notifying bank in a letter of credit General Average (2003)
Mercantile Law Bar Examination Q & A (1990-2006) Page 70 of 103 The insurance company should
M/V Ilog de Manila with a cargo of 500 tons bear the loss to the cargo because the
of iron ore left the Port of Zamboanga City deviation of the vessel was proper in order
bound for Manila. For one reason or another, to avoid a peril, which was the strong
M/V Ilog de Manila hit a submerged obstacle typhoon. The running out of provisions was
causing it to sink along with its cargo. A a direct consequence of the proper deviation
in order to avoid the peril of the typhoon.
salvor, Salvador, Inc., was contracted to
refloat the vessel for P1 Million. What kind of The owner of the cargo bears the loss
average was the refloating fee of P1 million, because in the case at bar, they stayed too
and for whose account should it be? Why? long at the island, making it an improper
Particular Average. The owner of the vessel deviation. Every deviation not specified in
shall shoulder the average. Generally Sec. 124 is improper. (Sec. 125, Insurance
speaking, simple or particular averages Code)
include all expenses and damages caused to Carriage of Goods; Deviation;
the vessel or cargo which have not inured to When what
Under Proper (2005)
circumstances can a vessel
the common benefit (Art. 809, and are, properly proceed to a port other than its
port of destination?
therefore, to be borne only by the owner of
the property which gave rise to the same Deviation is proper:
a) when caused by circumstances over which
(Art. 810) while general or gross averages
the master nor the owner of the ship has any
include "all the damages and expenses which
control; b) when necessary to comply with a
are deliberately caused in order to save the
warranty or avoid a
vessel, its cargo, or both at the same time, peril, whether or not the peril is insured
from a real and known risk" (Art. 811). Being against; c) when made in good faith, and
for the common benefit, gross averages are grounds of belief in its necessity to avoid a
upon reasonable
to be borne by the owners of the articles peril; or d) when in good faith, for the
saved (Art. 812). In the present case there is life, or
purpose ofrelieving another vessel in distress. (Sec.
saving human
Gigi obtained a loan from Jojo Corporation,
no proof that the vessel had to be put afloat Insurance Code)
payable in installments. Gigi executed a
to save it from an imminent danger.
chattel mortgage in favor of Jojo whereby she
transferred in favor of Jojo, its successors Carriage of Goods; Exercise
and assigns, all her title, rights ... to a vessel Extraordinary Diligence (2005)
of which Gigi is the absolute owner. The Star Shipping Lines accepted 100 cartons of
chattel mortgage was registered with the sardines from Master to be delivered to 555
Philippine Coast Guard pursuant to PD 1521. Company in Manila. Only 88 cartons were
Gigi defaulted and had a total accountability delivered, however, these were in bad
of P3M. But Jojo could not foreclose the condition. 555 Company claimed from Star
mortgage on the vessel because it sank Shipping Lines the value of the missing
during a typhoon. Meanwhile, Lutang goods, as well as the damaged goods. Star
Corporation which rendered salvage services Shipping Lines refused because the former
for refloating the vessel failed to present a bill of lading. Resolve
Lutang Corporations liensued Gigi.
should beWhose
given The claim of 555 Company is meritorious,
with reasons the claim of 555 Company.
lien should be given preference, that
preference. The lien of Jojo by virtue of of aJojo even if it fails to present a bill of lading.
or Lutang? (4%)
loan of bottomry was extinguished when the Although a bill of lading is the best evidence
vessel sank. Under such loan on bottomry of the contract of carriage for cargo,
Jojo acted not only as creditor but also as nevertheless such contract can exist even
insurer. Jojos right to recover the amount of without a bill of lading. Like any other
the loan is predicated on the safe arrival of contract, a contract of carriage is a meeting
the vessel at the port of destination. The of minds that gives rise to an obligation on
right was lost when the vessel sank (Sec 17 the part of the carrier to transport the goods.
PD 1521) of Goods: Deviation: Jurisprudence has held that the moment the
On a clear(2005)
weather, M/V Sundo, carrying G.R. No.receives
carrier L-18965, the
1964; Negre v.then
insured cargo, left the port of Manila bound Cabahug
its Shipping
duty to exercise & Co., G.R. No. L-19609,
extraordinary diligence April
for Cebu. While at sea, the vessel 29, 1966)
arises . (Cia. Maritima
Star Shipping v. Insurance
Lines can refuse to Co. of North
honor 555
encountered a strong typhoon forcing the America,
Company's claim for the missing and
captain to steer the vessel to the nearest damaged goods. The Bill of Lading is the
island where it stayed for seven days. The document of title that legally establishes the
vessel ran out of provisions for its ownership of 555 Company over said goods.
passengers. Consequently, the vessel (National
555 needs Union Fire Insurance
to present the Billofof
proceededthat the cargo
to Leyte was damaged
to replenish its supplies. Stolt-Nielaen,
legally claim G.R.
saidNo. 87958, April 26, 1990)
because of such deviation, who between the
insurance company and the owner of the Charter Party
cargo bearsANSWER:
the loss? Explain. (1991)
Mercantile Law Bar Examination Q & A (1990-2006) Page 71 of 103 AA entered into a contract with
The Saad Dev Co enters into a voyage BB thru CC to transport ladies' wear from
charter with XYZ over the latters vessel, the Manila to France with transhipment at
MV LadyLove. Before the Saad could load it, Taiwan. Somehow the goods were not loaded
XYZ sold Lady Love to Oslob Maritime Co at Taiwan on time. Hence, when the goods
which decided to load it for its own account. arrived in France, they arrived "off-season"
a) May XYZ Shipping Co validly ask for the and AA was paid only for one-half the value
rescission of the charter party? If so, can by the buyer. AA claimed damages from the
Saad recover damages? To what extent? b) If shipping company and its agent. The
Oslob did not load it for its own account, is it defense of the respondents was prescription.
bound by the charter party? c) Explain the Considering that the ladies' wear suffered
meaning of owner pro hac vice of the "loss of value," as claimed by AA, should the
vessel. In what kind of charter party does prescriptive period be one year under the
this obtain?
Carriage of Goods by Sea Act,
The applicable prescriptive or ten
period years
is ten
a) XYZ may ask for the rescission of the under the Civil Code? Explain briefly.
years under the Civil Code. The one-year (5%)
charter party if, as in this case, it sold the prescriptive period under the Carriage of
vessel before the charterer has begun to Goods by Sea Act applies in cases of loss or
load the vessel and the purchaser loads it damages to the cargo. The term "loss" as
for his own account. Saad may recover interpreted by the Supreme Court in Mitsui
damages to the extent of its losses (Art 689 O.S.K. Lines Ltd. v. Court of Appeals, 287 SCRA
b) If Oslob
Code did not load Lady Love for its own
of Commerce) 366 (1998), contemplates a situation where
account, it would be bound by the charter no delivery at all was made by the carrier of
party, but XYZ would have to indemnify the goods because the same had perished or
Oslob if it was not informed of the Charter gone out of commerce deteriorated or
Party at the time of sale. (Art 689 Code of decayed while in transit. In the present case,
Commerce) the shipment of ladies' wear was actually
c) The term Owner Pro Hac Vice of the COGSA; Prescription of
delivered. The "loss of value" is not the total
Vessel, is generally understood to be the Claims
A local (1992) sought to enforce judicially
loss contemplated by the Carriage of Goods
charterer of the vessel in the case of a claim against the carrier for loss of a
by Sea Act.
bareboat or demise charter (Litonjua Shipping shipment of drums of lubricating oil from
Co v National Seamens Board GR 51910 Japan under the Carriage of Goods by Sea Act
10Aug1989)Party (COGSA) after the carrier had rejected its
Under a charter party, XXO Trading Company demand. The carrier pleaded in its Answer
shipped sugar to Coca-Cola Company through the affirmative defense of prescription under
SS Negros Shipping Corp., insured by Capitol the provisions of said Act inasmuch as the
Insurance Company. The cargo arrived but suit was brought by the consignee after one
with shortages. Coca-Cola demanded from (1) year from the delivery of the goods. In
Capitol Insurance Co. P500.000 in settlement turn, the consignee contended that the
for XXO Trading. The MM Regional Trial Court, period of prescription was suspended by the
where the civil suit was filed, "absolved the written extrajudicial demand it had made
insurance company, declaring that under the against the carrier within the one-year period,
Code of Commerce, the shipping agent is pursuant to Article 1155 of the Civil Code
civilly liable for damages in favor of third providing that the prescription of actions is
persons due to the conduct of the carrier's interrupted when there is a written
captain, and the stipulation in the charter extrajudicial demand by the creditors. a) Has
party exempting
SUGGESTED ANSWER: the owner from liability is the action in fact prescribed? Why? b) If the
not against public policy. Coca-Cola
No. The appeal of Coca-Cola will not prosper. consignees
a) The actionaction
by thepredicated on
local consignee
appealed. Will its appeal
Under Article 587 of the Code prosper? Reason
of Commerce, misdelivery
has, in fact, or conversion
prescribed. of period
The the goods, would
of one
briefly. (5%)
the shipping agent is civilly liable for your under
year answerthebeCarriage
the same?of Explain
Goods by briefly.
Sea Act
damages in favor of third persons due to the (COGSA) is not interrupted by a written
conduct of the carrier's captain, and the extrajudicial demand. The provisions of Art
shipping agent can exempt himself 1155 of the NCC merely apply to prescriptive
therefrom only by abandoning the vessel periods provided for in said Code and not to
with all his equipment and the freight he special laws such as COGSA except when
may have earned during the voyage. On the otherwise provided. (Dole v Maritime Co 148 s
other hand, assuming there is bareboat b) If the consignees action were predicated
charter, the stipulation in the charter party on misdelivery or conversion of goods, the
exempting the owner from liability is not provisions of the COGSA would be
against inapplicable. In these cases, the NCC
COGSA:public policy because
Prescription of the public at
prescriptive periods, including Art 1155 of
large is not involved
Claims/Actions (2004) (Home Insurance Co. v.
American Steamship Agencies, Inc., 23 SCRA25 the NCC will apply (Ang v Compania Maritama
(1968). 133 s 600)
Mercantile Law Bar Examination Q & A (1990-2006) Page 72 of 103
COGSA; Prescription of
RC (2000)computer motherboards from
the United States and had them shipped to
Manila aboard an oceangoing cargo ship
owned by BC Shipping Company. When the
cargo arrived at Manila seaport and delivered
to RC, the crate appeared intact; but upon
inspection of the contents, RC discovered
that the items inside had all been badly
damaged. He did not file any notice of
damage or anything with anyone, least of all
with BC Shipping Company. What he did was
to proceed directly to your office to consult
you about whether he should have given a
notice of damage
SUGGESTED ANSWER:and how long a time he
had to initiate
My advice a suit
would beunder
that the
RC provisions
should give of
the Carriage of Goods by Sea Act (CA
notice of the damage sustained by the cargo 65).
3 days your
andadvice be?
that he (2%)
has to file the suit
to recover the damage sustained by the
cargo within one year from the date of the
delivery of the cargo to him.
COGSA; Prescriptive
What the prescriptive period for actions
involving lost or damaged cargo under the
Carriage of Goods by Sea Act?
ONE YEAR after the delivery of the goods or
the date when the goods should have been
delivered (Sec 3(6), COGSA)

Doctrine of Inscrutable
1. (1995)
2 vessels coming from the opposite directions
collided with each other due to fault imputable
to both. What are the liabilities of the two
vessels with respect to the damage caused to
them and their cargoes? Explain.
2. If it cannot be determined which of the two
vessels was at fault resulting in the collision,
which party should bear the damage caused
to the vessels and the cargoes? Explain.
3. Which party should bear the damage to the
vessels and the cargoes if the cause of the
collision was a fortuitous event? Explain.

1. Each vessel must bear its own damage. Both of
them were at fault. (Art 827, Code of
2. Each of them should bear their respective
damages. Since it cannot be determined as to
which vessel is at fault. This is the doctrine of
inscrutable fault.
3. No party shall be held liable since the cause of
the collision is fortuitous event. The carrier is
not an insurer.
Mercantile Law Bar Examination Q & A (1990-2006)
owner and the captain as the typhoon came SUGGESTED ANSWER:
earlier and overtook the vessel. The vessel Under the doctrine of inscrutable fault,
sank and a number of passengers where fault is established but it cannot be
disappeared with it. determined which of the two vessels were at
Relatives of the missing passengers claimed fault, both shall be deemed to have been at
damages against the shipowner. The fault.
shipowner set up the defense that under the Doctrine of Inscrutable
doctrine of limited liability, his liability was Fault
A severe(1998)
typhoon was raging when the
co-extensive with his interest in the vessel. vessel SS Masdaam collided with MV Princes.
How will you advice the claimants? Discuss
As the vessel was totally lost, his liability had the It is conceded that the typhoon was the
doctrine of limited liability
also been extinguished. in maritime law. (3%) major cause of the collision, although there
Assuming that the vessel was insured, may the was a very strong possibility that it could
claimants go after the insurance proceeds? (3%) have been avoided if the captain of SS
SUGGESTED ANSWER: Masdaam was not drunk and the captain of
Under the doctrine of limited liability in maritimethe MV Princes was not asleep at the time of
law, the liability of the shipowner arising from thecollisions. Who should bear the damages to
operation of a ship is confined to the vessel, SUGGESTED ANSWER:
the vessels and their cargoes? (5%)
equipment, and freight, or insurance, if any, so The shipowners of SS Masdaam and MV
that if the shipowner abandoned the ship, Princess shall each bear their respective loss
equipment, and freight, his liability is of vessels. For the losses and damages
extinguished. However, the doctrine of limited suffered by their cargoes both shipowners
liability does not apply when the shipowner or are solidarily liable.
Limited Liability
captain is guilty of negligence.
Rule a
Toni, (1994)
copra dealer, loaded 1000 sacks of
Yes. In case of a lost vessel, the claimants may
copra on board the vessel MV Tonichi (a
go after the proceeds of the insurance covering
common carrier engaged in coastwise trade
the vessel.
owned by Ichi) for shipment from Puerto
Galera to Manila. The cargo did not reach
Manila because the vessel capsized and
sank withToniall
sued Ichi for damages based on
its cargo.
breach of contract, the latter invoked the
limited liability rule. 1) What do you
understand of the rule invoked by Ichi? 2)
Are there exceptions to the limited liability
1) By limited liability rule is meant that the
liability of a shipowner for damages in case
of loss is limited to the value of the vessel
involved. His other properties cannot be
reached by the parties entitled to damages.
2) Yes. When the ship owner of the vessel
involved is guilty of negligence, the limited
liability rule does not apply. In such case,
the ship owner is liable to the full extent of
the damages v CA sustained
180 s 83) by the aggrieved
Limited Liability
Rule (1997)
Explain the doctrine in Maritime accidents
The Doctrine of Limited Liability
Under the doctrine of limited liability the
exclusively real and hypothecary nature of
maritime law operates to limit the liability of
the shipowner to the value of the vessel,
earned freightage and proceeds of the
insurance. However, such doctrine does not
apply if the shipowner and the captain are
Limited Liability
guilty of negligence.
Doctrine of Inscrutable Rule (1999)
Thinking that the impending typhoon was
Fault (1997)
Explain the doctrine in Maritime accidents still 24 hours away, MV Pioneer left port to
Doctrine of Inscrutable Fault sail for Leyte. That was a miscalculation of
the typhoon signals by both the ship-
Mercantile Law Bar Examination Q & A (1990-2006) Page 74 73
Page of 103
of 103
also already
the fact sighted
that A does
MV SuperFast, a passenger-cargo vessel noton have
its radar
the means
screen. andManila
had no to radar
owned by SF Shipping Company plying the P500th
in the security
As for speed,
agency. Don Claro was
inter-island routes, was on its way to ALTERNATIVE
twice as fast ANSWER:
as Manila.
Zamboanga City from the Manila port when it 1) The prosecutor may establish the fact that
accidentally, and without fault or negligence theAt P500th
the time would constitute
of the collision, a Manila
major failed to
of anyone on the ship, hit a huge floating investment
follow Rule and19yetof Atheis International
not even elected Rules of
object. The accident caused damage to the member
the Road of the
whichBOD or one of
requires the officers.
2 vessels meeting
vessel and loss of an accompanying crated Furthermore,
head on to itchangemay also their becourse
shownby that A
cargo of passenger PR. In order to lighten the does not even
vessel steeringhave tothe means (right)
starboard to raisesothe that
vessel and save it from sinking and in order amount
each of P500th
vessel may andpassthat onthe
the officers
port or (left)
of the of the directors
other. are foreigners.
to avoid risk of damage to or loss of the rest 2) No. The mereManila
fact ofsignaled that it would
being a common law
of the shipped items (none of which was turn to the port side and steered
wife of a foreigner does not bring her within
located on the deck), some had to be theaccordingly,
ambit of thethus resulting Law.
Anti-Dummy in the collision.
jettisoned. SF Shipping had the vessel Don Claros
ALTERNATIVE captain was off-duty and was
repaired at its port of destination. SF having
2) Yes. Beinga drink at the ships
a common bar itatcan
law wife, thebe time of
the passengers
collision. a) who
Who died
would and youthe owners
hold liable offor
Shipping thereafter filed a complaint presumed that she is the one running the
the recover
collision? damages
b) If Don from the
Claro facieowner
was at fault, of said
demanding all the other cargo owners to business,
SUGGESTED which raises
ANSWER: a prima
may vessel?
the heirs of the
share in the total repair costs incurred by the presumption of violation of the Anti-dummy
I can hold the 2 vessels liable. In the problem
company and in the value of the lost and Law, (RA 6084).
given, whether on the basis of the factual
jettisoned cargoes. In answer to the Nationalized Activities or
settings or under the doctrine of inscrutable
complaint, the shippers sole contention was Undertakings
Celeste, a domestic (1994) corporation wholly
SUGGESTED ANSWER: fault, both vessels can be said to have been
No. under the Code
shippers of Commerce,
contention is not valid.each The owned by Filipino citizens, is engaged in
guilty of negligence. The liability of the 2
owners of party
the cargoshould bear its or
jettisoned, to his
save ownthe trading and operates as general contractor.
carriers for the death or injury of passengers
vessel andsinking
from those that and did not suffer
to save the rest any of It buys and resells the products of Matilde, a
and for the loss of or damage to the goods
the or damage arewere not to
entitled obligated
contribution. to make The domestic corporation, 90% of whose capital
arising from the collision is solidary. Neither
jettisoning of said Liability
favor ofconstitute
those whogeneral did. Is stock is owned by aliens. All of Matildes
carrier may invoke the doctrine of last clear
theMV (2000)
average one
loss which ofvalid?
entitles five passenger
the Explain
owners (2%)ships goods are made in the Philippines from
chance which can only be relevant, if at all,
owned by Marina Navigation
thereof to contribution from the owner of the Co, sank off the materials found or produced in the
the two vessels but not on the
coast of Mindoro while
vessel and also from the owners of the en route to Iloilo City. Philippines. OnANSWER:
the other hand, ECQ
Yes, but ismade
subjectby passengers
to Filipino
the doctrine or shippers
of limited
SF Shipping
More than
cargoes saved. is not
200 entitled
passengersto contribution/
perished in the Integrated a 100% owned
liability. Shipping
The v
doctrine National
is to Seamen
the effectBoard
thatGR the
disaster. Evidence for the costs showed of repairs
that on thetheship corporation
and manufacturer of asbestos
vessel fromignored
captain the shippers.typhoon bulletins issued by liability of the shipowners
products. Celeste and ECQ took part in a would only be to
Pag-asa during the 24-hour period the bidding
public extent of any remaining
conducted by MWSS value forofits
immediately prior to the vessels departure vessel,pipe
asbestos proceeds of insurance,
requirements. if any,
Celeste wonand the
Nationalized Activities or
from Manila. The bulletins warned all types of bid,earned
offered 13% Given
lowerthe factual
than thatsettings,
the shipowner
offered by ECQ; and himself
MWSS was not guilty
awarded the of
sea crafts to avoid the typhoons expected
path near Mindoro. To make matters worse, negligence
contract and,
to supply therefore,
asbestos the doctrine
pipes to from can
1) Is Celeste
well apply barred
(Amparo de losthe Flag
Santos Law
he took more load than was allowed for the Celeste.
taking ECQ
part sought
in biddings to nullify
to General
supply award in s 69)
thethe CA 186
ships ratedActivities
capacity. or Sued for damages by favor of Celeste.
X Shipping
government? Loss (2000)
2) Did spent
Celeste andalmost
Matildea fortune
1) A
victims (1993)
P500th in a security
surviving relatives, agency
Marina on Nav in refitting
violate and repairing
the Anti-Dummy Law? its3)luxury passenger
Did Celeste
October 30, 1990.1)
Co contended Hethat
wasits charged
liability, withif any, had andvessel,
Matilde the MV Marina,
violate which
the Retail Tradeplied the inter-
been a dummy of his friend,
extinguished with thea foreigner.
sinking Ifof MV island routesLaw?
Nationalization of theExplain.
company from La Union
were the
and 2) that what evidence
assuming can not
it had in the north to Davao City in the south. The
presentso to prove
extinguished, violation
Yes. The contentions of Marina Nav Co are of the
liability Anti-
should be SUGGESTED
met an untimely fate during its
limited Law?
meritorious. to 2)the Juana
The loss de
of lathe
captain Cruz,
of cargo.
MV a commonAre these
Mariposa is 1) No. The materials
post-repair voyage. offered
It sankinoff thethe
bidscoast of
wife of of anegligence
contentions foreigner
meritoriouswrested in the
in ignoring thecontrol
thecontext of of
typhoon submitted
Zambales while en route to La Unionfrom
are made in the Philippines from
a television
bulletins At the by
issued instance
the the Codeand inof articles
Manila.produced or grown inshowed
The investigation the Philippines,
that the
Commerce?group of
overloading thethe
(3%) firm, she
vessel. But wasonlycharged
the captain andcaptain
the bidder,
aloneCeleste, is a domestic
was negligent. There entity.
were no
of violation
the vessel of theMV Anti-Dummy
MariposaLaw. May
is guilty of Thecasualties
Flag Law in does
that disaster. Faced be
not apply. It can with a
be convicted The by the
ship mere
owner fact
is not.that she is
Therefore, invoked
claim only against
for the payment a bidder
of the who is not and
refitting a
a domestic entity, or against a domestic entity
A shiplaw
allows wife can
permits of the
a foreigner?
use orthe Explain.
doctrine of
exploitation 2)
No, X Shipping
offers Celeste is
merely aasserted
materials. dealer of
Limited Liability Rule; Doctrine of exemption from liability onofthe
limited liability.
or enjoyment of a right, privilege or business,
Inscrutable Fault (1991) Matilde and not
SUGGESTED an alter ego
ANSWER: thebasis of the
the exercise or enjoyment of which is hypothecary
No. The
Celeste buys or
assertion limited
and sells ofon liability
X Shipping rule under
Company is
its own account
In a collision between M/T Manila, a tanker,
expressly reserved by the Constitution or the
and M/V Don Claro, an inter-island vessel, theArticle
not 587The
products ofofMatilde.
totalCode of Commerce.
destruction Is X
of the vessel
laws to citizens of the Philippines, by the Shipping
3) Matilde
does notdidCompanys
not violate
affect assertion
the Retail
the liability valid?
of the shipExplain
Trade owner
Don Claro sank and many of its passengers (3%).
foreigner not possessing the requisites Law since
for it does
repairs on thenotvessel
sell itscompleted
products to before its
drowned and died. All its cargoes were lost.
prescribed by the Constitution or the laws of consumers,
loss. but to dealers who resell them.
The collision occurred at nighttime but the Limited Liability Rule;the General
the Philippines. The prosecutor should prove Neither did Celeste violate Retail Trade
sea was calm, the weather fair and visibility Average
the above elements of the crime Law since, inLoss (2000)
the first place, it is not
was good. Prior to the collision and while still
prohibited to
4 nautical miles apart, Don
Mercantile Law Bar Examination Q & A (1990-2006)
engage in retail trade. Besides, Matildes sale
of the asbestos products to Celeste, being
wholesale, the transaction is not covered by
the RetailIntegrated
Trade Law v Peralta 155 S
Nationalized Activities or
Global (1995)
KL Malaysia, a 100% Malaysian owned
corporation, desires to build a hotel beach
resort in Samal Island, Davao City, to take
advantage of the increased traffic of tourists
and boost the tourism industry of the
1. Assuming that Global has US$100M to invest in
a hotel beach resort in the Philippines, may it
be allowed to acquire the land on which to
build the resort? If so, under what terms and
conditions may Global acquire the land?
Discuss fully.
2. May Global be allowed to manage the hotel
beach resort? Explain.
3. May Global be allowed to operate restaurants
within the hotel beach resort? Explain.
1. Global can secure a lease on the land. As a
corporation with a Malaysian nationality,
Global cannot own the land.
2. Yes, Global can manage the hotel beach resort.
There is no law prohibiting it from managing
the resort.
3. Global may be allowed to operate restaurants
within the beach resort. This is part of the
operation of the resort.
Mercantile Law Bar Examination Q & A (1990-2006) Page 76 75
Page of 103
of 103
in the
Filipino holding
of in
does not fall under the category. Neither goods,
land c)corporate
and d) its own
does it appear that Z is habitually engaged employees. Is EL engaged in retail trade?
in selling to the general public that Explain.
commodity. Since there is no violation of the SUGGESTED ANSWER:
c) The Anti-dummy Law allows board
Retail Trade Law, there would likewise by no Therepresentation
sale by EL ofto generators
the extentto of government
actual and
violation of the Anti-Dummy Law. offices, agricultural
permissible foreign enterprises
investments andinfactories
Retail Trade arecorporations.
outside theAccordingly,
scope of the term retail
the President of
A (1993)
foreign firm is engaged in the business of business
Acme may andnomay, sit intherefore,
the BOD ofbe themade by
manufacturing and selling rubber products to thedepartment
said corporation. However,
store corporation but sales
can do of so
dealers who in turn sell them to others. It also generators
d) The by
Treasurer EL of
in the realty corporation. to its
Acme own
may employees
not hold that
sells directly to agricultural enterprises, constitute retail in
position either sales and are proscribed.
the department store
automotive assembly plants, public utilities Under the amendment
corporation or in the realtyto the Retail Trade
corporation since
which buy them in large bulk, and to its Lawtheintroduced
Anti-Dummy by Law
PD 714, the the
prohibits term retail
officers and employees. 1) Is there violation business
employment shall of not include
aliens in sucha manufacturer
of the Retail Trade Law? Explain. 2) May said (such
areasasof business
EL) selling except tothose
that calland for
firm operate a canteen inside the premises of commercial users or
highly technical consumers who use the
its plant exclusively for its officials and products bought by them to render service to
theRetail Trade
employees without violating the Retail Trade general public (eg government offices)
1) On the assumption that the foreign firm is Law
Is the(1991)
Filipino common-law wife of a goods
Act? Explain. and/or
Retail to produce
Trade or Law;
doing business in the Philippines, the sale to foreigner barred fromsoldengaging
which are
ABC in
Manufacturing turn
(1991) by in
Inc, a company
the retail
them (eg
the dealers of agricultural enterprises, SUGGESTED
business? ANSWER:
owned by foreignenterprises
nationals, and factories).
automotive assembly plants, and public A Filipino common-law wife of a foreigner is
(Goodyear Tires v Reyes
utilities is wholesale and, therefore, not in typewriters
not barredwhich ABCSrdistributes
from engaging
Gr 30063, Jly to 2,the
in retail business.
violation of the Retail Trade Act (BF Goodrich v On consigns
general public
the its2typewriters
assumption ways: that sheto independent
acts for and in
Reyes 121 s 363) dealers
her who
own in turn
behalf, sell
and them
absent to
a the public;
violation of the
2) Yes. The operation of the canteen inside and,
Anti-Dummy Law which prohibits a foreigner
the premises exclusively for its officers and 2Through
from beingindividuals,
either the who areproprietor
real not employees or an
employees, would amount to an input in the of ABC, and who
employee of aare paidengaged
person strictly on inathe retail
manufacturing process and, therefore, does ALTERNATIVE
commission ANSWER:
trade, shebasiswould forbe each sale. the Retail
not violate the Retail Trade Act. An engagement by a wife (including
Trade Act.
Retail Trade common-law relationships) of a foreigner in
a capital of P2th Maria operates a stall the retail trade business, raises the
at aLaw
Acme (1990)
market. CoSheInc,manufactures
a trading company soap presumption that she has violated the Anti-
thatwholly owned
she sells to theby foreign
public. Her was Dummy Law. Hence, the wife is barred from
common by Paulo MaLee,
law husband, Alva, a Filipino,
who hasto a invest engaging in the retail trade business.
in 20%petition
pending of the outstanding
for naturalization,shares of stock of a Retail Trade
occasionally he is forming
finances which will
the purchase engage in
of goods Law
A (1992) purchased from Y Co on
for the department
resale, and assists store business
in the (the
management of installments a rice mill and made a down
SUGGESTED ANSWER: payment therefore. As security for the
business. Is there store corporation).
a violation of the Paulo also
there Acme
is no violation of the
to invest in 40% of the Retail Trade payment of the balance, the Cooperative
Trade Law? Explain.
Law. Maria is a manufacturer
outstanding shares of stock of the realty who sells to the executed a chattel mortgage in favor of Y
general public, he
corporation through
is puttingher stall
up toinownthe the
land Corporation. Y Co in turn assigned its rights
on whichthe soap which she manufactures.
the department store will be built to the chattel mortgage to Z Co a 5% foreign
Inasmuch as
corporation? her capital
(the realty corporation). doesanswer.
your notMay
a) exceed
b) May
Acme invest owned company doing business in the
P5thin (it
said P2th)
in thethenrealtyshe is considered
store Philippines. The cooperative thereafter made
under Sec 4a
Discuss. c) of
May thetheRetail Trade of
President Law as not
Acme, a Because
installment thepayments
Cooperative to Zwas
Co.unable to meet
engaged BOD in of
foreigner, the the
sit insaid
the business. store corporation? its obligations in full, Z Co filed against it a
as he be
Marias a business
director of is the
not realty
a retailcorporation?
business, court suit for collection. The Coop resisted
Discuss. d) May the Treasurer
then the requirement in Sec 1 of the Retail of Acme, contending that Z Co was illegally engaged in
another the
foreigner, same position
Trade Law that only Philippine nationals shall in the said departmentthe retail trade business for having sold a
engage, store corporation?
directly, May he
or indirectly, be the
in the treasurer of consumer good as opposed to a producer
business said
the is realty corporation?
inapplicable. For thisExplain.
reason, the item. The Coop also alleged that Z had
participation of Ma Lee, Marias common Law violated the Anti-Dummy Law. Is Z guilty of
a) Acme may not invest in the department violating the Retail Trade Law and the Anti-
husband, in the management of the business
corporation since the Retail Trade Act SUGGESTED ANSWER:
would not be a violation of the Retail Trade Dummy Law? Why?
Law (1996)
EL allows,
Inc, a domestic
in the case corporation with foreign
of corporations, only 100% Z Co is not guilty of violating the Retail Trade
Law in relation to the Anti-Dummy Law. Law and the Anti-Dummy Law. The term
equity, manufactures electric generators,
Filipino owned companies to engage in retail
sells them to the following customers: a) RETAIL under the Retail Trade Act requires
b) Acme may
government officesinvest
which in the
the generators that the seller must be habitually engaged in
during brownouts on to the assumption
render that the b)
public service, selling to the general public consumption
balance of
agricultural 60% of ownership
enterprises of the
which utilize thelatter goods. By consumption goods are meant
generators as is Filipino owned since the law personal, family and household purposes. A
merely Rice Mill
Mercantile Law Bar Examination Q & A (1990-2006) Page77 of 103 Civil Code and other laws of
SUGGESTED ANSWER: general application can still apply
A SURETY BOND is issued by a surety or suppletorily.
insurance company in favor of a designated ALTERNATIVE ANSWER:
beneficiary, pursuant to which such The dismissal by the court was correct. A
company acts as a surety to the debtor or check whether or not post-dated or crossed,
obligor of such beneficiary. A CASH BOND is is still a negotiable instrument and unless
a security in the form of cash established by Pablo is a general indorser, which is not
a guarantor or surety to secure the expressed in the factual settings, he cannot
Checks: Crossed
obligation of another. be held liable for the dishonor of the
What is (2005)
a crossed check? What are the instrument. In State Investment House v IAC (GR
effects of crossing a check? Explain. 72764 13Jul1989), the court did not go so far
as to hold that the fact of crossing would
A Crossed Check under accepted banking In State Investment House v IAC (GR 72764
render the instrument non-negotiable.
practice, crossing a check is done by writing 13Jul1989), the SC considered a crossed check
two parallel lines diagonally on the left top as subjecting a subsequent holder thereof to
portion of the checks. The crossing is special the contractual covenants of the payor and
where the name of the bank or a business the payee. If such were the case, then the
institution is written between the two parallel instrument is not one which can still be said
lines, which means that the drawee should to contain an unconditional promise to pay or
pay only with the intervention of that order a sum certain in money. In the transfer
company. of Crossed Checks of non-negotiable credits by assignment, the
1) The check may not be encashed but only transferor does not assume liability for the
in the bank. 2) The check may be negotiated
fault of the debtor or obligor. Accordingly the
only onceto one Yes. The check is crossed. It should have
courts decision was correct.
who has an account with a bank. 3) The act forewarned Mr. Noble that it was issued for a
of crossing the check serves as a warning to specific purpose. Hence, Mr Noble could not
the holder that the check has been issued for a be a holder in due course. He is subject to
definite purpose, so that he must inquire if he the personal defense of breach of trust/
received the check pursuant to that purpose;Do agreement
has by Mr. Pablo.
these arrangements Suchthe
violate defense
otherwise, he is not a holder in due Law?available in favor of Mr Carlos against Mr
course. Checks;ANSWER:
Checks: Crossed Checks vs. Check
a) PoThePress (1994)
firstissued in favor ofwould
arrangement Jose anot postdated
be in
Cancelled Checks
Distinguish (2004)
clearly (1) crossed checks from crossedofcheck,
violation in payment
the Retail Trade ofLaw.newsprint
The law
cancelled checks; whichonly
applies Jose when
promised the to deliver.
sale is direct Jose tosold and
SUGGESTED ANSWER: negotiated the check to Excel
general public. A dealer buys and sells for Inc. at a
A crossed check is one with two parallel lines anddiscount.
in his own Excel did and,
behalf not ask Jose thethe
therefore, purpose
drawn diagonally across its face or across a to of
generalthe check.
public Since Jose
is made by the failed to
corner thereof. On the other hand, a anddeliver
not bythe thenewsprint,
manufacturer Po ordered
(Marsman the&drawee
Co v
cancelled check is one marked or stamped ALTERNATIVE ANSWER:
First to stop
Coconut payment
Control on the20June1988)
Co GR39841 check. Efforts
"paid" and/or "cancelled" by or on behalf of a a) The first arrangement violates the Retail
of Excel to collect from Po failed. Excel wants
drawee bank to indicate payment thereof. Trade Law because when ABC consigned
to know from you as counsel: 1) What are the
Checks; Crossed the typewriters, the transaction was one of
effects of crossing a check? 2) Whether as
Mr Pablo(1991)
sought to borrow P200th from Mr consignment
crossed In
check, it aconsignment
holder of duesale,
in the course?an
second indorser and holder
Carlos. Carlos agreed to loan the amount in agency relationship is created
3) Whether Pos defense of lack of so it is as if
the form of a postdated check which was ABC sells
consideration Jose
as to
is the
also public
available through
as againstits
crossed (i.e. 2 parallel lines diagonally drawn agents. Excel?
The second arrangement would be
on the top left portion of the check). Before violative of the Retail Tradea check
Law, since the
the due date of the check, Pablo discounted 1) The effects of crossing
saleare:The check is for deposit onlybeing
is done through individuals in the paid
it with Noble On due date, Noble deposited strictlyaccount
on a of commission basis. The said
the check with his bank. The check was the payee
The check may be indorsed only onceasin
would then be acting merely
dishonored. Noble sued Pablo. The court agentsfavor
of the manufacturer. Sales,
dismissed Nobles complaint. Was the courts ALTERNATIVEof a person who has
ANSWER: an therefore,
account with
The courts decision was incorrect. Pablo and made aby banksuch agents are deemed direct
decision correct? b) The
sales by 2nd
the arrangement
manufacturer. is not violative of
Carlos, being immediate parties to the The Trade
the Retail check Lawis issued
becausefor atypewriters
specific purpose are
instrument, are governed by the rules of and the persongoods
not consumption who takes or itgoods
not in for
privity. Given the factual circumstances of personal, household and family use. does not
accordance with said purpose
the problem, Pablo has no valid excuse from become a holder in due course and is not
denying liability, (State investment House v IAC Negotiable Instruments Law
entitled to payment thereunder.
GR 72764 13July1989). Pablo undoubtedly had
benefited in the transaction. To hold Bond: Cash Bond vs. Surety
otherwise would also contravene the basic Bond (2004)
Distinguish clearly cash bond from surety
rules of unjust enrichment. Even in bond.
negotiable instruments, the
Mercantile Law Bar Examination Q & A (1990-2006)
prevented Excel from becoming a holder in
due course, as such failure or refusal
constituted bad faith.
3) Yes. Not being a holder in due course,
Excel is subject to the personal defense
which Po Press can set up against Jose (State
Investment House v IAC 175 S 310)
Checks; Crossed
On Oct (1995)
12, 1993, Chelsea Straights, a corp
engaged in the manufacture of cigarettes,
ordered from Moises 2,000 bales of tobacco.
Chelsea issued to Moises two crossed checks
postdated 15 Mar 94 and 15 Apr 94 in full
payment therefor. On 19 Jan 94 Moises sold
to Dragon Investment House at a discount
the two checks drawn by Chelsea in his
favor. Moises failed to deliver the bales of
tobacco as agreed despite Chelseas
demand. Consequently, on 1 Mar 94 Chelsea
issued a stop payment order on the 2
checks issued to Moises. Dragon, claiming to
be a holderANSWER:
SUGGESTED in due course, filed a complaint
for collection
Dragon cannot against
collectChelsea for the The
from Chelsea. value of
the checks. Rule on the complaint of
instruments are crossed checks which wereDragon.
Give yourto
intended legal
for the 2,000 bales of
tobacco to be delivered to Moises. It was
therefore the obligation of Dragon to inquire
as to the purpose of the issuance of the 2
crossed checks before causing them to be
discounted. Failure on its part to make such
inquiry, which resulted in its bad faith,
Dragon cannot claim to be a holder in due
course. Moreover, the checks were sold, not
endorsed, by him to Dragon which did not
become a holder in due course. Not being a
holder in due course, Dragon is subject to the
personal defense on the part of Chelsea
concerning the breach of trust on the part of
Checks; Crossed
CheckareLim in
(1996) not complying with his
What the effects of crossing a
obligation to
SUGGESTED deliver the 2000 bales of
The effects of crossing a check are as
The check may not be encashed but only
deposited in a bank;
The check may be negotiated only once to one
who has an account with a bank;
The act of crossing a check serves as a warning
to the holder thereof that the check has been
issued for a definite purpose so that the holder
must inquire if he has received the check
pursuant to that purpose, otherwise he is not a
holder in due course (See Bataan Cigar and
Cigarette Factory, Inc. v CA GR 93048, Mar 3, 1994;
230 s 643)

2) No. It is a crossed check and Excel did not

take it in accordance with the purpose for
which the check was issued. Failure on its
part to inquire as to said purpose,
Mercantile Law Bar Examination Q & A (1990-2006) Page 78 79
Page of 103
of 103
payment through the Clearing House, XM drawee-bank bears the loss (BPI Family Bank v.
Bank honored it. Thereafter, Albert withdrew OnBuenaventura,
April No.
G.R. 1, 1996, Pentium
148196, stopped 30,
September payment2005). A
the P210,000 and closed his account. of the
check for failure
payingofonCD a Bytes
forgedtocheck deliver must
considered Thus,as when
payingFund out House
of its funds and
When the check was returned to him after a (Samsung
deposited theConstruction
cannot charge check,the the
amount Co. to
drawee Phils,
bank v. Far East
month, William discovered the alteration. XM Bank, 129015, August 13, 2004). If the
Bank recredited P210,000 to Williams If Fund House files
drawee-bank has a complaint
charged drawer's against account,
current account, and sought reimbursement Pentium and can
the latter CD Bytes
recover forsuch
the payment
amount from of thethe
from ND Bank. ND Bank refused, claiming G.R.
dishonored No. 107382,
drawee-bank January
will 31, Bank
1996; v.
the complaint Bank
prosper?of P. I.
Court of
that XM Bank failed to return the altered v.
Explain. Case
Appeals, SUGGESTED ANSWER:: The complaint No.
Montessori Internationale, G.R.
check to it within 24 hour clearing period. 149454,
filed by Fund May 28, 2004).
House against Pentium will not
However, the drawer may be precluded or
Who, as between, XM Bank and ND Bank, prosper but the one against CD Bytes will.
SUGGESTED ANSWER: estopped from setting up the defense of
should bear the loss? Explain. Fund House is not a holder in due course and,
ND Bank should bear the loss if XM Bank forgery as against the drawee-bank, when it
therefore, Pentium can raise the defense of
returned the altered check to ND Bank within is shown that the drawer himself had been
failure of consideration against it. The check
twenty four hours after its discovery of the guilty of gross negligence as to have
in question was issued by Pentium to pay for
alteration. Under the given facts, William facilitated the forgery (Metropolitan
a computer that itBENE:
(NOTA ordered The from CD Bytes.
question does not
discovered the alteration when the altered Waterworks
The computer
v. Court of Appeals,
not thehaving
G.R. No.
been delivered,
check was returned to him after a month. It 143 SCRA qualify
20, July 14, term
1986)."forged check". An
there was answera failureaddressing
of consideration. The
the liabilities of a
may safely be assumed that William check discounted
drawer with should Fund be House
deemed by CD sufficient.
immediately advised XM Bank of such fact Bytes is a Answers
crossed check
addressingand this should
liabilities of have
and that the latter promptly notified ND Bank putDrawee
Fund House Bank
should versus
on inquiry. Collecting
be given full credit)
It should have Bank
thereafter. Central Bank Circular No. 9, as When thethe
ascertained signature
title of CD of the
Bytes drawer
to theischeckforged,
amended, on which the decisions of the as between
or the nature ofthe the drawee-bank
latters possession. and collecting
Supreme Court in Hongkong & Shanghai bank,
Failing the respect,
in this drawee-bank Fund House sustains the loss,
is deemed
Banking Corp v Peoples Bank & Trust Co and since
guilty of the
gross collecting
negligence bank does not to
amounting guarantee
Republic Bank vs CA were based was the signature
absence of theand,
of good faith drawer.
thus,The not payment
a holder of
expressly cancelled and superseded by CB the course.
in due check by Fund theHouse
drawee can bankcollectconstitutes
No 317 dated Dec 23 1970. The latter was in (Philippine
the proximate
CD Bytes Effect;
as the latter
Bank v. Court
negligence since
was the immediate
it Appeals,
has the
G.R. No. L-26001,
29, 1968).
turn amended by CB Circular No 580, dated duty
indorser to
of know
the (1998)
check. the signature of its
X draws a bank
check against (SeehisBataan
current Cigar
Sept 19, 1977. As to altered checks, the new drawer.
Cigarette Factory vbranch
CA et alof230 s 643 GR 93048
with the Ortigas Bonifacio Bank in
rules provide that the drawee bank can still Mar 3, of
(b) B. Although
Forged Payee's X does not haveWhen
return them even after 4:00 pm of the next
drawee-bankfunds, pays
the bank honorscheck,
the forged the check it must
day provided it does so within 24 hours from
when it is presented
be considered for payment.
as paying out of its funds and
discovery of the alteration but in no event
cannot charge X has theconspired
amountwith the banks
so paid to the
beyond the period
ALTERNATIVE ANSWER: fixed or provided by law
account ofsothe that his ledger
depositor. Incard
case, the
for filing
XM Bank ofshould
a legalbear
the byloss.
showbank that he still has
becomes liablesufficient
since itsfunds.
primary duty is
drawee bank (XM
bank against the Bank)
bank failed
sending to the
return the
same. Thetobank files
verify thean action for recovery
authenticity of the
of the payee's
altered check
that the
to the
collecting between
bank (NDthe amount paid (Traders
to B because the check
signature Royal Bank v. Radio
draweewithinbank the
and 24 thehour clearingbank
collecting period
is (c)
presented Forged
has no sufficient funds. Decide
Philippines Network, G.R. No. 138510, October
provided Secsome
4c ofwritten
CB Circular
9, dated
case ANSWER:
10, 2002; Westmont Bank v. Ong, G.R. No.
Feb 17, 1949,
prescriptive the latter
period wouldis be absolved from
10 years. The132560,
bank cannot
30, 2002). the amount paid to
liability. NIL HSBC
5th edv 454-455)
PB&T Co GR L-28226 Sep B for the check. When the bank honored the
30 1970; 35 s 140; also Rep Bank v CA GR 42725 check, it became an acceptor. As acceptor,
Checks; Forged Check;
Apr 22, 1991 196 s 100) the bank became primarily and directly
Effects the
Discuss (2006)
legal consequences when a bank liable to the payee/holder B.
honors a forged check. (5%) The recourse of the bank should be against
X and its bookkeeper who conspired to make
The legal consequences when a bank honors
Xs ledger show that he has sufficient funds.
a forged check are as follows: ALTERNATIVE ANSWER:
(a) When Drawer's Signature is Forged: The bank can recover from B. This is solutio
Drawee-bank by accepting the check cannot indebiti because there is payment by the
set up the defense of forgery, because by bank to B when such payment is not due.
accepting the instrument, the drawee bank The check issued by X to B as payee had no
Checks; the genuineness of signature of sufficient funds.
On drawer
Check (1996)
March 1, 1996,
(BPI Pentium
Family Company
Bank vs. ordered
Buenaventura G.R. Checks; Effects; Alterations;
a computer from
No. 148196, CD Bytes,
September and
30, issued
2005; a
Unless a forgery is attributable to the fault
23, Prescriptive
William issuedPeriod (1996)
to Albert a check for P10,000
crossed checkInstruments
in the Law). of P30,000 post-
amount drawn on XM Bank. Albert altered the
or negligence of the drawer himself, the
dated Mar 31,
remedy of 1996. Upon receiptisofagainst
the drawee-bank the the amount of the check to P210,000 and
check, CD Bytes discounted the check with deposited the check to his account with ND
party responsible for the forgery. Otherwise,
Fund House. Bank. When ND Bank presented the check
Mercantile Law Bar Examination Q & A (1990-2006) Page80 of 103 alteration of the instrument.
therefor (Traders Royal Bank v. RPN, G.R. The serial number is not material to the
No. 138510, October 10, 2002). negotiability of the instrument.
Drawee-bank can recover from the
collecting bank (Great Eastern Life Ins. Co. b. Yes. As a general rule, the drawee is not
v. Hongkong & Shanghai Bank, G.R. No. liable under the check because there is no
18657, Augusteven if the indorsement on
23,1922) privity of contract between XYZ Marketing,
the check deposited by the bank's as payee, and ABC Bank as the drawee bank.
client is forged, collecting bank is However, if the action taken by the bank is
bound by its warranties as an indorser an abuse of right which caused damage not
and cannot set up defense of forgery only to the issuer of the check but also to the
as against drawee bank (Associated payee, the payee has a cause of action
Bank v. Court of Appeals, G.R. No. 107382, Checks;
under quasi-delict.
Checks; Liability;
January Drawee
31, 1996). Presentment
Gemma drew a check on September 13,
Bank Guzman
Mario (1995) issued to Honesto Santos a (1994)
1990. The holder presented the check to the
check for P50th as payment for a 2nd hand drawee bank only on March 5, 1994. The
car. Without the knowledge of Mario, bank dishonored the check on the same
Honesto changed the amount to P150th date. After dishonor by the drawee bank, the
which alteration could not be detected by the holder gave a formal notice of dishonor to
naked eye. Honesto deposited the altered Gemma through a letter dated April 27,
check with Shure Bank which forwarded the 1994. 1) What is meant by unreasonable
same to Progressive Bank for payment. time as applied to presentment? 2) Is
Progressive Bank without noticing the Gemma liable to the holder?
1) As applied to presentment for payment,
alteration paid the check, debiting P150th
reasonable time: is meant not more than 6
from the account of Mario. Honesto withdrew
months from the date of issue. Beyond said
the amount of P15th from Shure Bank and
period, it is unreasonable time and the
disappeared. After receiving his bank
check becomes stale.
statement, Mario discovered the alteration
SUGGESTED ANSWER: 2) No. Aside form the check being already
and demanded
The demand of restitution from Progressive
Mario for restitution of the stale, Gemma is also discharged form
amount Discuss fully the
of P150,000 to rights and the
his account is tenable. liability under the check, being a drawer and
Progressive of the
Bank parties
has no concerned.
right to deduct said a person whose liability is secondary, this is
amount from Marios account since the order due to the giving of the notice of dishonor
of Mario is different. Moreover, Progressive beyond the period allowed by law. The giving
Bank is liable for the negligence of its of notice of dishonor on April 27, 1994 is
employees in not noticing the alteration more than one (1) month from March 5,
which, though it cannot be detected by the 1994 when the check was dishonored. Since
naked eye, could be detected by a it is not shown that Gemma and the holder
As between instrument
magnifying Progressiveused Bankbyand Shure
tellers. resided in the same place, the period within
Bank, it is the former that should bear the which to give notice of dishonor must be the
loss. Progressive Bank failed to notify Shure ALTERNATIVE ANSWER:
same time
2) Gemma can that still
the benotice would
liable under reach
Bank that there was something wrong with Gemma if sent by mail. (NIL Sec 103 &of104;
the check within the clearing hour rule of 24 original contract
Realty for
Drawer's the consideration
account cannot be
Checks; Material Alterations; Far East
which the Investment
checkandwas ifissued. Inc v CA 166 S
hours. 256) charged, charged, he can recover
A check for (1999)
P50,000.00 was drawn against Checks; (Associated Bank v. Court of Appeals,
from the drawee-bank
drawee bank and made payable to XYZ Presentment
A bank issuesG.R. its
107382check. May31,1996).
January the holder
Marketing or order. The check was deposited (2003)
hold the
liable thereunder if he fails
has no cause of toaction
with payees account at ABC Bank which prove presentment
against collectingfor payment, or the duty of
bank, since
then sent the check for clearing to drawee present the bill tobank
collecting the drawee
is onlyfor
to the payee. A
bank. Drawee bank refused to honor the acceptance? Explain
collecting bankyour answers.
is not guilty of(4%)
check on ground that the serial number over a forged indorsement on checks for
Is it proper
thereof hadfor
drawee XYZbankmarketing
to dishonor the it has no way of ascertaining the
check for the
sued drawee bank. reason that it had been altered? authority of the endorsement and when it
Explain (2%) caused the checks to pass through the
In instant suit, drawee bank contended that XYZ (Manila
clearing Lighter
house Transportation,
before Inc. v. Court of
allowing withdrawal
Marketing as payee could not sue the drawee G.R. No. 50373, February 15, 1990). On the
of the proceeds thereof
bank as there was no privity between then. other hand, a collecting bank which
Drawee theorized that there was no basis to make endorses a check bearing a forged
it liable for the check. Is this contention correct? endorsement and presents it to the
SUGGESTED ANSWER: drawee bank guarantees all prior
Explain. (3%)
a. No. The serial number is not a material endorsements including the forged
particular of the check. Its alteration does endorsement itself and should be held
not constitute material liable
Mercantile Law Bar Examination Q & A (1990-2006) Page 81 of 103
liability in the event that it should pay Yu e) May Pablo recover from either Mario or
through oversight or inadvertence. Despite Jose?
the stop order by Lim, BPI nevertheless paid SUGGESTED ANSWER:
Yu upon presentation of the check. Lim sued a) Camilo may not enforce said promissory
BPI for paying against his order. Decide the note against Mario and Jose. The promissory
case. note at the time of forgery being payable to
In the event that Mr. Lim, in fact, had order, the signature of Pablo was essential for
sufficient legal reasons to issue the stop the instrument to pass title to subsequent
payment order, he may sue BPI for paying parties. A forged signature was inoperative
against his order. The waiver executed by Mr (Sec 23 NIL). Accordingly, the parties before
Lim did not mean that it need not exercise the forgery are not juridically related to
due diligence to protect the interest of its parties after the forgery to allow such
account holder. It is not amiss to state that b) Camilo may not go against Pablo, the
the drawee, unless the instrument has earlier latter not having indorsed the instrument.
been accepted by it, is not bound to honor
payment to the holder of the check that c) Camilo may enforce the instrument
ALTERNATIVE ANSWER: against Julian because of his special
thereby excludes it from any liability if it
1991 6b) BPI would not be liable to Mr Lim. indorsement to Camilo, thereby making him
were to comply with its stop payment order
Mr Lim and BPI are governed by their own secondarily liable, both being parties after
(Sec 61 NIL)
agreement. The waiver executed by Mr Lim, the forgery.
neither being one of future fraud or gross d) Julian, in turn, may enforce the
negligence, would be valid. The problem instrument against Bert who, by his forgery,
does not indicate the existence of fraud or has rendered himself primarily liable.
gross negligence on the part of BPI so as to e) Pablo preserves his right to recover from
warrant liability on its part. either Mario or Jose who remain parties
CX (2004)
maintained a checking account with juridically related to him. Mario is still
UBANK, Makati Branch. One of his checks in considered primarily liable to Pablo. Pablo
a stub of fifty was missing. Later, he may, in case of dishonor, go after Jose who,
discovered that Ms. DY forged his signature by his Note: It indorsement,
special is possible that an answer
is secondarily
and succeeded to encash P15,000 from liable. might distinguish between blank and
another branch of the bank. DY was able to special indorsements of prior parties
encash the check when ET, a friend, which can thereby materially alter
guaranteed due execution, saying that she the above suggested answers. The
was a holder in due course. Can CX recover problem did not clearly indicate the
the money from the bank? Reason briefly. kind of Liabilities;
indorsements made. Prior &
Yes, CX can recover from the bank. Under Subsequent
Alex issued Parties (1995)PN (promissory
a negotiable
Section 23 of the Negotiable Instruments note) payable to Benito or order in payment
Law, forgery is a real defense. The forged of certain goods. Benito indorsed the PN to
check is wholly inoperative in relation to CX. Celso in payment of an existing obligation.
CX cannot be held liable thereon by anyone, Later Alex found the goods to be defective.
not even by a holder in due course. Under a While in Celsos possession the PN was
forged signature of the drawer, there is no stolen by Dennis who forged Celsos
valid instrument that would give rise to a signature and discounted it with Edgar, a
contract which can be the basis or source of money lender who did not make inquiries
liability on the part of the drawer. The about the PN. Edgar indorsed the PN to Felix,
drawee bank has no right or authority to a holder in due course. When Felix
touch the drawer's funds deposited with the 1. What arepayment
demanded the rightsofofthe
PN iffrom
Forgery; Liabilities; Prior &
drawee bank. Alex, Benito, Celso and Edgar? Explain
latter refused to pay. Dennis could no longer
Jose loaned MarioParties
money and, to 2.
be Does Celso have any right against Alex,
evidence his indebtedness, Mario executed SUGGESTED
and Felix? Explain.
and delivered to Jose a promissory note
payable to his order.
Jose endorsed the note to Pablo. Bert
fraudulently obtained the note from Pablo
Checks; Validity; Waiver of
and endorsed it to Julian by forging Pablos
Banks liability for negligence
signature. Julian endorsed the note to
Mr. Lim issued a check drawn against BPI
Camilo. a) May Camilo enforce the said
Bank in favor of Mr Yu as payment of certain
promissory note against Mario and Jose? b)
shares of stock which he purchased. On the
May Camilo go against Pablo? c) May
same day that he issued the check to Yu,
Camilo enforce said note against Julian? d)
Lim ordered BPI to stop payment. Per
Against whom can Julian have the right of
standard banking practice, Lim was made to
sign a waiver of BPIs
Mercantile Law Bar Examination Q & A (1990-2006) Page 82 of 103 delivered it to Marie. She
2. Celso has the right to collect from Alex accepted the check in good faith as payment
and Benito. Celso is a party subsequent to for goods she delivered to Ruth. Eventually,
the two. However, Celso has no right to claim Ruth regretted what she did and apologized
against Felix who is a party subsequent to to Jun. Immediately he directed the drawee
Celso (Sec 60 and 66 NIL) bank to dishonor the check. When Marie
Incomplete & encashed the check, it was dishonored.
AX, (2004)
a businessman, was preparing for a 1. Is Jun liable to Marie? (5%)
business trip abroad. As he usually did in the SUGGESTED ANSWER:
past, he signed several checks in blank and Yes. This covers the delivery of an
entrusted them to his secretary with incomplete instrument, under Section 14 of
instruction to safeguard them and fill them the Negotiable Instruments Law, which
out only when required to pay accounts provides that there was prima facie authority
during his absence. OB, his secretary, filled on the part of Ruth to fill-up any of the
out one of the checks by placing her name material particulars thereof. Having done so,
as the payee. She filled out the amount, and when it is first completed before it is
endorsed and delivered the check to KC, who negotiated to a holder in due course like
accepted it in good faith for payment of Marie, it is valid for all purposes, and Marie
gems that KC sold to OB. Later, OB told AX of may enforce it within a reasonable time, as if
it had the check
been filled was stolen
up strictly while in
in accordance
what she did with
Yes. AX could regrets.
be held AX to
liable timely directed
KC. This is a Ruth's possession and a thief filled the blank
the with the authority given.
case of an incomplete check, which hasAX
bank to dishonor the check. Could be
been check, endorsed and delivered it to Marie in
held liable to KC? Answer and reason briefly.
delivered. Under Section 14 of the Negotiable payment for the goods he purchased from
Instruments Law, KC, as a holder in due her, is Jun liable to Marie if the check is
course, can enforce payment of the check as dishonored? (5%)
if it had been filled up strictly in accordance SUGGESTED ANSWER:
with the authority given by AX to OB and No. Even though Marie is a holder in due
within a reasonable time. course, this is an incomplete and undelivered
Incomplete and instrument, covered by Section 15 of the
Brad was in(2005)
desperate need of money to pay Negotiable Instruments Law. Where an
his debt to Pete, a loan shark. Pete incomplete instrument has not been
threatened to take Brads life if he failed to delivered, it will not, if completed and
pay. Brad and Pete went to see Seorita negotiated without authority, be a valid
Isobel, Brads rich cousin, and asked her if contract in the hands of any holder, as
she could sign a promissory note in his favor against any person, including Jun, whose
in the amount of P10,000.00 to pay Pete. signature was placed thereon before
Fearing that Pete would kill Brad, Seorita delivery. Such defense is a real defense even
Indorser: Irregular
against a holder Indorser
in due course, vs.
available to a
Isobel acceded to the request. She affixed
an (2005)
irregular indorser from
party like Jun whose signature appeared prior a
her signature on a piece of paper with the
to indorser.
delivery. (3%)
assurance of Brad that he will just fill it up SUGGESTED ANSWER:
later. Brad then filled up the blank paper, Irregular Indorser is not a party to the
making a promissory note for the amount of instrument but he places his signature in
What defense or defenses can Seorita
P100,000.00. He then indorsed and delivered blank before delivery. He is not a party but
Isobel set up against Pete? Explain. (3%)
the same toANSWER:
SUGGESTED Pete, who accepted the note as he becomes one because of his signature in
The defense debt.
of the (personal defense) which the instrument. Because his signature he is
Seorita Isobel can set up against Pete is considered an indorser and he is liable to the
that the amount of P100,000.00 is not in While,
parties ain General Indorser warrants that the
the instrument.
accordance with the authority given to her to instrument is genuine, that he has a good
Brad (in the presence of Pete) and that Pete title to it, that all prior parties had capacity to
was not a holder in due course for acting in contract; that the instrument at the time of
bad faith when accepted the note as theSUGGESTED
indorsement is valid and subsisting; and
payment despite his knowledge that it was that1. on
no right totheclaim
against will
only 10,000.00 that was allowed by Seorita be Benito
acceptedand or
whoor are
prior and
to the
Isobel during Instruments;
their meeting with Brad. paidforgery
of Celsos
to its tenor,
and that
by ifDennis.
it is
Incomplete Delivered Instruments dishonored,
Parties to hean instrument
will pay ifwho thearenecessary
such prior
vs. Incomplete Undelivered Negotiability
to the forgery
for dishonor
cannot are
be made.
held liable by any
Jun was about
Instrument to leave for a business trip. As
(2006) (1993)
party the
became such or at
or subsequent to
his usual practice, he signed several blank of the
the following notes
forgery. However, Edgar, who became a
checks. He instructed Ruth, his secretary, to party to the instrument subsequent to the
fill them as payment for his obligations. Ruth 1) Manila,
forgery September 1, 1993 the same to Felix,
and who indorsed
filled one check with her name as payee, can be held liable by the latter.
placed P30,000.00 thereon, endorsed and
Mercantile Law Bar Examination Q & A (1990-2006)
P2,500.00 I promise to pay Pedro San Juan or
order the sum of P2,500.

(Sgd.) Noel Castro

2) Manila, June 3, 1993

P10,000.00 For value received, I promise to

pay Sergio Dee or order the sum of
P10,000.00 in five (5) installments, with the
first installment payable on October 5, 1993
and the other installments on or before the
fifth day of the succeeding month or
(Sgd.) Lito Villa

The promissory note is negotiable as it
complies with Sec 1, NIL.
Firstly, it is in writing and signed by the maker,
Noel Castro.
Secondly, the promise is unconditional to pay a
sum certain in money, that is, P2,500.00
Thirdly, it is payable on demand as no date of
maturity is specified.
Fourth, it is payable to
Mercantile Law Bar Examination Q & A (1990-2006) Page 84 83
Page of 103
of 103
b) Paragraph Instrument:
2 negotiability
a) MP bought a used cell phone from JR. JR Definition
& Characteristics (2005) What
preferred cash but MP is a friend so JR The interest
is a negotiable is to be computed
instrument? Give the at a particular
accepted MRs promissory note for P10,000. and is determinable.
characteristics of a negotiable It does not make the sum
JR thought of converting the note into cash (2%)uncertain or the promise conditional. c)
by endorsing it to his brother KR. The SUGGESTED
Paragraph ANSWER:
3 negotiability is AFFECTED.
promissory note is a piece of paper with the Negotiable
Giving Instrument
the makeristhea written
option contract
renders the promise
following hand-printed notation: MP WILL for conditional
the payment d) of money which
Paragraph is intended is
4 negotiability
a substitute for money and passes from
Giving to another
the optionastomoney, in such
the holder doesa not make
Below this notation MPs signature with manner as
the to give a holder
conditional. in due course the
8/1/00 next to it, indicating the date of the right to hold the instrument free from
promissory note. When JR presented MPs Negotiability;
defenses available Holder
to prior in Due Such
note to KR, the latter said it was not a Course
instrument (1992)
must a motor