2005 CENTRALIZED BAR OPERATIONS

COMMERCIAL LAW

FREQUENTLY ASKED QUESTIONS IN COMMERCIAL LAW

CODE OF COMMERCE
LETTERS OF CREDIT [1981, 1993, 1994, 2003] Rule: A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. (Bank of America vs. CA) 1) Q: BV agreed to sell to AC, a ship and merchandise broker, 2500 cubic meters of logs at $27 per cubic meter FOB. After inspecting the logs, CD issued a purchase order. On the arrangement made upon instructions of the consignee, H & T Corporation of Los Angeles, California, the SP Bank of Los Angeles issued an irrevocable letter of credit available at sight in favor BV for the total purchase price of the logs. The letter of credit was mailed to FE Bank with the instruction to forward it to the beneficiary. The letter of credit provided that the draft to be drawn is on SP Bank and that it be accompanied by, among others, a certification from AC, stating that the logs have been approved prior to shipment in accordance with the terms and conditions of the purchase order. Before loading on the vessel chartered by AC, the logs were inspected by customs inspectors and representatives of the Bureau of Forestry, who certified to the good condition and exportability of the logs. After the loading was completed, the Chief Mate of the vessel issued a mate receipt of the cargo which stated that the logs are in good condition. However, AC refused to issue the required certification in the letter of credit. Because of the absence of the certification, FE Bank refused to advance payment on the letter of credit. 1) May FE Bank be held liable under the letter of credit? Explain. 2) Under the facts stated above, the seller, BV, argued that FE Bank, accepting the obligation to notify him that the irrevocable letter of credit has been transmitted to it on its behalf, has confirmed the letter of credit. Consequently, FE Bank is liable under the letter of credit. Is the argument tenable? Explain. A: 1) No. The letter of credit provides as a condition, a certification from AC. Without such certification, there is no obligation on the part of FE Bank to advance payment of the letter of credit. (Feati Bank v. Court of Appeals, 196 SCRA 576) 2) No. FE Bank may have confirmed the letter of credit when it notified BV, that an irrevocable letter of credit has been transmitted to it on its behalf. But the conditions in the letter of credit must first be complied with, namely, that the draft be accompanied by a certification from AC. Further, confirmation of a letter of credit must be expressed. (Feati Bank v. Court of Appeals, 196 SCRA 576)

Red Notes in Commercial Law

2) Q: Explain the three (3) distinct but intertwined contract relationships that are indispensable in a letter of credit transaction. A: The three (3) distinct but intertwined contract relationships that are indispensable in a letter of credit transaction are: 1. Between the applicant/buyer/importer and the beneficiary/seller/ exporter - The applicant/buyer/ importer is the one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title, while the beneficiary/seller/exporter is the one who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment for the goods. Their relationship is governed by the sales contract. 2. Between the issuing bank and the beneficiary/ seller/ exporter -The issuing bank is the one that issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents of title and to surrender the documents to the buyer upon reimbursement. Their relationship is governed by the terms of the letter of credit issued by the bank. 3. Between the issuing bank and the applicant/buyer/importer - Their relationship is governed by the terms of the application and agreement for the issuance of the letter of credit by the bank.

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3) Q: What liability, if any, is incurred by an advising or notifying bank in a letter of credit transaction? A: In a letter of credit transaction, an advising or notifying bank is a correspondent bank of the bank which issued the letter of credit or the issuing bank. Its responsibility is solely to notify and or transmit the documentary credit to the seller-exporter-beneficiary. It assumes no liability except to notify and/or transmit to the beneficiary the existence of a letter of credit. 4) Q: Bravo Bank received from Cisco Bank by registered mail an irrevocable letter of credit issued by Delta Bank for the account of Y Company in the amount of US$10,000,000.00 to cover the ale of canned fruit juices. The beneficiary of the letter of credit was X Corporation which later on partially availed itself of the letter of credit by submitting to Bravo Bank all documents relative to the shipment of the cans of frit juices. Bravo Bank paid X Corporation for its partial availment. Later, however, it refused further availment because of suspicions of fraud being practiced upon it, and instead, sued X Corporation to recover what it had paid to the latter. How would you rule if you were the judge to decide the controversy? A: Bravo Bank may recover from X Corporation. Bravo Bank has merely been a negotiating bank and not a confirming bank. The fact that Bravo Bank paid the proceeds of the letter of credit did not make it a confirming bank. Also, the fact that the letter of credit was for the account of Y Company only means that the same had to be presented to the Delta Bank for payment. A letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft. The transaction between the Bravo Bank and X Corporation was a discounting arrangement. Bravo Bank has acted independently as a negotiating bank, thus saving the beneficiary from the hardship of presenting the necessary documents directly to the issuing bank. As a negotiating bank, Bravo Bank has a right of recourse against the issuing bank and until reimbursement is obtained, the beneficiary continues to assume a contingent liability thereon. However, by reason of the fraud independently employed by X Corporation, it is solely liable to Bravo Bank.

NEGOTIABLE INSTRUMENTS LAW

REQUISITES OF NEGOTIABILITY [1980, 1989, 1993,1996, 1997, 2000, 2002, 2003] Rule: The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. (Caltex Phil. Vs. CA)

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1) Q: Which of the following stipulations or features of a promissory note (PN) affect or do not affect its negotiability, assuming that the PN is otherwise negotiable? Indicate your answer by writing the paragraph number of the stipulation or feature of the PN as shown below and your corresponding answer, either "Affected" or "Not affected." Explain. a) The date of the PN is "February 30, 2002." b) The PN bears interest payable on the last day of each calendar quarter at a rate equal to five percent (5%) above the then prevailing 91-day Treasury Bill rate as published at the beginning of such calendar quarter. c) The PN gives the maker the option to make payment either in money or in quantity of palay of equivalent value, d) The PN gives the holder the option either to-require payment in money or to require the maker to serve as the bodyguard or escort of the holder for 30 days. A: a) Negotiability is "NOT AFFECTED". The date is not one of the requirements for negotiability. b) Negotiability is "NOT AFFECTED". The Interest is to be computed at a particular time and is determinable. It does not make the sum uncertain or the promise conditional. c) Negotiability is "AFFECTED". Giving the maker the option renders the promise conditional.

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d) Negotiability is "NOT AFFECTED". Giving the option to the holder does not make the promise conditional. 2) Q: TH is an indorsee of a promissory note that simply states: PAY TO JUAN TAN OR ORDER 400 PESOS. The note has no date, no place of payment and no consideration mentioned. It was signed by MK and written under his letterhead specifying the address, which happens to be his residence. TH accepted the promissory note as payment for services he rendered to SH, who in turn received the note from Juan Tan as payment for a prepaid cellphone card worth 450 pesos. The payee acknowledged having received the note on August 1, 2000. A Bar reviewee had told TH, who happens to be your friend, that TH is not a holder in due course under Article 52 of Negotiable Instruments Law (Act 2031) and therefore does not enjoy the rights and protection under the statute. TH ask for your advice specifically in connection with the note being undated and not mentioning a place of payment and any consideration. What would your advice be? A: The fact that the instrument is undated and does not mention the place of payment does not militate against its being negotiable. The date and place of payment are not material particulars required to make an instrument negotiable. The fact that no mention is made of any consideration is not material. Consideration is presumed. 3) Q: A promissory note reads as follows: I promise to pay Gabriela Silangan P100.00 three years after the unconditional withdrawal of the U.S. of its military bases in the Philippines. (a) Discuss the negotiability or non-negotiability of the above note. (b) Discuss the effect of each of the following upon the note's negotiability: 1) No date is given 2) The places where drawn and where payable are not stated. (1988) A: (a) The promissory note, is not a negotiable instrument. Section 1 of the Negotiable instruments Law requires among other things, for an instrument to be negotiable, that it must be payable to order or to bearer. Without being so payable, the note is not a negotiable instrument (Consolidated Plywood Industries vs. IFC Leasing,) The phrase "unconditional withdrawal of the U.S. of its military bases in the Philippines" may not be considered as being opposed to the requirement that the instrument must contain "an unconditional promise or order to pay" since the presence in the country of the bases is merely temporary and that their ultimate removal from the Philippines is just a matter of time (See Sec. 4, Negotiable Instruments Law). (b) (1) The negotiability of an instrument is not adversely affected by its being undated. (See. 6(a)) Even if it is needed to determine the maturity of the instrument, the holder is implicitly authorized to place the date thereof (See.13, Negotiable Instruments Law) or to consider it dated as of its issue (See. 17, Ibid). 2) For the negotiability of a promissory note it is not necessary that it must express the place where it is made or where it is payable. All that is required under the Negotiable Instruments Law is compliance with Section 1 thereof. (Sec. 6(c)). ACCOMMODATION PARTY [1985, 1995, 1998, 2003] Rule: In accommodation transactions recognized by the Negotiable Instruments Law, an accommodating party lends his credit to the accommodated party, by issuing or indorsing a check which is held by a payee or indorsee as a holder in due course, who gave full value therefor to the accommodated party. The latter, in other words, receives or realizes full value which the accommodated party then must repay to the accommodating party, unless of course the accommodating party intended to make a donation to the accommodated party. But the accommodating party is bound on the check to the holder in due course who is necessarily a third party and is not the accommodated party. Having issued or indorsed the check, the accommodating party has warranted to the holder in due course that he will pay the same according to its tenor. (TRAVEL-ON VS. CA) 1) Q: Susan Kawada borrowed P500,000 from XYZ bank which required her, together with Rose Reyes, who did not receive any amount from the bank, to execute a promissory note payable to the

COMMERCIAL LAW

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bank, or its order, on stated maturities. The note was executed as so agreed. What kind of liability was incurred by Rose, that of an accommodation party or that of a solidary debtor? Explain A: The liability incurred by Rose Reyes was that of an accommodation party, as provided for in Section 29 of the NIL. An accommodation party is one who has signed the instrument as maker, drawer, acceptor or indorser without receiving value therefor and for the purpose of lending his name to some other person. In this case, Rose did not receive any amount from the bank when she signed as a co-maker of the promissory note. She merely participated therein in order to fulfill the requirement imposed by the bank. It is presumed that se executed the instrument for the purpose of lending her name to ensure the approval of the loan. 2) Q: Juan Sy purchased from A Appliance Center one (1) generator set on installment with chattel mortgage in favor of the vendor. After getting hold of the generator set, Juan Sy immediately sold it without consent of the vendor. Juan Sy was criminally charged with estafa. To settle the case extra-judicially, Juan Sy paid the sum of P20,000.00 and for the balance of P5,000.00, he executed a promissory note for said amount with Ben Lopez as an accommodation party. Juan Sy paid the balance. 1) What is the liability of Ben Lopez as an accommodation party? Explain. 2) What is the liability of Juan Sy? A: 1) Ben Lopez, as an accommodation party, is liable as maker to the holder up to the sum of P5,000.00 even if he did not receive any consideration for the promissory note. This is the nature of accommodation. But Ben Lopez can ask for reimbursement from Juan Sy, the accommodated party. 2) Juan Sy is liable to the extent of P5,000.00 in the hands of a holder in due course (Sec. 14, NIL). If Ben Lopez paid the promissory note, Juan Sy has the obligation to reimburse Ben Lopez for the amount paid. If Juan Sy pays directly to the holder of the promissory note, or he pays Ben Lopez for the reimbursement of the payment by the latter to the holder, the instrument is discharged. INDORSEMENT BY A MINOR; NON-NEGOTIABLE INSTRUMENT [1989, 1998] Rule: Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. (Sesbreno vs. CA)

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1) Q: X makes a promissory note for P500.00 payable to A, a minor, to help him buy school books. A indorses the note to B who, in turn, indorses the note to C. C knows As minority. If C sues X on the note, can X set up the defenses of minority and lack of consideration? A: No. The promissory note not being payable to order or to bearer is not a negotiable instrument. Accordingly, the transferee merely steps into the shoes of the transferor and, being merely a successor-in-interest, has no right greater than that of the transferor. X may thus set up against C the possible defenses of (without delving into their merits) minority and lack of consideration (see Consolidated Plywood vs. IFC Leasing, G.R. 72593, 30 April 1987). LIABILITY ON INDORSEMENT IN RELATION TO FORGERY [1983, 1984, 1987, 1997, 1989] Rule: Where a check is drawn payable to the order of one person and is presented to a bank by another and purports upon its face to have been duly indorsed by the payee of the check, it is the duty of the bank to know that the check was duly indorsed by the original payee, and where the Bank pays the amount of the check to a third person, who has forged the signature of the payee, the loss falls upon the bank who cashed the check, and its only remedy is against the person to whom it paid the money.(Republic Bank vs. Ebrada)

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1) Q: A delivers a bearer instrument to B. B then specially indorses it to C and C later indorses it in blank to D. E steals the instrument from D and, forging the signature of D, succeeds in negotiating it to F who acquires the instrument in good faith and for value. a) If, for any reason, the drawee bank refuses to honor the check, can F enforce the instrument against the drawer? b) In case of the dishonor of the check by both the drawee and the drawer, can F hold any of B, C and D liable secondarily on the instrument? A: a) Yes. The instrument was payable to bearer as it was a bearer instrument. It could be negotiated by mere delivery despite the presence of special endorsements. The forged signature is unnecessary to presume the juridical relation between or among the parties prior to the forgery and the parties after the forgery. The only party who can raise the defense of forgery against a holder in due course is the person whose signature is forged. b) Only B and C can be held liable by F. The instrument at the time of forgery was payable to bearer, being a bearer instrument. Moreover, the instrument was indorsed in blank by C to D. D, whose signature was forged by E cannot be held liable by F. 2) Q: Alex issued a negotiable promissory note (PN) payable to Benito or order in payment of certain goods. Benito indorsed the PN to Celso in payment of an existing obligation. Later Alex found the goods to be defective. While in Celsos possession the PN was stolen by Dennis who forged Celsos signature and discounted it with Edgar, a money lender who did not make inquiries about the PN. Edgar indorsed the PN to Felix, a holder in due course. When Felix demanded payment of the PN from Alex, the latter refused to pay. Dennis could no longer be located. 1) What are the rights of Felix, if any, against Alex, Benito, Celso and Edgar? Explain. 2) Does Celso have any right against Alex, Benito and Felix? Explain. A: 1) Felix has no right to claim against Alex, Benito and Celso who are parties prior to the forgery of Celsos signature by Dennis. Parties to the instrument who are such prior to the forgery cannot be held liable by any party who became such at or subsequent to the forgery. However, Edgar, who became a party to the instrument subsequent to the forgery and who indorsed the same to Felix, can be held liable by the latter. (Sec. 124, NIL) 2) Celso has the right to collect from Alex and Benito. Celso is a party subsequent to the two. However, Celso has no right to claim against Felix who is a party subsequent to Celso. (Secs. 60 and 66, NIL) 3) Q: A issued a promissory note payable to B or bearer. A delivered the note to B. B indorsed the note to C. C placed the note in his drawer, which was stolen by the janitor X. X indorsed the note to D by forging C's signature. D indorsed the note to E who in turn delivered the note to F, a holder in due course, without indorsement. Discuss the individual liabilities to F of A, B, and C. A: A is liable to F. As the maker of the promissory note, A is directly or primarily liable to F, who is a holder in due course. Despite the presence of the special indorsements on the note, these do not detract from the fact that a bearer instrument, like the promissory note in question, is always negotiable by mere delivery, until it is indorsed restrictively "For Deposit Only. " B, as a general endorser, is liable to F secondarily, and warrants that the instrument is genuine and in all respects what it purports to be; that he has good title to it; that all prior parties had capacity to contract; that he has no knowledge of any fact which would impair the validity of the instrument or render it valueless; that at the time of his indorsement, the instrument is valid and subsisting; and that on due presentment, it shall be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay. C is not liable to F since the latter cannot trace his title to the former. The signature of C in the supposed indorsement by him to D was forged by X. C can raise the defense of forgery since it was his signature that was forged. Alternative Answer: As a general endorser, B is secondarily liable to F. C is liable to F since it is due to the negligence of C in placing the note in his drawer that enabled X to steal the same and forge the signature of C relative to the indorsement in favor of D.

COMMERCIAL LAW

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As between C and F who are both innocent parties, it is C whose negligence is the proximate cause of the loss. Hence, C should suffer the loss. 4) Q: Adam makes a note payable to Bert or to order. Bert indorses the note to Cora. Douglas steals the note and indorses it to Elvin by forging Coras signature. Elvin then indorses the note to Felix who is not aware of the forgery. What is the right of Felix against Adam, Bert, Cora, Douglas and Elvin? A: On the assumption that Bert made a blank endorsement, thereby rendering the instrument payable to bearer in the hands of Cora, the latter's signature would be unnecessary so as to preserve the juridical relation between parties prior to the forgery and parties after the forgery. On the further assumption that Felix had acquired the instrument for value, thus making him a holder in due course, he may accordingly hold Adam, Bert and Douglas liable. The liability of Adam, as maker, and Douglas, as forger, is primary and that of Bert, as blank indorser, secondary. If, however, Felix did not acquire it for value and is not thus a holder in due course, he then acquires no right greater than that of the immediate transferor and, Adam; Bert and Cora would he without any liability in favor of Felix. On the assumption that Bert made a special indorsement, the signature of Cora would be essential to pass title to the instrument. Her signature, forged by Douglas would be inoperative, and Elvin, whether a holder in due course which is forged is required to pass title, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto (Secs. 23, 40, 52, 65-67, NIL; see Republic Bank vs. Ebrada, 65 SCRA 680 ). LIABILITY OF A DRAWEE BANK VIS--VIS A COLLECTING BANK ON FORGED OR ALTERED CHECKS [1983, 1987, 1995, 1996, 1999] Rule: The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order of the payee. The drawer's instructions are reflected on the face and by the terms of the check. Payment under a forged indorsement is not to the drawer's order. When the drawee bank pays a person other than the payee, it does not comply with the terms of the check and violates its duty to charge its customer's (the drawer) account only for properly payable items. Since the drawee bank did not pay a holder or other person entitled to receive payment, it has no right to reimbursement from the drawer. The general rule then is that the drawee bank may not debit the drawer's account and is not entitled to indemnification from the drawer. The risk of loss must perforce fall on the drawee bank. (Associated Bank vs. CA) 1) Q: B "forged "A's" signature as drawer of a check drawn on Citibank. The check was purportedly payable to the order of "B". "B" then indorsed the check to "C", a holder in due course, who deposited the same to his account with Bank of P.I. The check passed through the normal course of clearing and accordingly the drawee, Citibank, credited the collecting bank, Bank of P.I., with the amount of the check which Citibank in turn debited from "A's" deposit account. Upon receiving his monthly statement from Citibank, together with the cancelled checks debited from his deposit account, "A" discovered the forgery. (a) Can "A" compel Citibank to re-credit to his account the amount of the forged check? (b) Does Citibank in turn have a recourse against the collecting bank, Bank of P.I. ? Explain. (c) Can Citibank or Bank of P. I., as the case may be, proceed against "C as indorser? Explain. A: (a) "A" can compel Citibank to re-credit to his account the amount of the forged check, he being not a party to the instrument. Forgery renders the forged signature totally inoperative. Additionally, the drawee bank is charged with knowledge of the drawer's signature. (Note: Any of the above reasons, it is believed, should suffice). (b)Citibank has no right of recourse against Bank of P.I. Having gone through "the normal course of clearing", the latter can assume that the check was properly drawn by the drawer. The drawee bank is charged with knowledge of the drawer's signature. The negligence, if at all, is attributed more to Citibank than with the Bank of P.I. Note: An answer stating that such recourse by Citibank may be had against Bank of P. I. because having gone through "the normal course of clearing" the latter must be deemed to have warranted

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or guaranteed previous indorsements, it is believed, should likewise be given credit. In PNB vs. BPI (G.R. 27838, 4 August 1986), the Supreme Court had recognized the practice of guaranteeing such indorsements in accordance with the Bankers' Association's Rules that may have influenced an examinee to apply the rule to all prior parties. (c) Recourse may be had by either against "C" as indorser because of his warranty. In the case particularly of Bank of P.I., its right of recourse may be based likewise on the agency rule that puts the risk of loss on the principal (Bank of P.I.).

COMMERCIAL LAW

Alternative Answer: (c) If ever Bank of P.I. is held liable, it can proceed against C as an indorser under the latter's warranty. Citibank, as drawee, cannot proceed against C, as indorser, under the doctrine of comparative negligence. Under the facts, it is the negligence of Citibank, which had access to the signature specimen of the drawer, which is the proximate cause of the loss. As between Citibank and C, the former is more negligent than the latter and it is the former's negligence that gave rise to the loss. 2) Q: Mario Guzman issued to Honesto Santos a check for P50,000.00 as payment for a secondhand car. Without knowledge of Mario, Honesto changed the amount to P150,000.00 which alteration could not be detected by the naked eye. Honesto deposited the altered check with Shure Bank which forwarded the same to Progressive Bank for payment. Progressive Bank without noticing the alteration paid the check, debiting P150,000.00 from the account of Mario. Honesto withdrew the amount of P150,000.00 from Shure Bank and disappeared. After receiving his bank statement, Mario discovered the alteration and demanded restitution from Progressive Bank. Discuss fully the rights and liabilities of the parties. A: The demand of Mario for restitution of the amount of P150,000.00 to his account is tenable. Progressive Bank has no right to deduct said amount from Marios account since the order of Mario is different. Moreover, Progressive Bank is liable for the negligence of its employees in not noticing the alteration which, though it cannot be detected by the naked eye, could be detected by a magnifying instrument used by tellers. As between Progressive Bank and Shure Bank, it is the former that should bear the loss. Progressive failed to notify Shure that there was something wrong with the check within the clearing hour rule of twenty-four hours. 3) Q: Placido, a bank depositor left a checkbook on his house. Unknown to him, a visitor at the time, noticing the same, took a check therefrom , filled it up in the amount of P3,000.00 and succeeded in encashing the check the same day. Placidos account was thereby debited in the same amount. Discovering the erroneous debit, Placido demanded that the bank credit him with a like amount. The bank refused on the ground that Placido was negligent in leaving the checkbook on his desk so that he could not put up the defense of forgery or want of authority under the Negotiable Instruments Law. The facts disclose that even to the naked eye, there were marked differences between Placidos signature and the check forged by the visitor. As between Placido and the bank, who should bear the loss? Explain A: The bank should bear the loss. A drawee bank must exercise the highest diligence in safeguarding the accounts of its client-depositors. The bank is also charged with genuiness of the signature of its current account holders. But what can be made more striking is that there were marked differences between Placidos signature and the one in the check forged by the visitor. Certainly Placido was not negligent in leaving the checkbook on his own desk ( PNB v. Quimpo 158 SCRA 582) FORGERY BY AN EMPLOYEE; DOCTRINE OF COMPARATIVE NEGLIGENCE [1997, 2004] Rule: The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the depositor to act as a prudent businessman would under the circumstances. (GEMPESAW VS. CA)

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1) Q: A, single proprietor of a business concern, is about to leave for a business trip and, as he often does on these occasions, signs several checks in blank. He instructs B, his secretary, to safe keep the checks and fill them out when and as required to pay accounts during his absence. B fills out one of the checks by placing her name as payee, fills in the amount, endorses and delivers the check to C who accepts it in good faith as payment for goods sold to B. B regrets her action and tells A what she did. A directs the Bank in time to dishonor the check. When C encashed the check, it was dishonored. Can A be held liable to C? A: Yes. A can be held liable to C, assuming that the latter gave notice of dishonor to A. This is a case of an incomplete instrument but delivered as it was entrusted to B, the secretary of A. Moreover, under the doctrine of comparative negligence, it was the negligence of A in entrusting the check to B which is the proximate cause of the loss. HOLDER IN DUE COURSE [1986, 1994, 1996, 2000] Rule: As the holder's title was defective or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holder's title, and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist. And having presented no evidence that it acquired the check in good faith, it (payee) cannot be considered as a holder in due course. (De Ocampo vs. Gatchalian) 1) Q: 1) PN makes a promissory note for P 5,000.00, but leaves the name of the payee in blank because he wanted to verify its correct spelling first. He mindlessly left the note on top of his desk at the end of the workday. When he returned the following morning, the note was missing. It turned up later when X presented it to PN for payment. Before X, T, who turned out to have flinched the note from PNs office, had endorsed the note after inserting his own name in the blank space as the payee. PN dishonored the note, contending that he did not authorize its completion and delivery. But X said he had no participation in, or knowledge about, the pilferage and alteration of the note and therefore he enjoys the rights of a holder in due course under the Negotiable Instruments Law. Who is correct and why? 2) Can the payee in a promissory note be a holder in due course within the meaning of the Negotiable Instruments Law (Act 2031)? Explain your answer? A: 1) PN is right. The instrument is incomplete and undelivered. It did not create any contract that would bind PN to an obligation to pay the amount thereof.

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2) A payee in a promissory note cannot be a holder in due course within the meaning of the Negotiable Instruments Law, because a payee is an immediate party in relation to the marker. The payee is subject to whatever defenses, real or personal, available to the marker of the promissory note. Alternative Answer: 2) A payee can be a holder in due course. A holder is defined as the payee or indorsee of the instrument who is in possession of it. Every holder is deemed prima facie to be a holder in due course. 2) Q: Eva issued to Imelda a check in the amount of P50,000 post-dated September 30, 1995, as security for a diamond ring to be sold on commission. On September 15, 1995, Imelda negotiated the check to MT Investment which paid the amount of P40,000 to her. Eva failed to sell the ring, so she returned it to Imelda on September 19, 1995. Unable to retrieve her check, Eva withdrew her funds from the drawee bank. Thus, when MT Investment presented the check for payment, the drawee bank dishonored it. Later on, when MT Investment sued her, Eva raised the defense of absence of consideration, the check having been issued merely as security for the ring that she could not sell. Does Eva have a valid defense? Explain.

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A: No. Eva does not have a valid defense. MT Investment is a holder in due course and as such, holds the post-dated check free from any defect of title of prior parties and from defenses available to prior parties among themselves. Eva can invoke the defense of absence of consideration against MT Investment only if the latter was privy to the purpose for which the checks were issued and, therefore, not a holder in due course. Second, it is not a ground for the discharge of the post-dated check as against a holder in due course that it was issued merely as a security. The only grounds for the discharge of a negotiable instrument are those set forth in Section 119 of the NIL and none of those grounds are available to Eva. The latter may not unilaterally discharge herself from her liability by the mere expediency of withdrawing funds from the drawee bank. LIABILITY OF INDORSERS [1982, 1989, 2002] Rule: The collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements. (BPI vs. CA and Napiza) 1) Q: Anna makes a promissory note payable to bearer and delivers it to Bing. In turn, Bing negotiates it by mere delivery to Carmen, who endorses it specially to Dong. Dong negotiates it by special indorsement to Emma, who negotiates it to Fe by mere delivery. Anna did not pay. To whom are Bing, Carmen, Dong, and Emma liable? Explain your answer fully. A: Bing, not being an indorser, may only he held liable for breach of warranty but the facts in the problem do not disclose any such breach. Carmen, under her special indorsement, may he held secondarily liable by Dong and Emma since the latter (Dong and Emma) derived title under Carmen's special indorsement. Carmen is not secondarily liable to Fe since the latter obtained it by mere delivery from Emma and therefore did not obtain title through Carmen's special indorsement (see Sec. 40, Negotiable Instruments Law). Dong holds himself secondarily liable to Emma since the latter derived title under Dong's special indorsement but not to Fe who acquired the instrument only by delivery (See. 40, Ibid). Emma, not being an indorser is not secondarily liable to Fe. Emma's only possible source of liability to Fe would be for a breach of warranty but the facts in the problem do not disclose any such breach. (See. 40 Ibid.) Secondary liability requires due notice of dishonor, unless excused, which we assume had properly been observed. CROSSED CHECKS [1985, 1994, 1995, 1996, 1997, 2002] Rule: In order to preserve the credit worthiness of chocks, jurisprudence has pronounced that crossing of a check should have the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once-to one who has an account with a bank; (c) and the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. (BATAAN CIGAR & CIGARETTE FACTORY VS. CA) 1) Q: Po Press issued in favor of Jose a postdated crossed check in payment of newsprint which Jose promised to deliver. Jose sold and negotiated the check to Excel Inc. at a discount. Excel did not ask Jose the purpose of crossing the check. Since Jose failed to deliver the newsprint, Po ordered the drawee bank to stop payment on the check. Efforts of Excel to collect from Po failed. Excel wants to know from you as counsel: 1) What are the effects of crossing a check? 2) Whether as a second indorser and holder of the crossed check, is it a holder in due course? 3) Whether Pos defense of lack of consideration as against Jose is also available as against Excel? A: 1) The effects of crossing a check are: a) The check is for deposit only in the account of the payee. b) The check may be indorsed only once in favor of a person who has an account with a bank.

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c)The check is issued for a specific purpose and the person who takes it not in accordance with said purpose does not become a holder in due course and is not entitled to payment thereunder. 2) No. It is a crossed check and excel did not take it in accordance with the purpose for which the check was issued. Failure on its part to inquire as to said purpose, prevented Excel from becoming a holder in due course, as such failure or refusal constituted bad faith. 3) Yes. Not being a holder in due course, Excel is subject to the personal defense which Po Press can set up against Jose. (State Investment House v. IAC, 175 SCRA 310) 2) Q: On 12 October 1993, Chelsea Straights (CHELSEA), a corporation engaged in the manufacture of cigarettes, ordered from Moises Lim 2,000 bales of tobacco. CHELSEA issued to Moises Lim two crossed checks postdated 15 March 1994 and 15 April 1994 in full payment therefore. On 19 January 1994 Moises Lim sold to Dragon Investment House (DRAGON) at a discount the two checks drawn by CHELSEA in his favor. Moises Lim failed to deliver the bales of tobacco as agreed despite CHELSEAs demand. Consequently, on 1 March 1994 CHELSEA issued a stop payment order on the two checks issued to Moises Lim. DRAGON, claiming to be a holder in due course, filed a compliant for collection against CHELSEA for the value of the checks. Rule on the complaint of DRAGON. Give your legal advice. A: DRAGON cannot collect from CHELSEA. The instruments are crossed checks which were intended to pay for the 2,000 bales of tobacco to be delivered by Moises Lim. It was therefore the obligation of DRAGON to inquire as to the purpose of the issuance of the two crossed checks before causing them to be discounted. Failure on its part to make such inquiry, which resulted in its bad faith. Dragon cannot claim to be a holder in due course. Moreover, the checks were sold, not endorsed, by him to DRAGON which did not become a holder in due course. Not being a holder in due course, DRAGON is subject to the personal defense on the part of CHELSEA concerning the breach of trust on the part of Moises Lim in not complying with his obligation to deliver the 2,000 bales of tobacco. 3) Q: Mr. Pablo sought to borrow P200,000.00 from Mr. Carlos. The latter agreed to loan the amount in the form of a post-dated chech which was crossed (with two parallel lines diagonally drawn on the top left portion of the check. Before the due date of the check, Mr. Pablo discounted it with Mr. Noble. On due date, Mr. Noble deposited the check with his bank. The check was dishonored. Mr. Noble sued Mr. Pablo. The court dismissed Mr. Nobles complaint. Was courts decision correct? A: Yes, the check is crossed. It should have forwarded Mr. Noble that it was issued for a specific purpose. Hence, Mr. Noble could not be a holder in due course. He is subject to the personal defense of breach of trust by Mr. Pablo. Such defense is available in favor of Mr. Carlos against Mr. Noble.

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INSURANCE LAW
INSURABLE INTEREST [1980, 1982, 1987, 2001, 2002] Rule: A person who is interested in the safety and preservation of materials in his possession belonging to third parties because he stands either to benefit from their continued existence or to be prejudiced by their destruction, has an insurable interest thereon which is not necessarily limited to the extent of his liability to the owners thereof. A person having mere right of possession of property may insure it to its full value and in his own name, even when he is not responsible for its safekeeping. (ANG KA YU vs. PHOENIX ASSURANCE CO. LTD 1CAR 2) 1) Q: BD has a bank deposit of half a million pesos. Since the limit of the insurance coverage of the Philippine Deposit Insurance Corporation Act (R.A. 3591) is only one tenth of BDs deposit, he would like some protection for the excess by taking out an insurance against all risks or

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contingencies of loss arising from any unsound or unsafe banking practices including unforeseen adverse effects of the continuing crisis involving the banking and financial sector in the Asian Region. Does BD have an insurable interest within the meaning of the Insurance Code of the Philippines (P.D. 1460)? A: Yes. BD has insurable interest in his bank deposit. In case of loss of said deposit, more particularly to the extent of the amount in excess of the limit covered by the Philippine Deposit Insurance Corporation Act, BD will be damnified. He will suffer pecuniary loss of P 400,000.00, that is, his bank deposit of half a million pesos minus P100,000.00 which is the maximum amount recoverable from the PDIC. (Note: R.A. No. 9302 is now in effect increasing the PDIC insurance coverage from P100,000.00 to P250,000.00.) 2) Q: JQ, owner of a condominium unit, insured the same against fire with XYZ Insurance Co., and made the loss payable to his brother, MLQ. In case of loss by fire of the said condominium unit, who may recover on the fire insurance policy? State the reason(s) for your answer. A: JQ can recover on the fire insurance policy for the loss of the said condominium unit. He has the insurable interest as owner-insured. As beneficiary in the fire insurance policy, MLQ cannot recover on the fire insurance policy. For the beneficiary to recover on the fire or property insurance policy, it is required that he must have insurable interest in the property insured. In this case, MLQ does not have insurable interest in the condominium unit. 3) Q: On February 3, 1987, while Jose Palacio was in the hospital preparatory to a heart surgery, he called his only son, Boy Palacio, and showed the latter a will naming the son as sole heir to all the father's estate including the family mansion in Forbes Park. The following day, Boy Palacio took out a fire insurance policy on the Forbes Park mansion. One week later, the father died. After his father's death, Boy Palacio moved his wife and children to the family mansion which he inherited. On March 30, 1987, a fire occurred razing the mansion to the ground. Boy Palacio then proceeded to collect on the fire insurance he took earlier on the house.. Should the insurance company pay? Reasons. A: No. In property insurance, insurable interest must exist both at the time of the taking of the insurance and at the time the risk insured against occurs. The insurable interest must be an existing interest. The fact alone that Boy Palacio was the expected sole heir of his father's estate does not give the prospective heir any existing interest prior to the death of the decedent. BENEFICIARY [1985, 1988, 2000] Rule: According to the Article 2012 of the New Civil Code that any person who is forbidden from receiving any donation under Art. 739 cannot be named beneficiary of a life insurance policy by the person who cannot make a donation to him. Both are founded upon the same consideration which is liberality. (INSULAR LIFE vs. EBRADO 80 SCRA 181) 1) Q: Juan de la Cruz was issued Policy no. 8888 of the Midland Life Insurance Co. on a whole life plan for P 20,000.00 on August 19, 1989. Juan de la Cruz is married to Cynthia with whom he has three legitimate children. He, however, designated Purita, his common-law wife, as the revocable beneficiary. Juan de la Cruz referred to Purita in his application and policy as the legal wife. Three years later, Juan de la Cruz died. Purita filed her claim for the proceeds of the policy as designated beneficiary therein. The widow, Cynthia also filed a claim as the legal wife. To whom should the proceeds of the insurance policy be awarded? A: The proceeds of the insurance policy shall be awarded to the estate of Juan de la Cruz. Purita, the common law wife, is disqualified as the beneficiary of the deceased because of illicit relation between the deceased and Purita, the designated beneficiary. Due to such illicit relation, Purita cannot be a Donee of the deceased. Hence, she cannot also be his beneficiary. 2) Q: On October 18, 1980, P. took out a life insurance policy and named his only son Q as beneficiary. The policy was silent with regard to any change of beneficiary. P later learned that Q was hooked on drugs and immediately notified the insurance company in writing that he is

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substituting his sister, R, as his beneficiary in place of Q. P later died of advanced tuberculosis. In the application form filled up by the agent of the insurance company prior to the issuance of the life insurance policy by the insurance company, the agent, without the knowledge of P, filled in a false answer and made it appear that P was in good health. Upon P's death, Q claimed the proceeds of the insurance policy contending that as designated beneficiary, he cannot be changed without his consent, he having acquired a vested right to the proceeds of the policy. (a) Is Q's contention correct? Reasons. (b) Can the insurance company refuse liability on the policy? Reasons. A: (a) No, the designation of the beneficiary is revocable unless the right to revoke is waived (Sec. 11, Insurance Code). (b) No, the insurer cannot escape liability. The insurance agent is an agent not of the insured but of the insurer (see Malayan Insurance Co. vs. Pinca, G.R. No. 67835, 12 October 1987) and the latter must thus suffer for the misconduct of the agent. The result would have been different had the false answer been made by the agent in connivance with the insured ( Great Pacific Life vs. CA, 89 SCRA 543). CONCEALMENT OR MISREPRESENTATION IN RELATION TO THE INCONSTESTABILITY CLAUSE [1983, 1984, 1988, 1989, 1994, 1998, 2002] Rule: Section 48 of the Insurance Code precludes the insurer from raising the defense of false representations or concealment of material facts insofar as health and previous diseases are concerned if the insurance has been in force for at least 2 years during the insureds lifetime. The phrase during the lifetime in section 48 means that the policy is no longer considered in force after the insured has died. The key phrase in section 48 is for a period of 2 years. The insurer has 2 years from the date of the issuance of the contract or its last reinstatement within which to contest the policy whether or not the insured still lives within such period. (TAN vs. CA 174 SCRA 403) 1) Q: On September 23, 1990, Tan took a life insurance policy from Philam. The Policy was issued on November 6, 1990. He died on April 26, 1992 of hematoma. The insurance company denied the beneficiaries claim and rescinded the policy by reason of alleged misrepresentation and concealment of material facts made by Tan in his application. It returned the premiums paid. The beneficiaries contend that the company had no right to rescind the contract as rescission must be done during the lifetime of the insured within two years and prior to the commencement of the action. Is the contention of the beneficiaries tenable?

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A: No. The incontestability clause does not apply. The insured died within less than two (2) years from the issuance of the policy on September 23, 1990. The insured died on April 26, 1992, or less than two (2) years from September 23, 1990. The right of the insurer to rescind is only lost if the beneficiary has commenced an action on the policy. There is no such action in the case. (Tan v. Court of Appeals, 174 SCRA 143) 2) Q: Juan procured a non-medical life insurance from Good Life Insurance. He designated his wife Petra as the beneficiary. Earlier, in his application in response as to whether or not he had ever been hospitalized, he answered in the negative. He forgot to mention his confinement at the Kidney Hospital. After Juan died in a plane crash, Petra filed a claim with Good Life. Discovering Juans previous hospitalization, Good Life rejected Petras claim on the ground of concealment and representation. Petra sued Good Life, invoking good faith on the part of Juan. Will Petras suit prosper? Explain. A: No. Petras suit will not prosper (assuming that the policy of life insurance has been in force for a period of less than two years from the date of issue.) The matters which Juan failed to disclose was material and relevant to the approval and issuance of the insurance policy. They would have affected Good Lifes action on his application, either by approving it with the corresponding adjustment for a higher premium or rejecting the same. Moreover, a disclosure may have

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warranted a medical examination of Juan by Good Life in order for it to reasonably assess the risk involved in accepting the application. In any case, good faith is no defense in concealment. The waiver of a medical examination in the non-medical life insurance from Good Life makes it more necessary that Juan supply complete information constitutes an important factor which Good Life takes into consideration in deciding whether to issue the policy or not. ( Sun Life Assurance vs. CA, 245 SCRA 268) If the policy of life insurance has been in force for a period of two years or more from the date of its issue then Good Life can no longer prove that the policy is void ab initio or is rescindable by reason of fraudulent concealment or misrepresentation of Juan. (Sec.48, Insurance Code)

COMMERCIAL LAW

LOSS [1982, 1988] Rule: Suffice it to say that any attempt to draw a distinction between "loss" and "damage" is uncalled for, because the word "loss" in insurance law embraces injury or damage. (Bonifacio Bros. vs. Mora) 1) Q: RC Corporation purchased rice from Thailand, which it intended to sell locally. Due to stormy weather, the ship carrying the rice became submerged in sea water, and with it the rice cargo. When the cargo arrived in Manila, RC filed a claim for total loss with the insurer, because the rice was no longer fit for human consumption. Admittedly, the rice could still be used as animal feed. Is RCs claim for total loss justified? Explain. A: Yes. RCs claim for total loss is justified. The rice, which was imported from Thailand for sale locally, is obviously intended for consumption by the public. The complete physical destruction of the rice is not essential to constitute an actual total loss. Such a loss exists in this case since the rice having been soaked in sea water and thereby rendered unfit for human consumption, has become totally useless for the purpose for which it was imported. ( Pan Malayan Insurance Corp vs. CA, 201 SCRA 382) 2) Q: An insurance company issued a marine insurance policy covering a shipment by sea from Mindoro to Batangas of 1,000 pieces of Mindoro harden stones against total loss only. The stones were loaded in two lighters, the firsy with 600 pieces and the second with 400 pieces. Because of rough sees, damage was caused the second lighter resulting in the loss of 325 out of 400 pieces. The owner of the shipment filed a claim against the insurance company on the ground of constructive total loss inasmuch as more than three-fourths (3/4) of the value of stones had been lost in one of the lighters. Is the insurance company liable under its policy? Why? A: The insurance company is not liable under its policy covering against total loss only the shipment of 1,000 pieces of Mindoro Garden Stones. There is no constructive total loss that can be claimed since the rule is to be computed on the total 1,000 pieces of Mindoro garden stones covered by the single policy coverage, see Oriental Assurance Corporation v. CA, 200 SCRA 459) 3) Q: A marine insurance policy on a cargo states that the insurer shall be liable for losses incident to perils of the sea. During the voyage, seawater entered the compartment where the cargo was stored due to the defective drainpipe of the ship. The insured filed an action on the policy for recovery of the damages caused to the cargo. May the insured recover damages? A: No. The proximate cause of the damage to the cargo insured was the defective drainpipe of the ship. This is peril of the ship, and not peril of the sea. The defect in the drainpipe was the result of the ordinary use of the ship. To recover under a marine insurance policy, the proximate cause of the loss or damage must be peril of the sea. THEFT CLAUSE [1985, 1988] Rule: Where a car is admittedly unlawfully and wrongfully taken without the owners consent, such taking constitutes or partakes the nature of theft for purposes of recovery under the insurance policy. (VILLACORTA vs. INSURANCE COMMISSION, 100 SCRA 467)

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1) Q: HL insured his brand new car with P Insurance Company for comprehensive coverage wherein the insurance company undertook to indemnify him against loss or damage to the car (a) by accidental collision xxx, (b) by fire, external explosion, burglary, or theft, and (c) malicious act. After a month, the car was carnapped while parked in the parking space in front of the Intercontinental Hotel in Makati. Hls wife who was driving said car before it was carnapped reported immediately the incident to various government agencies in compliance with the insurance requirements. Because the car could not be recovered, HL filed a claim for the loss of the car with the insurance company but it was denied on the ground that his wife was driving the car when it was carnapped was in possession of an expired drivers license, a violation of the authorized driver clause of the insurance company. 1) May the insurance company be held liable to indemnify HL for the loss of the insured vehicle? Explain. 2) Supposing that the car was brought by HL on installment basis and there were installments due and payable before the loss of the car was as installments not yet payable. Because of the loss of the car, the vendor demanded from HL the unpaid balance of the promissory note. HL resisted the demand and claimed that he was only liable for the installments due and payable before the loss of the car but no longer liable for the other installments not yet due at the time of the loss of the car. Decide. A: 1) Yes. The car was lost due to theft. What applies in this case is the theft clause, and not the authorized driver clause. It is immaterial that HLs wife was driving the car with an expired drivers license at the time it was carnapped. (Perla Compania de Seguros v. CA, 208 SCRA 487). 2) The promissory note is not affected by whatever befalls the subject matter of the accessory contract. The unpaid balance on the promissory note should be paid and not only the installments due and payable before the loss of the car. 2) Q: Mr. Gonzales was the owner of a car insured with Masagana Insurance Company for Own Damage", "Theft", and "Third Party Liability" effective May 14, 1986 to May 14,1987. On May 2,1987, the car was brought to a machine shop for repairs. On May 11, 1987, while in the custody of the machine shop, the car was taken by one of the employees (of the machine shop) to show off to his girlfriend. While on the way to his girlfriends house, the car smashed into a parked truck and was extensively damaged. Mr. Gonzales filed a claim for recovery under the policy but was refused payment. The insurance company averred that the ear was not stolen, and therefore was not covered by the "Theft Clause". Decide the merits of the insurers contention, with reasons. A: I would decide in favor of the insured. The coverage of the policy was rather comprehensive in scope. The Theft Clause particularly, at least by intendment, should cover situations of the loss of the property occasioned by the taking or use by another without the authority of the insured (see Association of Baptists vs. Fieldmen's Insurance, 124 SCRA 618). Furthermore, doubts on the insurance, being a contract by adherence" must be construed against the insurer (Bayview Hotel vs. Ker & Co., 116 SCRA 327). NO-FAULT INDEMNITY CLAUSE [1989, 1993, 1994] Rule: Section 378 of the Insurance Code has established the following rules under the no fault indemnity provision 1.) a claim maybe made against one motor vehicle only; 2) if the victim is an occupant of a vehicle, the claim shall lie against the insurer of the motor vehicle in which he is riding, mounting, dismounting from; 3) in any other case [i.e.] if the victim was not an occupant of the vehicle, the claim shall lie against the insurer of the directly offending vehicle; 4) in all cases, the right of the party paying the claim to recover the owner of the vehicle responsible for the accident shall be maintained. (PERLA COMPANIA DE SEGURO INC. vs. ANCHETA 164 SCRA 144)

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1) Q: What is your understanding of a no fault indemnity clause in an insurance policy?

COMMERCIAL LAW

A: 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 person shall not exceed P5,000.00, provided they are under oath, the following proofs shall be sufficient: a) Police report of the accident; and b) Death certificate and evidence sufficient to establish the proper payee; or c) Medical report and evidence of medical or hospital disbursement in respect of refund is claimed. Claim may be made against one vehicle only. 2) Q: X was riding a suburban utility vehicle (SUV) covered by a comprehensive motor vehicle liability insurance (CMVLI) underwritten by Fast Pay Insurance Company when it collided with a speeding bus owned by RM Travel, Inc. The collision resulted in serious injuries to X; Y, a passenger of the bus; and Z, a pedestrian waiting for a ride at the scene of the collision. The police report established that the bus was the offending vehicle. The bus had a CMVLI policy issued by Dragon Insurance Corporation. X, Y, and Z jointly sued RM Travel and Dragon Insurance for indemnity under the Insurance Code of the Philippines (P.D. 1460). The lower court applied the no-fault indemnity policy of the statute, dismissed the suit against RM travel, and ordered Dragon Insurance to pay indemnity to all three plaintiffs. Do you agree with the courts judgment? Explain. A: No. The cause of action of Y is based on the contract of carriage, while that of X and Z is based on torts. The court should not have dismissed the suit against RM Travel .The court should have ordered Dragon Insurance to pay each of X, Y, and Z to the extent of the Insurance coverage, but whatever amount is agreed upon in the policy should be answered first by RM Travel and the succeeding amount should be paid by Dragon Insurance up to the amount of the Insurance coverage. The excess of the claims of X, Y, and Z, over and above such insurance coverage, if any, should be answered or paid by RM Travel. AUTHORIZED DRIVER CLAUSE [1986, 1993, 1994] Rule: The requirement in an authorized driver clause that the driver be permitted in accordance with the licensing or other law or regulations to drive the motor vehicle and is not disqualified from driving such motor vehicle by order of a court of law or by reason of an enactment or regulation in that behalf applies only when the driver is driving under the insureds order or with his permission. It does not apply when the person driving is the insured himself. (PALERMO vs. PYRAMID INSURANCE CO. INC., 161 SCRA 677) 1) Q: Sherly insured her newly acquired car, a Nissan Maxima against any loss or damage for P50,000.00 and against third party liability for P20,000.00 with the XYZ Insurance Corp. (XYZ). Under the policy, the car must be driven only by an authorized driver who is either: 1) the insured, or 2) any person driving on the insurers order or with his permission: provided that the person driving is permitted in accordance with the licensing or other laws or regulations to drive the motor vehicle and is not disqualified from driving such motor vehicle by order of a court. During the effectively of the policy, the car, then driven by Sherly herself, who had no drivers license, met an accident and was extensively damaged. The estimated cost of repairs was P40,000.00. Sheryl immediately notified XYZ but the latter refused to pay on the policy alleging that Sherly violated the terms thereof when she drove it without a drivers license. Is the insurer correct? A: The insurer was not correct in denying the claim since the proviso that the person driving is permitted in accordance with the licensing, etc. qualifies only a person driving the vehicle other than the insured at the time of the accident (Palermo v. Pyramid Insurance Co. G.R. 36480, 31 May 1988)

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TRANSPORTATION LAWS
COMMON CARRIER; CONCEPT [1994, 1996, 2000, 2002]

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Rule: Art. 1732 makes no distinction as to the means of transporting, as long as it is by land, water or air. It does not provide that the transportation should be by motor vehicle. The test for determining whether a party is a common carrier is: 1. It must be engaged in the business of carrying goods for others as a public employment and must hold itself out as ready to engage in the transportation of goods generally as a business and not as a casual occupation; 2. It must undertake to carry goods of the kind to which its business in confined; 3. It must undertake to carry by the method by which his business is conducted and over its established roads; and 4. The transportation must be for hire. (FIRST PHILIPPINE INDUSTRIAL CORPORATION VS. CA) 1) Q: AM Trucking, a small company, operates two trucks for hire on a selective basis. It caters to only a few customers, and its trucks do not make regular or scheduled trips. It does not even have a certificate of public convenience. On one occasion, Reynaldo contracted AM to transport, for a fee, 100 sacks of rice from Manila to Tarlac. However, AM failed to deliver the cargo, because its truck was hijacked when the driver stopped in Bulacan to visit his girlfriend. a) May Reynaldo hold AM liable as a common carrier? Explain. b) May AM set up the hijacking as a defense to defeat Reynaldos claim? A: a) Yes. Reynaldo may hold AM Trucking liable as a common carrier. The fact that AM Trucking operates only two trucks for hire on a selective basis, caters only to a few customers, does not make regular or scheduled trips, and does not have a certificate of public convenience are of no moment as the law: 1) does not distinguish between one whose principal business activity is the carrying of persons or goods or both and one who does such carrying only as an ancillary activity; 2) avoids making any distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic or unscheduled basis; and 3) refrains form making a distinction between a carrier offering its services to the general public and one who offers services or solicits business only from a narrow segment of the general population. (De Guzman vs. CA, 168 SCRA 612) b) No. AM Trucking may not set up the hijacking as a defense to defeat Reynaldos claim as the facts given do not indicate that the same was attended by the use of grave or irresistible threat, violence or force. It would appear that the truck was left unattended by its driver and taken while he was visiting his girlfriend. (De Guzman vs. CA)

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2) Q: X has a Tamaraw FX among other cars. Every other day during the workweek, he goes to his office in Quezon City using his Tamaraw FX and picks up friends as passengers at designated points along the way. His passengers pay him a flat fee for the ride, usually P20 per person, one way. Although a lawyer, he never bothered to obtain a license to engage in this type of incomegenerating activity. He believes that he is not a common carrier within the purview of the law. Do you agree with him? Explain. A: No. I do not agree with X. A common carrier holds itself out to the public as engaged in the business of transporting persons or property from place to place, for compensation, offering his services to the public general. The fact that X has a limited clientele does not exclude him from the definition of a common carrier. The law does not make any distinction between one whose principal business activity is the carrying of persons or goods or both, and the one who does such carrying only as an ancillary activity or in the local idiom, as a sideline. BREACH OF CONTRACT OF CARRIAGE; PRESUMPTION OF NEGLIGENCE [1981, 1985, 1986,1997, 2001, 2002, 2003] Rule: In an action based on a contract of carriage, the court need not make an express finding of fault or negligence on the part of the carrier in order to hold it responsible to pay the damages sought for by the passenger. By the contract of carriage, the carrier assumes the express obligation to transport the passenger to his destination safely and to observe extraordinary diligence with due regard for all the circumstances, and any injury that might be suffered by the

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passenger is right away attributable to the fault or negligence of the carrier. ( BATANGAS TRANSPORTATION COMPANY VS. CAGUIMBAL) 1) Q: A bus of GL Transit on its way to Davao stopped to enable a passenger to alight. At that moment, Santiago, who had been waiting for a ride, boarded the bus. However, the bus driver failed to notice Santiago who was still standing on the bus platform, and stepped on the accelerator. Because of the sudden motion, Santiago slipped and fell down, suffering serious injuries. May Santiago hold GL Transit liable for breach of contract of carriage? Explain. A: Yes. Santiago may hold GL Transit liable for breach of contract of carriage. It was the duty of the driver, when he stopped the bus, to do no act that would have the effect of increasing the peril to a passenger such as Santiago while he was attempting to board the same. When a Bus is not in motion there is no necessity for a person who wants to ride the same to signal his intention to board. A public utility bus, once it stops, is in effect making a continuous offer to bus riders. It is the duty of common carriers to stop their conveyances for a reasonable length of time in order to afford passengers an opportunity to board and enter, and they are liable for injuries suffered by boarding passengers resulting form sudden starting up or jerking of their conveyances while they are doing so. Santiago, by stepping and standing on the platform of the bus, is already considered a passenger and is entitled to all the rights and protection pertaining to a contract of carriage. (Dangwa vs. CA, 202 SCRA 574) 2) Q: X took the Benguet Bus from Baguio going to Manila. He deposited, his maleta in the baggage compartment of the bus common to all passengers. He did not declare his baggage nor pay its charges contrary to the regulations of the bus company. When X got off, he could not find his baggage, which obviously was taken by another passenger. Determine the liability of the bus company. A: The bus company is liable for the loss of the maleta. The duty of extraordinary diligence in the vigilance over the goods is due on such goods as are deposited or surrendered to the common carrier for transportation. The fact that the maleta was not declared nor the charges paid thereon, would not be consequential so long as it was received by the carrier for transportation (Art. 1754, in relation to Arts. 1733-1753, Civil Code). Alternative Answer: The act of the passenger who "did not declare his baggage nor pay its charges contrary to the regulations of the bus company" conveys a surreptitious act on his part which constitutes an act of bad faith and would therefore disentitle recovery. 3) Q: X brought seven (7) sacks of palay to the PNR. He paid its freight charges and was issued Way Bill No. 1. The cargo was loaded on the freight wagon of the train. Without any permission, X boarded the freight wagon and not the passenger coach. Shortly after the train started, it was derailed. The freight wagon fell on its side, killing X. There is no evidence that X bought a ticket or paid his fare at the same time that he paid the freight charges for his cargo. Is X a passenger of PNR? A: No, X was not a "passenger" (see Nueca vs. Manila Railroad, 65 O. C. 3153). A "stowaway", being a trespasser, has been held to assume the risk of damage (Pontillas vs. Cebu Autobus Co. 13 CA Reps., 211). 4) Q: X, an 80-year old epileptic, boarded the S/S Tamaraw in Manila going to Mindoro. To disembark, the passengers have to walk thru a gang plank. While negotiating the gang plank, X slipped and fell into the waters. X was saved from drowning, brought to a hospital but after a month died from pneumonia. Except for X, all the passengers were able to walk thru the gang plank. What is the liability of the owner of S/S Tamaraw? A: The owner of S/S Tamaraw is liable for the death of X in failing to exercise utmost diligence in the safety of passengers. Evidently, the carrier did not take the necessary precautions in ensuring the safety of passengers in the boarding of and disembarking from the vessel. Unless

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shown to the contrary, a common carrier is presumed to have been, negligent in cases of death or injury to its passengers (Arts. 1755-1756, Civil Code). Since X has not completely disembarked yet, the obligation of the shipowner to exercise utmost diligence still then subsisted and he can still he held liable. 5) Q: Marino was a passenger on a train. Another passenger, Juancho, had taken a gallon of gasoline placed in a plastic bag into the same coach where Marino was riding. The gasoline ignited and exploded causing injury to Marino who filed a civil suit for damages against the railway company claiming that Juancho should have been subjected to inspection by its conductor. The railway company disclaimed liability resulting from the explosion contending that it was unaware of the contents of the plastic bag and invoke the right of Juancho to privacy. a. Should the railway company be held liable for damages? b. If it were an airline company involved, would your answer be the same? Explain your answer briefly? A: a. No. The railway company is not liable for damages. In overland transportation, the common carrier is not bound nor empowered to make an examination on the contents of packages or bags, particularly those hand carried by passengers. b. If it were an airline company, the common carrier should be made liable. In the case of air carriers, it is not lawful to carry flammable materials in passenger aircrafts, and airline companies may open and investigate suspicious packages and cargoes (RA 6235). 6) Q: In a court case involving claims for damages arising from death and injury of bus passengers, counsel for the bus operator files a demurrer of evidence arguing that the complaint should be dismissed because the plaintiffs did not submit any evidence that the operator or its employees were negligent. If you were the judge, would you dismiss the complaint? A: No. In the carriage of passengers, the failure of the common carrier to bring the passengers safely to their destination immediately raises the presumption that such failure is attributable to the carriers fault or negligence. In the case at bar, the fact of death and injury of the bus passengers raises the presumption of fault or negligence on the part of the common carrier. The carrier must rebut such presumption. Otherwise, the conclusion can be properly made that the carrier failed to exercise extraordinary diligence as required by law.

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DEFENSES OF A COMMON CARRIER [1987, 1995, 1996, 1997, 2001] Rule: In order that a common carrier may be absolved from liability where the loss, destruction or deterioration of the goods is due to a natural disaster or calamity, it must further be shown that such natural disaster or calamity was the proximate and only cause of the loss and that the common carrier exercised due diligence to prevent or minimize the loss before, during, and after the occurrence of the natural disaster. (PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. VS. MGG MARINE SERVICES, INC.) 1) Q: Mariter, a payer bus passenger, was hit above her left eye by a stone hurled at the bus by an unidentified bystander as the bus was speeding through the National Highway. The bus owners personnel lost no time in bringing Mariter to the provincial hospital where she was confined and treated. Mariter wants to sue the bus company for damages and seeks your advice whether she can legally hold the bus company liable. What will you advise her? A: Mariter cannot legally hold the bus company liable. There is no showing that any such incident previously happened so as to impose an obligation on the part of the personnel of the bus company to warn the passengers and to take the necessary precaution. Such hurling of a stone constitutes fortuitous event in this case. The bus company is not an insurer. ( Pilapil v. CA, 180 SCRA 346)

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2) Q: Antonio, a paying passenger, boarded a bus bound for Batangas City. He chose a seat at the front row, near the bus driver, and told the bus driver that he had valuable items in his hand carried bag which he placed beside the drivers seat. Not having slept for 24 hours, he requested the driver to keep an eye on the bag should he doze off during the trip. While Antonio was asleep, another passenger took the bag away and alighted at Calamba, Laguna. Could the common carrier be held liable by Antonio for the loss? A: Yes. Ordinarily, the common carrier is not liable for acts of other passengers. But the common carrier cannot relieve itself from liability if the common carriers employees could have prevented the act or omission by exercising due diligence. In this case, the passenger asked the driver to keep an eye on the bag which was placed beside the drivers seat. If the driver exercised due diligence, he could have prevented the loss of the bag. Alternative answer: No. The common carrier is not liable for the loss. It is not the duty of the driver to watch over the baggages of passengers. His attention should be directed at driving the bus. 3) Q: Philip Mauricio shipped a box of cigarettes to a dealer in Naga City through Bicol Bus Company (BBC). When the bus reached Lucena City, the bus developed engine trouble. The driver brought the bus to a repair shop in Lucena where he was informed by the mechanic that an extensive repair was necessary, which would take at least two days. While the bus was in the repair shop, Typhoon Coring lashed at Quezon Province. The cargoes inside the bus, including Mauricio's cigarettes, got wet and were totally spoiled. Mauricio sued BBC for damage to his cargoes. Decide. A: The Bicol Bus Corporation (BBC) is liable for damages to the cargoes lost by Mauricio. A natural disaster would relieve liability if it is the proximate and only cause of the damage. The carrier itself, in this case, had been negligent. The presumption of negligence in culpa contractual is not overcome by engine trouble which does not preclude its having been due to the fault of the common carrier. The fact that an extensive repair work was necessary which, in fact, took 2 days to complete somehow justifies an impression that the engine trouble could have been detected, if not already known, well before the actual breakdown. 4) Q: X boarded an air-conditioned Pantranco Bus bound for Baguio. X was given notice that the carrier is not liable for baggage brought in by passengers. X kept in his custody his attache case containing $10,000.00. In Tarlac, all the passengers, including X, were told to get off and to take their lunch, the cost of which is included in the ticket. X left his attache case on his seat as the door of the bus was locked. After lunch and when X returned to the bus, he discovered that his attache case was missing. A vendor said that a man picked the lock of the door, entered the bus and ran away with the attache case. What, if any, is the liability of the carrier? A: Hand-carried luggages of passengers are governed by the rules on necessary deposits. Under Article 2000 of the Civil Code the responsibility of the depository shall, among other cases, include the loss of property of the guest caused by strangers but not that which may proceed from force majeure. Article 2001 of the same Code considers an act of a thief as not one of force majeure unless done with the use of arms or through an irresistible force. Accordingly, the carrier may, given the factual setting in the problem, still be held liable (See Art. 1754, Civil Code). STIPULATION LIMITING LIABILITY [1981, 1983, 1984, 1985] Rule: Three kinds of stipulation have often been made in a bill of lading. The first is one exempting the carrier from any and all liability for loss or damage occasioned by its own negligence. The second is one providing for an unqualified limitation of such liability to an agreed valuation. And the third is one limiting the liability of the carrier to an agreed valuation unless the shipper declares a higher value and pays a higher rate of freight. The first and second kinds of stipulations are invalid as being contrary to public policy, but the third is valid and enforceable. (H.E. HEACOCK CO. VS. MACONDRAY & CO.) 1) Q: A shipped thirteen (13) pieces of luggage through LG Airlines from Tehran to Manila as evidenced by LG Air Waybill which disclosed that the actual gross weight of the luggage was 180

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kilograms. Z did not declare an inventory of the contents or the value of the thirteen (13) pieces of luggage. After the said pieces of luggage arrived in Manila, the consignee was able to claim from the cargo broker only twelve (12) pieces, with a total weight of 174 kilograms. X advised the airlines of the loss of one of the thirteen (13) pieces of luggage and the contents thereof. Efforts of the airlines to trace the missing luggage were fruitless. Since the airlines failed to comply with the demand of X to produce the missing luggage, X filed an action for breach of contract with damages against the LG Airlines. In its answer, LG Airlines alleged that the Warsaw Convention which limits the liability of the carrier, if any, with respect to cargo to a sum of 420 per kilo or $9.07 per pound, unless a higher value is declared in advance and additional charges are paid by the passenger and the conditions of the contract as set forth in the air waybill, expressly subject the contract of the carriage of the cargo to the Warsaw Convention. May the allegation of LG Airlines be sustained? Explain. A: Yes. Unless the contents of a cargo are declared or the contents of a lost luggage are proved by satisfactory evidence other than the self-serving declaration of one party, the contract should be enforced as it is the only reasonable basis to arrive at a just award. The passenger or shipper is bound by the terms of the passenger ticket or the waybill. ( PanAm v. Rapadas, 209 SCRA 67) 2) Q: Suppose A was riding on an airplane of a common carrier when the accident happened and A suffered serious injuries. In an action by A against the common carrier, the latter claimed that: 1) there was a stipulation in the ticket issued to A absolutely exempting the carrier from liability from the passenger's death or injuries, and notices were posted by the common carrier dispensing with the extraordinary diligence of the carrier; and 2) A was given a discount on his plane fare thereby reducing the liability of the common carrier with respect to A in particular. a) Are those valid defenses? b) What are the defenses available to any common carrier to limit or exempt it from liability? A: a) No. These are not valid defenses because they are contrary to law as they are in violation of the extraordinary diligence required of common carriers. (Articles 1757 and 1758, New Civil Code) b) The defenses available to any common carrier to limit or exempt it from liability are: 1) observance of extraordinary diligence; 2) the proximate cause of the incident is a fortuitous event or force majeure; 3) act or omission of the shipper or owner of the goods; 4) the character of the goods or defects in the packing or in the containers; and 5) order or act of competent public authority, without the common carrier being guilty of even simple negligence. (Article 1734, New Civil Code) CHARTER PARTY [1987, 1989, 1990, 2003, 2004] Rule: It is imperative that a public carrier shall remain as such, notwithstanding the charter of the whole or portion of a vessel by one or more persons, provided the charter is limited to the ship only, as in the case of a time-charter or voyage-charter. It is only when the charter includes both the vessel and crew, as in demise or bareboat that a common carrier becomes private, at least insofar as the particular voyage covering the charter-party is concerned. (PLANTERS PRODUCTS, INC. VS. CA) 1) Q: For the transportation of its cargo from the Port of Manila to the Port of Kobe, Japan Osawa and & Co. chartered bareboat M/V Ilog of Karagatan Corporation. M/V Ilog met a sea accident resulting in the loss of the cargo and in the death of some of the seamen manning the vessel. Who should bear the loss of the cargo and the death of the seamen? Why?

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A: Osawa & Co. should bear the loss. Under a bareboat or demise charter party, the charterer will generally be liable as if it were the owner, except when the cause of the liability arises from the unworthiness of the vessel. The charterer in a bareboat or demise charter party mans the vessel with his own people and becomes, in effect, the owner pro hac vice, for the voyage or service stipulated, subject to the liability for damages caused by negligence. 2) Q: (1) X owns the ship M/V Aguinaldo. He bareboat chartered the ship to Y who appointed all its crew members from the captain down to its last official. Y then transported a shipment of 10,000 bags of sugar belonging to Z. Thru the negligence of the ship captain, half of the sugar was damaged due to sea water. Since Y is bankrupt, Z sued the captain and X. Will the suit succeed? (2) X chartered the ship of Y to transport his logs from Zamboanga to Manila. In the course of their voyage, the ship met a storm and had to dock in Cebu for three days. Z, the captain of the ship, borrowed P20,000.00 from X on the pretext that he would need the money for the repair of the ship. Z misappropriated the money and converted it to his own benefit. What is the liability of Y, if any? A: (1) The action could prosper against the ship captain whose negligence caused the damage but not against X who merely was the lessor of the vessel and who was neither a party to the contract for the shipment of the goods nor an employer of the ship captain. Note: One author has expressed another view that would hold the owner liable since it is to be assumed that he is also the registered owner. (2) A shipowner would only be liable for contracts made by the captain (a) when duly authorized or (b) even when unauthorized, for ship repairs, or for equipping or provisioning the vessel when the proceeds are invested therein (Art. 586, Code of Commerce). Since the loan by the captain from X does not fall under any of the foregoing cases, the amount borrowed shall be considered a personal liability of Z, the captain, and Y, the shipowner, cannot thus he held liable. 3) Q: The Saad Developing Corp. enters into a voyage charter with the XYZ Shipping Corp. over the latters vessel, the M/V Lady Love. Before the Saad Development Corp. could load it, XYZ Shipping Corp. sold M/V Lady Love to Oslob Maritime Corp., which decided to load it for its own account. May XYZ Shipping Corp. validly ask for the rescission of the charter party. If so, can Saad Development Corp. recover damages? To what extent? A: XYZ Shipping Corporation may ask for the rescission of the charter party if, as in this case, it sold the vessel before the charterer has begun to load the vessel and the purchaser loads it for his own account. Saad corporation may recover damages to the extent of its losses. (Art. 689, Code of Commerce) 4) Q: If the Oslob Maritime Corp. did not load it for its own account, it is bound by the charter party? A: If Oslob Maritime Corporation did not load M/V Lady Love for its own account, it would be bound by the charter party, but XYZ Shipping would have to indemnify Oslob Maritime if it was not informed of the Charter Party at the time of sale (Art. 689, Code of Commerce) 5) Q: Explain the meaning of owner pro hac vice of the vessel. In what kind of charter party does this obtain? A: The term Owner pro hac vice of the vessel is generally understood to be the charterer of a vessel in the case of bareboat or demise charter (Litonjua Shipping Company v. National Seamans Board, G.R. 51910, 10 August 1989) LIMITED LIABILITY RULE [1982, 1985, 1988, 1989, 1991, 1994, 1997, 1999, 2000] Rule: No vessel, no liability, expresses in a nutshell the limited liability rule. The shipowners or agents liability is merely co-extensive with his interest in the vessel such that a total loss

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thereof results in its extinction. The total destruction of the vessel extinguishes maritime liens because there is no longer any res to which it can attach. (MONARCH INSURANCE CO., INC. VS. CA) 1) Q: Thinking that impending typhoon was still 24 hours away, MV pioneer left port to sail for Leyte. There was a miscalculation of the typhoon signals by both the ship-owner and the captain as the typhoon came earlier and overtook the vessel. The vessel sank and a number of passengers disappeared with it. Relatives of the missing passengers claimed damages against the ship owner. The shipowner set up the defense that under the doctrine of limited liability, his liability was co-extensive with his interest in the vessel. As the vessel was totally lost, his liability had also been extinguished. a) How will you advice the claimants? Discuss the doctrine of limited liability in maritime law. b) Assuming that the vessel was insured, may the claimants go after the insurance proceeds? A: a) Under the doctrine of limited liability in maritime law, the liability of the ship-owner arising from the operation of a ship is confined to the vessel, equipment, and freight, or insurance, if any, so that if the ship-owner abandoned the ship, equipment, and freight, his liability is extinguished. However, the doctrine of limited liability does not apply when the ship-owner or captain is guilty of negligence. b) Yes. In case of a lost vessel, the claimants may go after the proceeds of the insurance covering the vessel. 2) Q: MV Mariposa, one of five passenger ships owned by Marina Navigation Company, sank off the cost of Mindoro while en route to Iloilo City. More than 200 passengers perished in the disaster. Evidence showed that the ship captain ignored typhoon bulletins issued by PAGASA during the 24hour period immediately prior to the vessels departure to Manila. The bulletins warned all types of sea crafts to avoid the typhoons expected path near Mindoro. To make matters worse, he took more load than was allowed for the ships rated capacity. Sued for damages by the victims surviving relatives, Marina Navigation Company contended: 1) that its liability, if any, had been extinguished with the sinking of MV Mariposa; and 2) that assuming it had not been so extinguished, such liability should be limited to the loss of the cargo. Are these contentions meritorious in the context of applicable provisions of the Code of Commerce?

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A: Yes. The contentions of Marina Navigation Company are meritorious. The captain of MV Mariposa is guilty of negligence in ignoring the typhoon bulletins issued by PAGASA and in overloading the vessel. But only the captain of the vessel MV Mariposa is guilty of negligence. The shipowner is not. Therefore, the shipowner can invoke doctrine of limited liability. 3) Q: Captain Hook, the ship captain of M.V. Peter Pan, overloaded the M.V. Peter Pan, as a consequence of which the vessel sank in the middle of the Sulu sea, and nothing whatsoever was recovered. The owners of the cargo and the heirs of the three passengers of the vessel filed an action for damages in the amount of P500,000.00 against Mr. Wendy, the owner. Will the action prosper? Reasons. A: The total loss or the lawful abandonment of the vessel precludes further liability on the part of the shipowner, except to the extent of earned freightage or proceeds of insurance, if any, for the loss of cargo arising from the conduct of the captain in the care of the goods (Art. 587, in relation to Art. 590, Code of Commerce). This right of abandonment likewise applies to collisions and shipwreck but in the latter case only for unpaid wages (Arts. 643 and 838, Code of Commerce). Accordingly, the action filed by the owners of the lost cargo, absent any remaining value of the vessel, earned freightage or insurance proceeds, may not prosper. The action filed by the heirs of the deceased passengers may, however, prosper since, except in collisions, the shipowners are not granted the right of abandonment.

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4) Q: X, a rich trader, boarded the M/V Cebu, a small vessel with a value of P3 M and owned by Y, plying the route Cotabato to Pagadian City. X had in his possession a diamond worth P5 M. The vessel had a capacity of 40 passengers. Near Pagadian, the vessel met squally weather and was hit by six foot waves every three seconds. Soon, water entered the engine room and the hull of the vessel. The patron of the vessel ordered the distribution of life belts to the passengers. He told them the vessel was sinking and for them to take care of themselves. The vessel turned out to be overloaded by 20 passengers and had no sufficient life belts. X failed to get a life belt and died when the vessel totally sunk. The heirs of X sued Y for P10 M damages. Y raised the defense of limited liability. Decide. A: The doctrine of limited liability does not apply when death or injury or damage sustained is attributable to the fault or negligence of the shipowner or shipagent or to the concurring fault or negligence of the shipowner or shipagent and the captain (or patron) of the vessel (see Chua vs. Intermediate Appeallate Court, G.R. 74811, 30 September 1988). Undoubtedly, the shipowner himself, was guilty of such fault or negligence in not making certain that the passenger vessel is not overloaded, as well as and is having failed to provide sufficient life belts on board the vessel. COLLISION [1980, 1987, 1991, 1995, 1997] Rule: If the shipowner or agent may in any way be held civilly liable at all for injury to or death of passengers arising form the negligence of the captain in cases of collisions or shipwrecks, his liability is merely co-extensive with his interest in the vessel such that a total loss thereof results in its extinction. (YANGCO VS. LASERNA) 1) Q: In a collision between M/T Manila, a tanker and M/V Don Claro, an inter-island vessel, M/V Don Claro sank and many of its passengers drowned and died. All its cargoes were lost. The collision occurred at nighttime but the sea was calm, the weather fair and visibility was good. Prior to the collision and while still four nautical miles apart, M/V Don Claro already sighted M/T Manila on its radar screen. M/T Manila had no radar equipment. As for speed, M/V Don Claro was twice as fast as M/T Manila. At the time of the collision, M/T Manila failed to show Rule 19 of the International Rules of the Road which requires two vessels meeting head on to change their course by each vessel steering to starboard (right) so that each vessel may pass on the portside (left) of the other. M/T Manila signaled that it would turn to portside and steered accordingly, thus resulting in the collision. M/T Don Claros captain was off-duty and was having a drink at the ships bar at the time of the collision. Who would you hold liable for the collision? A: I hold that the two vessels liable. In the problem given, whether on the basis of the factual settings or under the doctrine of inscrutable fault, both vessels can be said to be guilty of negligence. The liability of the two carriers for the death or injury of passengers and for the loss or damage to the goods arising from the collision is solidary. Neither carrier may invoke the doctrine of last clear chance which can only be relevant if at all, between the two vessels but not on the claims made by passengers or shippers ( Litonjua shipping v. National Seamen Board , G.R. 51910, 10 august 1989). PUBLIC UTILITIES [1988, 1992, 1995, 2000] Rule: As its name indicates, the term public utility implies public use and service to the public. The principal determinative characteristic of a public utility is that of service to, or readiness to serve, an indefinite public or portion of the public as such which has a legal right to demand and receive its services or commodities. (JG Summit Holdings vs. CA) 1) Q: The City of Manila passed an ordinance banning provincial buses from the city. The ordinance was challenged as invalid under the Public Service Act by X who had a certificate of public convenience to operate auto-trucks with fixed routes from certain towns in Bulacan and Rizal to Manila and within Manila. Firstly, he claimed that the ordinance was null and void because, among other things, it in effect amends his certificate of public convenience, a thing which only the Public Service Commission can do under Section 16(m) of the Public Service Act. Under said section, the Commission is empowered to amend, modify or revoke a certificate of

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public convenience after notice and hearing. Secondly, he contended that even if the ordinance was valid, it is only the Commission which can require compliance with its provisions under Section 17(j) of said Act and since the implementation of the ordinance was without sanction or approval of the Commission, its enforcement was unauthorized and illegal. 1) May the reliance of X on Section 16(m) of the Public Service Act be sustained? Explain. 2) Was X correct in his contention that under Section 17(j) of the Public Service Act it is only the Commission which can require compliance with the provisions with the ordinance? Explain. A: 1) No. The power vested in the Public Service Commission under Section 16(m) is subordinate to the authority of the City of Manila under Section 18(h) of its revised charter, to superintend, regulate or control the streets of the City of Manila. ( Lagman v. City of Manila, 17 SCRA 579) 2) No. The powers conferred by law upon the Public Service Commission were not designed to deny or supersede the regulatory power of local governments over motor traffic in the streets subject to their control. (Lagman v. City if Manila, 17 SCRA 579) 2) Q: Robert is a holder of a certificate of public convenience to operate a taxicab service in Manila and suburbs. One evening, one of his taxicab units was boarded by three (3) robbers as they escaped after staging a hold-up. Because of said incident, the Land Transportation Franchising and Regulatory Board revoked the certificate of public convenience of Robert on the ground that said operator failed to render safe, proper and adequate service as required under Section 19(a) of the Public Service Act. a) Was the revocation of the certificate of public convenience of Robert justified? Explain. b) When can the Commission (Board) exercise its power to suspend or revoke certificate of public conveniences? A: a) No. A single hold-up incident which does not link Roberts taxicab can not be construed that he rendered a service that is unsafe, inadequate and improper. ( Manzanal v. Ausejo, 164 SCRA 36). b) Under Section 19(a) of the Public Service Act, the Commission (Board) can suspend or revoke a certificate of public convenience when the operator fails to provide a service that is safe, proper and adequate, and refuses to render any service which can be reasonably demanded and furnished.

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3) Q: The Batong Bakal Corporation filed with the Board of Energy an application for a Certificate of Public Convenience for the purpose of supplying electric power and lights to the factory and its employees living within the compound. The application was opposed by the Bulacan Electric Corporation, contending that the Batong Bakal Corporation has not secured a franchise to operate and maintain an electric plant. Is the oppositions contention correct? A: No. A certificate of public convenience may be granted to Batong Bakal Corporation, though not possessing a legislative franchise, if it meets all other requirements. There is nothing in the law or the Constitution, which indicates that a legislative franchise is necessary or required for an entity to operate as supplier of electric power and light to its factory and its employees living within the compound. 4) Q: WWW Communications Inc. is an e-commerce company whose present business activity is limited to providing its clients with all types of information technology hardware. It plans to refocus its corporate direction of gradually converting itself into a full convergence organization. Towards this objective, the company has been aggressively acquiring telecommunications businesses and broadcast media enterprises, and consolidating their corporate structures. The ultimate plan is to have only two organizations: one to own the facilities of the combined businesses and to develop and produce content materials, and another to operate the facilities and

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provide content to the other new corporation which, in turn, will operate those facilities and provide the services. WWW Communications seeks your professional advice on whether or not its reorganized business activity would be considered a public utility requiring a franchise or certificate or any other form of authorization from the government. What will be your advice? Explain. A: The reorganized business activity of WWW Communications Inc. would not be considered a public utility requiring a franchise or any other form of authorization from the government. It owns the facilities but does not operate the same. 5) Q: Antonio was granted a certificate of Public Convenience (CPC) in 1986 to operate a ferry between Mindoro and Batangas using the motor vessel MV Lotus. He stopped operations in 1988 due to unserviceability of the vessel. In 1989, Basilio was granted a CPC for the same route. After a few months, he discovered that Carlos was operating on his route under Antonios CPC. Because Basilio filed a complaint for illegal operations with the Marine Industry Authority, Antonio and Carlos jointly filed an application for sale and transfer of Antonios CPC and substitution of the vessel MV Lotus with another owned by Carlos. Should Antonios and Carlos joint application be approved? Give your reasons A: No. The certificate of public convenience and MV Lotus are inseparable. The unserviceability of the vessel covered by the certificate had likewise rendere ineffective the certificate itself, and the holder thereof may not legally transfer the same to another ( Cohon v. Court of Appeals, 188 SCRA 719). PRIOR OPERATOR RULE; REGISTERED OWNER RULE Rule: Although not outrightly penalized as a criminal offense, the kabit system is invariably recognized as being contrary to public policy and, therefore, void and inexistent under Art. 1409 of the Civil Code. It is a fundamental principle that the court will not aid either party to enforce an illegal contract, but will leave them both where it finds them. (LITA ENTERPRISES, INC. VS. IAC) 1) Q: Bayan Bus Lines had been operating satisfactorily a bus service over the route Manila to Tarlac and vice versa via the MacArthur Highway. With the upgrading of the New North Expressway, Bayan Bus Lines service became seemingly inadequate despite its efforts of improving the same. Pasok Transportation, Inc. now applies for the issuance to it by the Land Transportation Franchising and Regulatory Board (LTFRB) of certificate of public convenience for the same Manila-TarlacManila route. Could Bayan Bus Lines, Inc. invoke the prior operator rule against Pasok Transportation, Inc.? Why? A: Yes, it could invoke the prior operator rule. Since the route which is the subject of the application is the same, the prior operator rule granting preferential right to existing franchised operator should be applied and should prompt the LTFRB to deny the application of Pasok Transportation, Inc. Before granting a certificate of public convenince and necessity to a transportation company or common carrier on land, there being another with a proper certificate, such other or the prior operator should always be given first an opportunity to improve its service, if inadequate or deficient. (Bohol Land Transportation Co. vs. Jureidini) 2) Q: Johnny owns a Sarao jeepney. He asked his neighbor Van if he could operate the said jeepney under Vans certificate of public convenience. Van agreed and accordingly registered his jeepney in Vans name. On June 10, 1990, one of the passenger jeepneys operated by Van bumped Tomas. Tomas was injured and in due time, he filed a complaint for damages against Van and his driver for the damages he suffered. The court rendered judgment in favor of Van and his driver and severally to pay Tomas actual and moral damages, attorneys fee and costs. The Sheriff levied on the jeepney belonging to Johnny but registered in the name of Van. Johnny filed a third-party claim with the Sheriff alleging ownership of the jeepney levied upon and stating that the jeepney was registered in the name of Van merely to enable Johnny to make use of Vans certificate of public convenience. May the sheriff proceed with the public auction of Johnnys jeepney? Discuss the reasons.

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A: Yes, the sheriff may proceed with the auction sale of Johnnys jeepney. In contemplation of law as regards the public and third persons, the vehicle is considered property of the registered operator (Santos v. Sibug 194 SCRA 520).

CORPORATION LAW
DOCTRINE OF SEPARATE ENTITY; PIERCING THE VEIL [1989, 1991, 2000, 2004] Rule: The rationale behind piercing a corporation's identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. (Francisco Motors vs. CA) 1) Q: PR Corporation owns a beach resort with several cottages. Jaime, the President of PR, occupied one of the cottages for residential purposes. After Jaimes term expired, PR wanted to recover possession of the cottage. Jaime refused to surrender the cottage, contending that as a stockholder and former President, he has a right to possess and enjoy the properties of the corporation. Is Jaimes contention correct? Explain. A: Jaimes contention is not correct. Jaime may own shares of stock in PR Corporation but such ownership does not entitle him to the possession of any specific property of the corporation or a definite portion thereof. Neither is he a co-owner of corporate property. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its stockholders. Stockholders like Jaime only own shares of stock in the corporation. Such shares of stock do not represent specific corporate property. (Rebecca Boyer-Roxas vs. CA, 211 SCRA 470) 2) Q: Richard owns 90% of the shares of the capital stock of GOM Corporation. On one occasion, GOM Corporation, represented by Richard as President and General Manager, executed a contract to sell a subdivision lot in favor of Thomas. For failure of GOM Corporation to develop the subdivision, Thomas filed an action for rescission and damages against GOM Corporation and Richard. Will the action prosper? Explain.

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A: The action may prosper against GOM Corporation but definitely not against Richard. Richard has a legal personality separate from that of GOM Corporation. If he signed the contract to sell, he did so as the President and General Manager of GOM Corporation and not in his personal capacity. Mere ownership by Richard of 90% of the capital stock of GOM Corporation is not of itself sufficient ground to disregard his separate legal personality absent a showing, for example, that he acted maliciously or in bad faith. (EPG Construction, Inc vs. CA, 210 SCRA 230) 3) Q: Nine individuals formed a private corporation pursuant of the provisions of the Corporation Code of the Philippines. Incorporator S was elected director and president general manager. Part of his emolument is a Ford Expedition, which the corporation owns. After few years, S lost his corporate positions but he refused to return the motor vehicle claiming that as a stockholder with a substantial equity share, he owns that portion of the corporate assets now in his possession. Is the contention of S valid? Explain. A: No. The contention of S is not valid. The Ford Expedition is owned by the corporation. The corporation has a legal personality separate and distinct from that of its stockholder. What the corporation owns is its own property and not the property of any stockholder even how substantial the equity share that stockholder owns.

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CONTRACTS ENTERED INTO BY THE BOARD OF DIRECTORS [1989, 1991, 1995, 1996, 2001] Rule: Instances when, without necessarily piercing the veil of corporate fiction, personal civil liability can also be said to lawfully attach to a corporate director, trustee or officer; to wit: When "(1) He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons ; "(2) He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; "(3) He agrees to hold himself personally and solidarity liable with the corporation; or "(4) He is made, by a specific provision of law, to personally answer for his corporate action."(Santos Vs. NLRC) 1) Q: Rodman, the President of TF Corporation, wrote a letter to Gregorio, offering to sell to the latter 5,000 bags of fertilizer at P100 per bag. Gregorio signed his conformity to the letter offer, and paid a downpayment of P50,000. A few days later, the Corporate Secretary of TF informed Gregorio of the decision of their Board of Directors not to ratify the letter-offer. However, since Gregorio had already paid the downpayment, TF delivered 500 bags of fertilizer which Gregorio accepted. TF made it clear that the delivery should be considered as an entirely new transaction. Thereafter, Gregorio sought the enforcement of the letter-offer. Is there a binding contract for the 5,000 bags of fertilizer? Explain. A: No. There is binding contract for the P5,000 bags of fertilizer. First, the facts do not indicate that Rodman, the President of TF Corporation, was authorized by the Board of Directors to enter into the said contract or that he was empowered to do so under some provision of the bylaws of TF Corporation. The facts do not also indicate that Rodman has been clothed with the apparent power to execute the contracts or agreements similar to it. Second, TF Corporation has specifically informed Gregorio that it has not ratified and that the delivery to Gregorio of 500 bags, which Gregorio accepted, is an entirely new transaction. (Yao Ka Sin Trading vs. CA, 209 SCRA 763) 2) Q: ABC Piggery Inc., is engaged in raising and selling hogs in the local market. Mr. De Dios, one of its directors, while traveling abroad, met a leather goods manufacturer who was interested in buying pigskins from the Philippines. Mr. De Dios set up a separate company and started exporting pigskins to his foreign contract but the pigskins exported were not sourced from ABC. His fellow directors in ABC complained that he should have given his business to ABC. How would you decide to this matter? A: I would answer in favor of Mr. De Dios. ABC Inc., is engaged in raising, and selling hogs in the local market. The company that Mr.De Dios had set up was to engage, as it did, in the export of pigskins. There is thus no conflict of interest between Mr. De Dios and ABC Piggery Inc., so as to make the case fall within the conflict of interest situation under the law. (Sec 34 Corporation Code)

Red Notes in Commercial Law

Alternative Answer: I would decide in favor of ABC. The business in which Mr. De Dios engaged in could have well been taken out by ABC since the latters main business is in selling hogs. There was thus an opportunity to expand its business so as to include the export of pigskin. The act of Mr. De Dios constituted an act of disloyalty on his part. POWERS OF A CORPORATION; DIVIDEND DECLARATION [1981, 1987, 1989, 1991, 1992, 2001] Rule: While as a rule an ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred upon it by law, there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation. (Republic vs. Acoje Mining) 1) Q: STIKKI Cement Corporation was organized primarily for cement manufacturing. Anticipating substantial profits, its President proposed that STIKKI invest in a) a power plant project, b) a concrete road project, and c) quarry operations for limestone used in the manufacture of cement.

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1) What corporate approvals or votes are needed for the proposed investments? Explain. 2) Describe the procedure in securing these approvals. A: 1) Unless the power plant and the concrete road project are reasonably necessary to the manufacture of cement by STIKKI (and they do not appear to be so), then the approval of said projects by a majority of the Board of Directors and ratification of such approval by the stockholders representing at least 2/3 of the outstanding capital stock would be necessary. As for the quarry operations for limestone, the same is an indispensable ingredient in the manufacture of cement and may, therefore, be considered reasonably necessary to accomplish the primary purpose of STIKKI. In such case, only the approval of the Board of Directors would be necessary. 2) a) The procedure in securing the approval of the Board of Directors is as follows: i) A notice of the meeting of the Board of Directors should be sent to all the directors. The notice should state the purpose of the meeting. ii) At the meeting, each of the project should be approved by a majority of the Board (not merely a majority of those present at the meeting). b) The procedure in securing the approval of the stockholders is as follows: i) Written notice of the proposed investment and the time and place of the stockholders meeting should be sent to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage paid, or served personally. ii) At the meeting, each of the projects should be approved by the stockholders representing at least 2/3 of the outstanding capital stock. (Sec. 42, BP 68)

Alternative Answer: 2) The majority vote of the Board of Directors 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 incidental to, or necessary for the existence of the corporation. 2) Q: May a corporation enter into a joint venture?

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A: A corporation may enter into a joint venture. However, inasmuch as the term joint venture has no precise legal definition, it may take various forms. It could take the form of a simple pooling of resources (not involving incorporation) between 2 or more corporations for a specific project, purpose, or undertaking, or for a limited time. It may involve the creation of a more formal structure and hence, the formation of a corporation. If the joint venture would involve the creation of a partnership, as the term is understood under the Civil Code, the a corporation cannot be a party to it. 3) Q: A corporation executed a promissory note binding itself to pay President/Director, who had tendered his resignation, a certain sum in payment of the latters shares and interest in the company. The corporation defaulted in paying the full amount, so the said former President filed suit for collection of balance before the SEC. a) Under what conditions is a stock corporation empowered to acquire its own shares? b) Is the arrangement between the corporation and its President covered by the Trust Fund Doctrine? Explain your answer briefly. A: a) A stock corporation may only acquire its own shares of stock if the Trust Fund Doctrine is not impaired. This is to say, for instance, that it may purchase its own shares of stock by utilizing merely its surplus profits over and above the subscribed capital of the corporation. Generally, a corporation is without power to purchase its own shares except otherwise provided in this Code. Section 41 grants the corporation the power to acquire its own shares subject to the following limitations: 1) That its capital is not thereby impaired; 2) That it be for a legitimate and proper corporate purpose;

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3) That there shall be unrestricted retained earnings to purchase the same and its capital is not thereby impaired; 4) That the corporation acts in good faith and without prejudice to the rights of creditors and stockholders; and 5) That the conditions of corporate affairs warrant it. b) YES. The arrangement between the corporation and its President to the extent that it calls for the payment of the latters share is covered by the Trust Fund Doctrine. The only exceptions to the Trust Fund Doctrine are the redemption of redeemable shares and, in case of closed corporations, when there should be a deadlock and the SEC orders the payment of the apprised value of a stockholders value. 4) Q: Taurus Corporation (TC) commenced operation in 1985. During that year TCs loss from operations amounted to P500,000. In 1986, TC recouped all its losses in 1985, registering a net after tax profit of P500,000. In the same year, the management of the company discovered that a parcel of land originally acquired in 1985 for P300,000 had at least doubled in value and accordingly the Board of Directors of TC, with the conformity of the external auditors and backed up by a valuation report of a reputable appraiser, recognized a revaluation or appraisal surplus of P300,000. May the Board of Directors of TC declare a cash dividend out of this surplus? Explain. A: The Board of Directors cannot declare cash dividends out of the revaluation or appraisal surplus that may fluctuate from time to time. Dividends can only be declared from surplus profits arising from its operations. 5) Q: At least 2/3 of the stockholders of Solar Corporation meeting upon the recommendation of the Board of Directors, declared a 50% stock dividend during their annual meeting. The notice of the annual stockholders meeting did not mention anything about a stock dividend declaration. The matter was taken up under the term Other Business in the agenda of the meeting. C.K. Senna, a stockholder, who received a copy of the notice but did not attend the meeting, subsequently learned about the 50% stock dividend declaration. He desires to have the stock dividend declaration cancelled and set aside, and wishes to retain your services as a lawyer for the purpose. Will you accept the case? Discuss with reasons. A: I will not accept the case. Although under ordinary circumstances, a matter not normally taken up in the annual stockholders meetings, should be included as part of the agenda in the notice of the meeting; in the case at bar, the matter taken up was only the approval by the stockholders of a stock dividend declaration previously made by the board. Section 43 of the Corporation Code states that no dividend shall be declared without the approval of the stockholders representing not less than 2/3 of the outstanding capital stock at a regular or special meeting duly called for the purpose.

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6) Q: ABC Management Inc. presented to DEF Mining Corp. the draft of its proposed management contract. As an incentive, ABC included in the terms of compensation that ABC would be entitled to ten percent (10%) of any stock dividend which DEF may declare during the lifetime of the Management Contract. Would you approve of such a provision? If not, what would you suggest as an alternative? A: I would not approve of a proposed stipulation in the management contract that the managing corporation, in an additional compensation to it should be entitled to 10% of any stock dividend that may be declared. Stockholders are the only ones entitled to receive any stock dividends (Nielsen & Co. vs Lepanto Mining 26 SCRA 569). I would add that the unsubscribed capital stock of a corporation may only be issued for cash or property or for services already rendered constituting a demandable debt. (Sec. 62 Corporation Code). As an alternative, I would suggest that the managing corporation should instead be given a net profit participation and, if it later so desires, to then convert the amount that may be due thereby to equity or shares of stock at no less than the par value thereof.

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RIGHTS OF A STOCKHOLDER [1982, 1983, 1984, 1985, 1988, 1994, 1993, 1998, 1999, 2001, 2003, 2004] Rule: One of the rights of a stockholder is the right to participate in the control and management of the corporation that is exercised through his vote. The right to vote inherent in and incidental to the ownership of corporate stock, and as such is a property right. The stockholder cannot be deprived of the to vote his stock nor may the right be essentially impaired, either by the legislature or by the corporation without his consent, through amending the charter, or the bylaws. (CASTILLO VS. BALINGHASAY) 1) Q: A became a stockholder of Prime Real Estate Corporation (PREC) on July 10, 1991, when he was given one share by another stockholder to qualify him as a director. A was not re-elected director in July 1, 1992 annual meeting but he continued to be a registered shareholder of PREC. When he was still a director, A discovered that on January 5, 1991, PREC issued free of charge 10,000 shares to X, a lawyer who assisted in a court case involving PREC. 1) Can A now bring an action in the name of the corporation to question the issuance of the shares to X without receiving any payment? 2) Can X question the right of A to sue him in behalf of the corporation on the ground that A has only one share in his name? 3) Can not the shares issued to X be considered as watered stock? A: 1) As a general rule, A cannot bring a derivative suit in the name of the corporation concerning the act that took place before he became a stockholder. However, if the act complained of is a continuing one, A may do so. 2) No. In a derivative suit, the action is instituted/brought in the name of a corporation and reliefs are prayed for therein for the corporation, by a minority stockholder. The law does not qualify the term minority in terms of the number of shares owned by a stockholder bringing the action in behalf of the corporation. (San Miguel Corp. v. Khan, 176 SCRA 448) 3) No. Watered stocks are those sold by the corporation for less than the par/book value. In the instant case, it will depend upon the value of services rendered in relation to the total par value of the shares. 2) Q: ABC Corporation has an authorized capital stock of One Million (P1,000,000.00) Pesos divided into 50, 000 common shares and 50, 000 preferred shares. At its inception, the Corporation offered for subscription all the common shares. However, only 40, 000 shares were subscribed. Recently, the directors thought of raising additional capital and decided to offer to the public all the authorized shares of the Corporation at their market value. a) Would Mr. X, a stockholder holding 4, 000 shares, have pre-emptive rights to the remaining 10, 000 shares? b) Would Mr. X have pre-emptive rights to the 50, 000 preferred shares? c) Assuming that the existing stockholders are entitled to pre-emptive rights, at what price will the shares be offered? d) Assuming a stockholder disagrees with the issuance of new shares and the pricing for the shares, may the stockholder invoke his appraisal rights and demand payment for his shareholdings? Explain your answers. A: a) Yes. Mr. X, a stockholder holding 4,000 shares, has pre-emptive right over the remaining 10,000 shares. All stockholders of a stock corporation shall enjoy pre-emptive right to all issues or disposition of shares of any class, in proportion to their respective shareholdings. The ruling in Benito v. Datu and Tan v. SEC to the effect that pre-emptive right applies only to issuance of shares in connection with an increase in capital is no longer applicable under the Corporation Code. The facts in those cases happened during the regime of the old Corporation Law.

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b) Yes. Mr. X would have pre-emptive rights to the 50,000 preferred shares. All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. c) The shares will be offered to existing stockholders, who are entitled to pre-emptive right, at a price fixed by the Board of Directors, which shall not be less than the par value of such shares. d) No, the stockholder may not exercise appraisal right because the matter that he dissented from is not one of those where right of appraisal is available under the Corporation Code. Alternative Answers: a) No. Mr. X does not have preemptive right over the remaining 10,000 shares because these shares have already been offered at incorporation and he chose not to subscribe to them. Therefore, he has waived his right thereto and the corporation may offer them to anyone. b) Yes. Mr. X has pre-emptive right over the 50,000 preferred shares because they were not offered before by the corporation for subscription. 3) Q: Suppose that X Corporation has already issued 1000 originally authorized shares of the corporation so that its Board of Directors and stockholders wish to increase Xs authorized capital stock. After complying with the requirements of the law on increase of capital stock, X issued an additional 1000 shares of the same value. a) Assume that stockholder A presently holds 200 of the 1000 original shares. Would A have a pre-emptive right to 200 of the new issue of 1000 shares? Why? b) When should stockholder A exercise the pre-emptive right? A: a) Yes, A would have a pre-emptive right to 200 of the new issue of 1000 shares. A is a stockholder of record holding 200 shares in X Corporation. According to the Corporation Code, each stockholder has the pre-emptive right to all issues of shares made by the corporation in proportion to the number of shares he holds on record in the corporation. b) Pre-emptive right must be exercised in accordance with the Articles of Incorporation or the By-Laws. When the Articles of Incorporation and the By-Laws are silent, the Board may fix a reasonable time within which the stockholders may exercise the right. 4) Q: The stockholders of People Power, Inc. (PPI) approved the following two resolutions in a special stockholders' meeting: (i) Resolution increasing the authorized capital stock of PPI, and (ii) resolution authorizing the Board of Directors to issue for cash payment the new shares from the proposed capital stock increase in favor of outside investors who are non-stockholders. The foregoing resolutions were approved by stockholders representing 99% of the total outstanding capital stock. The sole dissenter was Jose Estrada who owned the rest (1%) of the stock. (a) Are the resolutions binding on the corporations and its stockholders, including. Estrada, the dissenting stockholder? (b) What remedies, if any, are available to Estrada? A: a). The board resolutions (i) increasing the authorized capital stock of the corporation and (ii) authorizing the board to issue new shares from that increase of capital stock in favor of outside investors is binding on the stockholders since the said resolutions were approved by the stockholders representing at least 2/3 of the total outstanding capital stock. b). Estrada, the dissenting stockholder, may avail himself of the appraisal rights by claiming that since the resolutions appear to favor outside investors, as against incumbent stockholders, on the increase in capital stock, he may demand the payment of the appraised value of his shares. Alternative Answer: (a) Even if the resolutions in question have been approved by stockholders representing 99% of the outstanding capital stock, they cannot be binding on the corporation and stockholders since there is no showing that the same have been approved by a majority vote of the Board of

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Directors. This is especially so in the case of the first resolution increasing the authorized capital stock which, in effect, requires an amendment of the articles of incorporation. (b) Since the resolutions in question have the net effect of depriving him of his preemptive right as a stockholder of record of the corporation, Estrada can resort to the remedy of exercising his appraisal right. 5) Q: Petitioner who is a stockholder of Bilmoko Corporation wanted to examine the books and records of a foreign subsidiary wholly owned by Bilmoko Corporation. The books and records of the foreign subsidiary were in the possession of Bilmoko Corporation. The latter's hoard of directors refused to allow the petitioner to examine the said books and records, contending that the foreign subsidiary is a separate and distinct corporation domiciled in another country; hence, the petitioner was not within the class of persons having an interest in the operations of the foreign subsidiary. (a) Decide the case. (b) What are the limitations on a stockholder's rights to inspect corporation books and records? A: (a) The statutory right of a stockholder to inspect the books and records of a corporation extends in consonance with equity, good faith and fair dealing to a foreign subsidiary wholly owned by the corporation (Gokongwei vs. SEC, L-45911, 11 April 1979; L-15214, 21 April 1980). (b) The right of inspection does not allow the stockholder to improperly use any information that is secured thereby. The stockholder must exercise the right in good faith and for a legitimate purpose only (see Sec. 74, Corporation Code; Gonzales vs. PNB, 122 SCRA 489). BY-LAWS PROVISION; VALIDITY [1981, 1987, 2000, 2001] Rule: As the "rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it," by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. (LOYOLA GRAND VILLAS HOMEOWNERS ASSOC. VS. CA) 1) Q: The Board of Directors of X Corporation, acting on a standing authority of the stockholders to amend the by-laws, amended its by-laws so as to disqualify any of its stockholders who is also a stockholder and director of a competitor from being elected to its Board of Directors. Y, a stockholder holding sufficient shares to assure him of a seat in the Board, filed a petition with the Securities and Exchange Commission for a declaration of nullity of the amended by-laws. He alleged among other things that as a stockholder, he had acquired rights inherent in stock ownership such as the right to vote and be voted upon in the election of directors. Is the stockholders petition tenable? A: No. There is no vested right of a stockholder to be elected as director. When a person buys a stock in a corporation he does so with the knowledge that its affairs are dominated by a majority of the stockholders. To this extent, the stockholder parted with his personal right to regulate the disposition of his property which he invested in the capital stock of the corporation and surrendered it to the will of the majority of his fellow incorporators or stockholders. Corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the Corporations Board of Directors. An amendment which renders a director, or if elected, subjects him to removal, if he is also a director in a corporation whose business is in competition with or is antagonistic to the other corporation, is valid. (Gokongwei vs. SEC) 2) Q: The proposed Amended By-laws of CXT Inc., a corporation listed in the Makati Stock Exchange, contain the following provisions: (a) That the holders of a majority of the outstanding capital stock may elect all the members of the Board of Directors; (b) That no officer of the corporation shall be required to be a stockholder;

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That the directors' bonuses shall be equivalent to 10% of gross revenues in any given year; (d) That a candidate for director must own at least 1,000 shares; (e) That meetings of the Board of Directors need not be held in the principal office and may even be held outside the country. As Corporate Secretary of CXT, you are asked to comment on the validity of the above proposed amendments. A: As Corporate Secretary of CXT, I would give the following comments on the question of validity of the various proposed amendments to the By-Laws, as follows: (a) The minority stockholders may not be deprived of their right to vote in electing the members of the board of directors; hence, the proposed amendment would be invalid. (b) The President should be a director who should thus own at least one share of stock. Therefore, the suggested amendment would be invalid unless the President is excluded from the proposed amendment. (c) The directors' bonuses (total compensation) cannot exceed 10% of net income; accordingly, the proposed amendment fixing the directors' bonuses to 10% of gross revenues in any given year would be invalid. (d) While the By-Laws may provide additional qualifications for directors such qualifications must not be unreasonable. A qualification requiring a director to own at least 1,000 shares, in my view, would be untenable and a denial of the right of representation by the minority shareholders in the Board of Directors. (e) The meetings of the Board of Directors, unlike those of the stockholders, may be held outside the Philippines; accordingly, the proposed amendment to the by-laws on the matter can be valid. STOCK CERTIFICATES; UNPAID SUBSCRIPTION [1990, 1996, 2004] Rule: For a valid transfer of stocks, there must be a strict compliance with the mode of transfer prescribed by law. The requirements are: (a) There must be a delivery of the stock certificate; (b) the certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and (c) to be valid against third persons, the transfer must be recorded in the books of the corporation. (Rural Bank of Lipa City vs. CA) 1) Q: Arnold has in his name 1,000 shares of the capital stock of ABC Corporation as evidenced by a stock certificate. Arnold delivered the stock certificate to Steven who now claims to be the real owner of the shares, having paid for Arnolds subscription. ABC refused to recognize and register Stevens ownership. Is the refusal justified? Explain. A: ABCs refusal to recognize and register Stevens ownership is justified. The facts indicate that the stock certificate for the 1,000 shares in question is in the name of Arnold. Although the certificate was delivered by Arnold to Steven, the facts do not indicate that the certificate was duly endorsed by Arnold at the time it was delivered to Steven or that procedure for the effective transfer of shares of stock set out in the by-laws of ABC Corporation, if any, was observed. Since the certificate was not endorsed in favor of Steven (or anybody else for that matter), the only conclusion could be no other than that the shares in question still belong to Arnold. ( Razon vs. IAC, 207 SCRA 234) 2) Q: A is the registered owner of Stock Certificate No. 000011. He entrusted the possession of said certificate to his best friend B who borrowed the said endorsed certificate to support B's application for passport (or for a purpose other than transfer). But B sold the certificate to X, a bona fide purchaser who relied on the endorsed certificates and believed him to be the owner thereof. a) Can A claim the shares of stocks from X? b) Would your answer be the same if A lost the stock certificate in question or if it was stolen from him? A: a) No. Assuming that the shares were already transferred to B, A cannot claim the shares of stock from X. The certificate of stock covering said shares have been duly endorsed by A and (c)

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entrusted by him to B. By his said acts, A is now estopped from claiming said shares from X, a bona fide purchaser who relied on the endorsement by A of the certificate of stock. b) Yes. In the case where the certificate of stock was lost or stolen from A, A has a right to claim the certificate of stock from the thief who has no right or title to the same. One who has lost any movable or has been unlawfully deprived thereof, may recover it from the person in possession of the same." (Art. 559, New Civil Code) 3) Q: Victor was employed in MAIA Corporation. He subscribed to 1,500 shares of the corporation at P100.00 per share or a total of P150,000.00. He made an initial down payment of P37,500.00. He was appointed President and General Manager. Because of his disagreement with the Board of Directors, he resigned and demanded payment of his unpaid salaries, his cost of living allowance, his bonus, and reimbursement of his gasoline and representation expenses. MAIA Corporation admits that it owed Victor P40,000.00, but told him that this will be applied to the unpaid balance of his subscription in the amount of P100,000.00. There was no call or notice for the payment of the unpaid subscription. Victor questioned the set-off. 1) May MAIA set-off the unpaid subscription with Victors claim for salaries? 2) Would your answer be the same if indeed there had been a call for the unpaid subscription? A: 1) No. MAIA cannot set-off the unpaid subscription with Victors claims for salaries. The unpaid subscription is not yet due as there is no call. 2) Yes. The reason is that Victor is entitled to the payment of his salaries which MAIA has no right to withhold in payment of unpaid subscription. To do so would violate Labor Laws. (Apodaca v. NLRC, 172 SCRA 442) 4) Q: Mr. Balimbing signed a written subscription for 100 shares of stock of Laban and Co., paving 25 % of the amount thereof. The corporation subsequently became insolvent due to a series of financial reverses. Mr. Balimbing demanded from the Corporate Secretary the stock certificates corresponding to 25 shares which he claimed was already paid. Since the corporation was insolvent, Mr Balimbing refused to pay for his remaining unpaid subscription. (a) Can the Corporate Secretary validly refuse to issue stock certificates in the name of Mr. Balimbing for 25 shares despite the payment of 25% of the subscription of 100 shares? Reasons. (b) Is Mr. Balimbing correct in refusing to pay for the remaining shares, the Company being already insolvent? Reasons.

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A: (a) Yes, the Corporation Code expressly provides that no certificate of stock shall be issued unless the full amount of the subscription is paid. This is to say that a partial payment of the subscription amount is allocated or apportioned to the entire number of the subscribed shares and, therefore, each share subscribed by Mr. Balimbing would been paid only to the extent of 25% thereof (Sec. 64, Corporation Code). (b) The refusal of Mr. Balimbing to pay is not correct. The obligation to pay for unpaid subscription is a liability of Mr. Balimbing that has not yet been discharged, but is instead entrenched under the trust fund doctrine upon the insolvency of the corporation. FOREIGN CORPORATIONS Rule: The obtainment of a license prescribed by Section 125 of the Corporation Code is not a condition precedent to the maintenance of any kind of action in Philippine courts by a foreign corporation. However, under the aforequoted provision, no foreign corporation shall be permitted to transact business in the Philippines, as this phrase is understood under the Corporation Code, unless it shall have the license required by law, and until it complies with the law in transacting business here, it shall not be permitted to maintain any suit in local courts. (Columbia Pictures vs. CA) 1) Q: When is a foreign corporation deemed to be doing business in the Philippines?

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A: A foreign corporation is deemed to be doing business in the Philippines if it is continuing the body or substance of the business or enterprise for which it was organized. It is the intention of an entity to continue the body of its business in the country. The grant and extension of 90-day credit terms by a foreign corporation to a domestic corporation for every purchase shows an intention to continue transacting with the latter. 2) Q: Equity Online Corporation (EOL), a New York corporation, has a securities brokerage service on the Internet after obtaining all requisite U.S. licenses and permits to do so. EOL's website (www.eonline.com), which is hosted by a server in Florida, enables Internet users to trade on-line in securities listed in the various stock exchanges in the U S. EOL buys and sells U.S. -listed securities for the accounts of its clients all over the world, who convey their buy and sell instructions to EOL through the Internet. EOL has no offices, employees or representatives outside the U.S. The website has icons for many countries, including an icon "For Filipino Traders" containing the day's prices of U.S.-listed securities expressed in U.S. dollars and in their Philippine peso equivalent. Grace Gonzales, a resident of Makati, is a regular customer of the website and has been purchasing and selling securities through EOL with the use of her American Express credit card. Grace has never traveled outside the Philippines. After a series of erroneous stock picks, she had incurred a net indebtedness of US$30,000.00 with EOL, at which time she cancelled her Arnerican Express credit card. After a number of demand letters sent to Grace, all of them unanswered, EOL, through a Makati law firm, filed a complaint for collection against Grace with the Regional Trial Court of Makati. Grace, through her lawyer, filed a motion to dismiss on the ground that EOL: a) was doing business in the Philippines without a license and was therefore barred from bringing suit; and b) violated the Securities Regulation Code by selling or offering to sell securities within the Philippines without registering the securities with the Philippine SEC and thus came to court "with unclean hands." EOL opposed the motion to dismiss, contending that it had never established a physical presence in the Philippines, and that all of the activities related to plaintiffs trading in U.S. securities all transpired outside the Philippines. If you are the judge, decide the motion to dismiss by ruling on the respective contentions of the parties on the basis of the facts presented above. A: The grounds of Graces motion to dismiss are both untenable. EOL Is not doing business in the Philippines, and it did not violate the Securities Act, because it was not selling securities in the country. The contention of EOL is correct, because it never did any business in the Philippines. All its transactions in question were consummated outside the Philippines. DISSOLUTION AND LIQUIDATION [1981, 1997, 2000, 2001, 2002] Rule: The word "trustee" as used in the corporation statute must be understood in its general concept which could include the counsel to whom was entrusted in the instant case, the prosecution of the suit filed by the corporation. The purpose in the transfer of the assets of the corporation to a trustee upon its dissolution is more for the protection of its creditor and stockholders. (Gelano vs. CA) 1) Q: X Corporation shortened its corporate life by amending its articles of incorporation. It has no debts but owns a prime property located in Quezon City. How would the said property be liquidated among the five stockholders of said corporation? Discuss two methods of liquidation. A: The prime property of X Corporation can be liquidated among the five stockholders after the property has been conveyed by the corporation to the five stockholders, by dividing or partitioning it among themselves in any two of the following ways: 1) by physical division or partition based on the proportion of the value of their stockholdings; or 2) selling the property to a third person and dividing the proceeds among the five stockholders in proportion to their stockholdings; or 3) after the determination of the value of the property, by assigning or transferring the property to one stockholder with the obligation on the part of said stockholder to pay the other four stockholders the amount/s in proportion to the value of the stockholding of each.

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2) Q: A group of stockholders of Sesame Corporation filed a court suit against the members of the Board of Directors to make good to the shareholders, in proportion to their shareholdings, the losses incurred by the corporation because of the defendant Board of Directors' management. (a) Will the action prosper? Reasons. (b) While the case was pending, the corporation was dissolved. During the three-year period from its dissolution, the Board of Directors decided to extend the corporate life by an amendment of its Articles of Incorporation. Can the Board of Directors do so? Reasons. A: (a) The action will not prosper since the right belongs to the Corporation. Until the corporation is dissolved and the liquidation of assets shall have been made, the shareholders have no right over any specific asset of the corporation (Sec. 122, Corporation Code). The suit should have been filed instead by and in the name of the corporation (Evangelista vs. Santos. 64 Phil. 697, see also Gamboa vs. Victoriano, 90 SCRA 40). (b) The Board of Directors may not do so. The corporate life may be extended so long as the proper steps therefor (charter amendment) are done by the corporation before its expiry date (Alhambra vs. SEC. 24 SCRA 269). INTRA-CORPORATE CONTROVERSY [1981, 1985, 1994, 1996] Rule: To determine whether a case involves an intra-corporate controversy, and is to be heard and decided by the Branches of the RTC specifically designated by the Court to try and decide such cases, two elements must concur: (a) the status or relationship of the parties; and (2) the nature of the question that is the subject of their controversy. The first element requires that the controversy must arise out of intra-corporate or partnership relations between any or all of the parties and the corporation, partnership or association of which they are stockholders, members or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the State insofar as it concerns their individual franchises. The second element requires that the dispute among the parties be intrinsically connected with the regulation of the corporation. If the nature of the controversy involves matters that are purely civil in character, necessarily, the case does not involve an intra-corporate controversy. The determination of whether a contract is simulated or not is an issue that could be resolved by applying pertinent provisions of the Civil Code. (Speed Distributing Corp. vs. CA)

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1) Q: In 1970, Magno joined AMD Corporation as a Junior Accountant. He steadily rose from the ranks until he became AMDs Executive Vice-President. Subsequently, however, because of his involvement in certain anomalies, the AMD Board of Directors considered him resigned from the company due to loss of confidence. Aggrieved, Magno filed a complaint in the SEC, questioning the validity of his termination, and seeking reinstatement to his former position, with back wages, vacation and sick leave benefits, 13th month pay and Christmas bonus, plus moral and exemplary damages, attorneys fees and costs. AMD filed a motion to dismiss, arguing that the SEC has no jurisdiction over cases of illegal dismissal, and no power to award damages. Should the motion to dismiss be granted? Explain. A: Yes, it should. Jurisdiction properly falls with the Regional Trial Court (RA 8799, SRC). The dismissal of Magno is a corporate act as it resulted in his non-reelection to his position, and his nonacceptance of such dismissal is an intra-corporate controversy. Neither the SEC nor the labor arbiter has jurisdiction. While the affirmative reliefs and monetary claims sought by Magno may, at first glance, mislead one into placing the case under the jurisdiction of the Labor Arbiter, a closer examination reveals that they are actually part of the perquisites of his elective position, hence, intimately linked with his relations with the corporation. (Espino vs. NLRC, 240 SCRA 52) 2) Q: Jennifer and Gabriel owned the controlling stocks in MFF Corporation and CLO, Inc., both family corporations. Due to serious disagreements, Jennifer assigned all her shares in MFF

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Corporation to Gabriel, while Gabriel assigned all his shares in CLO, Inc. to Jennifer. Subsequently, Jennifer and CLO, Inc., filed a complaint against Gabriel and MFF Corporation in the SEC, seeking to recover the corporate records and funds of CLO, Inc., which Gabriel allegedly refused to turn over, and which remained in the offices of MFF Corporation. a) Is there an intra-corporate controversy in this case? Explain. b) Who has jurisdiction over the case? A: a) Yes. There is an intra-corporate controversy in this case. The fact that, when the complaint against Gabriel and MFF Corporation was filed with the SEC, Jennifer and CLO, Inc., were no longer stockholders of MFF Corporation did not divest the SEC of its jurisdiction over the case inasmuch as Jennifer was a former stockholder of MFF Corporation and the controversy arose out of this relation. (SEC vs. CA, 201 SCRA 124) b) The Regional Trial Courts have jurisdiction over intra-corporate controversies as now provided for under RA 8799 or the SRC. 3) Q: Juan was a stockholder of X Corporation. He owned a total of 500 shares evidenced by Certificate of Stock No. 1001. He sold the shares to Pedro. After getting paid, Juan indorsed and delivered said Certificate of Stock No. 1001 to Pedro. The following day, Juan went to the offices of the corporation and claimed that his Certificate of Stock No. 1001 was lost and that, despite diligent efforts, the certificate could not be located. The formalities prescribed by law for the replacement of the lost certificate were complied with. Eventually X Corporation issued, in substitution of the lost certificate, Certificate of Stock No. 2002. Juan forthwith transferred for valuable consideration the new certificate to Jose who knew nothing of the previous sale to Pedro. In time, the corporation was confronted wit the conflicting claims of Pedro and Jose. The Board of Directors of X Corporation invited you to enlighten them on these questions; viz: a) In a suit were to be initiated in order to resolve the controversy between Pedro and Jose, should the matter be submitted to the Securities and Exchange Commission or to the Regular courts? b) Between Pedro and Jose, whom should the corporation recognize as the rightful stockholder? How would you respond to the above queries? A: a) The matter should be submitted to the SEC, as provided under RA 8799. The controversy between Pedro and Jose is not an intra-corporate controversy. b) If there is no over-issuance of shares resulting from the two transactions of Juan, the corporation should recognize both Pedro and Jose as rightful stockholders. This is without prejudice to the right of the corporation to claim against Juan for the value of the shares which Juan sold to Jose. SECURITIES AND REGULATIONS CODE; CORPORATE REHABILITATION [1984, 1985, 1995, 1998, 2003] Rule: The reason for suspending actions for claims against the corporation should not be difficult to discover. It is not really to enable the management committee or the rehabilitation receiver to substitute the defendant in any pending action against it before any court, tribunal, board or body. Obviously, the real justification is to enable the management committee or rehabilitation receiver to effectively exercise its/his powers free from any judicial or extra-judicial interference that might duly hinder or prevent the rescue of the debtor company. (B.F. HOMES, INC. VS. CA cited in PAL VS. SPOUSES SADIC) 1) Q: Debtor Corporation and its principal stockholders filed with the Securities and Exchange Commission (SEC) a petition for rehabilitation and declaration of a state of suspension of payments under P.D. 902-A. The objective was for SEC to take control of the corporation and all its assets and liabilities, earnings and operations, and to determine the feasibility of continuing operations and rehabilitating the company for the benefit of investors and creditors. Generally, the unsecured creditors had manifested willingness to cooperate with Debtor Corporation. The secured creditors, however, expressed serious objections and reservations. First Bank had already initiated judicial foreclosure proceedings on the mortgage constituted on the factory of Debtor Corporation.

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Second Bank had already initiated foreclosure proceedings on a third-party mortgage constituted on certain assets of the principal stockholders. Third Bank had already filed a suit against the principal stockholders who had held themselves liable jointly and severally for the loans of Debtor Corporation with said Bank. After hearing, the SEC directed the appointed of a rehabilitation receiver and ordered the suspension of all actions and claims against the Debtor Corporation as well as against the principal stockholders. 1) Discuss the validity of the SEC order of suspension? 2) Discuss the effects of the SEC order of suspension on the judicial foreclosure proceedings initiated by First Bank. 3) Would the order of suspension have any effect on the foreclosure proceedings initiated by Second Bank? Explain. 4) Would the order of suspension have any effect on the suit filed by Third Bank? Explain. 5) What are the legal consequences of a rehabilitation receivership? 6) What measures may the receiver take to preserve the assets of Debtor Corporation? A: 1) The SEC order of suspension of payment is valid with respect to the debtor corporation, but not with respect to the principal stockholders. The SEC has jurisdiction to declare suspension of payments with respect to corporations, partnership or associations, but not with respect to individuals. 2) The SEC order of suspension of payment suspended the judicial proceedings initiated by First Bank. According to the Supreme Court in a line of cases, the suspension order applies to secured creditors and to the action to enforce the security against the corporation regardless of the stage thereof. 3) The order of suspension of payments suspended the foreclosure proceedings initiated by Second Bank. While the foreclosure is against the property of a third party, it is in reality an action to collect the principal obligation owed by the corporation. During the time that the payment of the principal obligation is suspended, the debtor corporation is considered to be not in default and, therefore, even the right to enforce the security, whether owned by the debtor-corporation or of a third party, has not yet risen. 4) For the same reason as in 3), the order of suspension of payments suspended the suit filed by Third Bank against the principal stockholders.

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5) Under PD 902-A, the appointment of a rehabilitation receiver will suspend all actions for claims against the corporation and the corporation will be placed under rehabilitation in accordance with a rehabilitation plan approved by the Commission. 6) To preserve the assets of the Debtor Corporation, the receiver may take custody of, and control over, all the existing assets and property of the corporation; evaluate existing assets and liabilities, earnings and operations of the corporation; and determine the best way to salvage and protect the interest of the investors and creditors. 2) Q: Suppose A is the owner of several inactive securities. To create an appearance of active trading for such securities, A connives with E by which A will offer for sale some of his securities and E will buy them at a certain fixed price, with the understanding that although there would be an apparent sale, A will retain the beneficial ownership thereof. a) Is the arrangement lawful? b) If the sale materializes, what is It called? A: a) No. The arrangement is not lawful. It is an artificial manipulation of the price of securities. This is prohibited by the Securities Regulation Code. b) If the sale materializes, it is called a wash sale or simulated sale. 3) Q: a) What is a tender offer?

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b) In what instances is a tender offer required to be made? A: a) Tender offer is a publicly announced Intention of a person acting alone or in concert with other persons to acquire equity securities of a. public company. It may also be defined as a method of taking over a company by asking stockholders to sell their shares at a price higher that the current market price and on a particular date. b) Instances where tender offer is required to be made: 1) The person intends to acquire 15% or more of the equity share of a public company pursuant to an agreement made between or among the person and one or more sellers. 2) The person intends to acquire 30% or more of the equity shares of a public company within a period of 12 months. 3) The person intends to acquire equity shares of a public company that would result in ownership of more than 50% of the said shares. 4) Q: When is the remedy of declaration in a state of suspension of payments available to a corporation? A: The remedy is available to the corporate debtor in two instances: a. Where the corporate debtor possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due; or b. Where the corporate debtor as no sufficient assets to cover its liabilities but is under management of a Rehabilitation Receiver or Management Committee.

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5) Q: Distinguish the stay order in corporate rehabilitation from a declaration in a state of suspension of payments. A: STAY ORDER IN CORPORATE REHABILITATION
Suspensive effect commences from the issuance by the court of the stay order or upon the appointment of a rehabilitation receiver or management committee. The suspensive effect has no time limit and would prevail for as long as the corporate debtor is under a management committee or rehabilitation receiver and there is no directive to have its assets liquidated. The suspensive effect covers all corporate creditors, both secured and unsecured.

DECLARATION IN A STATE OF SUSPENSION OF PAYMENTS

Suspensive effect commences from the filing of the petition. In the absence of any agreement among the corporate creditors, the suspensive effect would expire after 3 months The suspensive effect covers unsecured creditors only.

6) Q: X Corporation applied for its rehabilitation and submitted a rehabilitation plan which called for the entry by it into a joint venture agreement with Y Corporation. Under the agreement, Y Corporation was to lend to X Corporation its credit facilities with certain banks to obtain funds not only to operate X Corporation but also for a part thereof in the amount of P1 Million as initial deposit in a sinking fund to be augmented annually in amounts equivalent to 10% of the from its operation of the business of X Corporation. From this fund, the creditors of X Corporation were to be paid annually, starting from the second year of operations, with the entire indebtedness to be liquidated in 15 years. The creditors of X Corporation objected to the plan because Y Corporation would be taking over the business and assets of Y Corporation. a. Could the court approve the plan despite the objection of the creditors of X Corporation and could the creditors be compelled to follow the plan? b. Could Y Corporation, in managing the business of X Corporation in the meantime, be deemed to have taken over X Corporation itself? A: a. Yes, it could. The Interim Rules of Procedure on Corporate Rehabilitation (2000) expressly provides for the cram-down power of the court, particularly the Regional Trial Court (RTC), having jurisdiction over the petition for rehabilitation.

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This cram-down power of the RTC enables it to approve the rehabilitation plan even over the opposition of creditors holding a majority of the total liabilities of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. b. No, it could not. In the rehabilitation plan, Y Corporation is envisaged merely as a rehabilitation receiver. A rehabilitation receiver implements the rehabilitation plan after its approval by the court. Its primary task is to study the best way to rehabilitate the debtor and to ensure that the value of the debtors property is reasonably maintained pending the determination of whether or no the debtor should be rehabilitated. It does not take over the management and control of the corporate debtor but simply oversees and monitors closely the operations of the latter during the pendency of the proceedings.

BANKING LAWS
NEW CENTRAL BANK ACT Rule: It must be remembered that the Central Bank of the. Philippines (now Bangko Sentral ng Pilipinas), through the Monetary Board, is the government agency charged with the responsibility of administering the monetary, banking and credit system of the country and is granted, the power of supervision and examination over banks and non-bank financial institutions performing quasi-banking functions. (Busuego vs. CA) 1) Q: What are the responsibilities and primary objectives of the Bangko Sentral ng Pilipinas?

A: The Bangko Sentral shall provide policy directions in the areas of money, banking and credit. It shall have supervision over the operations of banks and exercise such regulatory powers as provided in the Central Bank Act and other pertinent laws over the operations of finance companies and non-bank financial institutions performing quasi-banking functions, such as quasi-banks and institutions performing similar functions. The primary objective of the Bangko Sentral is to maintain price stability conducive to a balanced and sustainable growth f the economy. It shall also promote and maintain monetary stability and convertibility of the Peso. 2) Q: After many years of shopping in the Metro Manila area, a housewife HW has developed the sound habit of making cash purchases only, none on credit. In one shopping trip to Mega Mall, she got the shock of her shopping life for the first time, a stores smart salesgirl refused to accept her coins in payment for a purchase worth not more that one hundred pesos. HW was paying seventy pesos in 25-centavo coins and twenty five pesos in 10-centavo coins. Strange as it may seem, the salesgirl told HW that her coins were not legal tender. Do you agree with the salesgirl in respect of her understanding of legal tender? Explain. A: No. The salesgirls understanding that coins are not legal tender is not correct. Coins are legal tender in amounts not exceeding fifty pesos for denominations from twenty five centavos and above, and in amounts not exceeding twenty pesos for denominations ten centavos and less. 3) Q: Give the basic requirements to be complied with by the Central Bank (Bangko Sentral ng Pilipinas) before the Monetary Board can declare a bank insolvent, order it closed and forbid it from doing further business in the Philippines. A: Before the Monetary Board can declare a bank insolvent, order it closed and forbid it from doing further business in the Philippines, the following basic requirements must be complied with by the Central Bank, to wit: a) There must be an examination by the head of the Department of Supervision or his examiners or agents into the condition of the bank. b) The examination discloses that the condition of the bank is one of insolvency, or that its continuance in business would involve probable loss to creditors or depositors. c) The head of said Department shall inform in writing the Monetary Board of such facts.

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d) Upon finding said information or statement to be true, the Monetary Board shall appoint a receiver to take charge of the assets and liabilities of the Bank. e) Within sixty (60) days, the Monetary Board shall determine and confirm if the bank is insolvent, and public interest requires, to order the liquidation of the Bank. SECRECY OF BANK DEPOSITS; [1980, 1981, 1983, 1988, 1989, 1999, 2000, 2004] Rule: With regard to the claim that disclosure would be contrary to the policy making bank deposits confidential, it is enough to point out that while section 2 of Republic Act No. 1405 declares bank deposits to be "absolutely confidential" it nevertheless allows such disclosure in the following instances: (1) Upon written permission of the depositor; (2) In cases of impeachment; (2) Upon order of a competent court in cases of bribery or dereliction of duty of public officials; (4) In cases where the money deposited is the subject of the litigation. Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential. (PNB vs. Gancayco) 1) Q: Miguel, a special customs agent is charged before the Ombudsman with having acquired property out of proportion to his salary, on violation of the Anti-Graft and Corrupt Practices Act. The Ombudsman issued a subpoena duces tecum to the Banco de Cinco commanding its representative to furnish the Ombudsman records of transactions by or in the name of Miguel, his wife and children. A second subpoena was issued expanding the first by including the production of records of friends of Miguel in said bank and in all its branches and extension offices, specifically naming them. Miguel moved to quash the subpoenas arguing that they violate the Law on Secrecy of Bank Deposits. In addition, he contends that the subpoenas are in the nature of fishing expedition or general warrants, and are constitutionally impermissible with respect to private individuals who are not under investigation. Is Miguels contention correct? A: No. Miguels contention is not tenable. The inquiry into illegally acquired property extends to cases where such property is concealed by being held by or recorded in the name of other persons. To sustain Miguels theory and restrict the inquiry only to property held by or in the name of the government official would make available to persons in government who illegally acquire property an easy means of evading prosecution. All they have to do would be to simply place the property in the name of persons other then their spouses and children. ( Banco Filipino Savings v. Purisima, 161 SCRA 576; Sec. 8, Anti-Graft Law, as amended by B.P. 195.) 2) Q: Michael withdrew without authority funds of the partnership in the amounts of P500,000.00 and US$50,000.00 for services he claims he rendered for the benefit of the partnership. He deposited the P500,000.00 in his personal peso current account with the Prosperity Bank and the US$50,000.00 in his personal foreign currency savings account with Eastern Bank. The partnership instituted an action in court against Michael, Prosperity Bank and Eastern Bank to compel Michael to return the subject funds to the partnership and pending litigation to order both banks to disallow any withdrawal from his accounts. At the initial hearing of the case the court ordered Prosperity Bank to produce the records of Michaels peso current account and Eastern Bank to produce the records of his foreign currency savings account. Can the court compel Prosperity Bank and Eastern Bank to disclose the bank deposits of Michael? Discuss fully. A: Yes, as far as the peso account is concerned. Section 2 of Republic Act 1405 allows the disclosure of bank deposits in case where the money deposited is the subject of litigation. Since the case filed against Michael is aimed at recovering the amount he withdrew from the funds of the partnership, which amount he allegedly deposited in his account, a disclosure of his bank deposits would prosper. No, with respect to the foreign currency deposit account. Under the Foreign Currency Law, the exemption to the prohibition against disclosure of information concerning bank deposits is the written consent of the depositor. 3) Q: An employee of a large manufacturing firm earns a salary which is just a bit more than what he needs for a comfortable living. He is thus able to still maintain a P10,000.00 saving

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account, a P20,000.00 checking account, a P30,000.00 money market placement and a P40,000.00 trust fund in a medium-size commercial bank. a) State which of the four accounts are deemed insured by the Philippine Deposit Insurance Corporation. b) State which of the above accounts are covered by the Law on Secrecy of Bank Deposits. A: a) The P10,000.00 savings account and the P20,000.00 checking account are deemed insured by the Philippine Deposit Insurance Corporation. b) The P10,000.00 savings account and the P20,000.00 checking account are covered by the Law on Secrecy of Bank Deposits 4) Q: An insurance company is deluded into releasing a check to A for P 35,000.00 to pay for Treasury Bills (T-bills) which A claims to be en route on board an armored truck from a government bank. The check is delivered to A who deposits it to his account with XYZ Bank before the insurance company realizes it is a scam. Upon such realization, the insurance company files an action against A for recovery of the amount defrauded and obtains a writ of preliminary attachment. In addition to the writ, the Bank is also served a subpoena to examine the account records of A. The bank declines to provide any information in response to the writ and moves to quash the subpoena invoking the secrecy of Bank deposits under R.A. 1405, as amended. Can the Bank justifiably invoke R.A. 1405 and a) not respond to the writ and b) quash the subpoena for examination? A: Yes. Whether the transaction is considered a sale or money placement does not make the money subject matter of litigation within the meaning of section 2 of Republic Act No. 1405 which prohibits the disclosure or inquiry into bank deposits except in cases where the money deposited or invested is the subject matter of litigation nor will it matter whether the money was swindled. 5) Q: GP is a suspected jueteng lord who is rumored to be enjoying police and military protection, to 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 the GP. GP and the banks opposed the production of the banks records of deposits on the ground that no such inquiry is allowed under the Law on Secrecy of Bank Deposits (R.A. 1405 as amended). Is the opposition of GP and the banks valid? Explain. A: Yes. The opposition is valid. GP is not a public official. The investigation does not involve one of the exceptions to the prohibition against disclosure of any information concerning bank deposits under the Law on Secrecy of Bank Deposits. The Committee conducting the investigation is not a competent court or the Ombudsman authorized under the law to issue a subpoena for the production of the bank record involving such disclosure. 6) Q: The Law on Secrecy of Bank Deposits, otherwise known as RA 1405, is intended to encourage people to deposit their money in banking institutions and also to discourage private hoarding so that the same may be properly utilized by banks to assist in the economic development of the country. Is a notice of garnishment served on a bank, at the instance of a creditor of a depositor, covered by the said law? State the reason/s for your answer. A: No, it is not. Garnishment is just a part of the process of execution. The moment a notice of garnishment is served on a bank and there exists a deposit by the judgment debtor, the bank is directly accountable to the sheriff, for the benefit of the judgment creditor, for the whole amount

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of the deposit. In such event, the amount of the deposit becomes, in effect, a subject of the litigation. 7) Q: Socorro received $10,000 from a foreign bank although she was entitled only to $1,000. In an apparent plan to conceal the erroneously sent amount, she opened a dollar account with her local bank,deposited the $10,000 and issued four checks in the amount of $2,000 and one check for $1,000 each payable to different individuals who deposited the same in their respective dollar accounts with different local banks. The sender bank then brought a civil suit before the Regional trial Court for the recovery of the erroneously sent amount. In the course of the trial, the sender presented testimonies of bank officials to show that the funds were in fact, deposited in bank by Socorro and paid out to several persons, who participated in the concealment and dissipation of the amount that Socorro had erroneously received. Socorro moved to strike out said testimonies from the record invoking the law on secrecy of bank deposits. If you were the Judge would you issue an order to strike them out? Why? A: I will not strike out the testimonies from the record. The testimonies of bank officials indicating where the questioned dollar account were opened in depositing misappropriated sums must be considered as likewise involved in litigation, one which is among the excepted cases under the secrecy of bank deposits (Melon Bank v. Magsino 190 SCRA 633) 8) Q: A secured a judgment by default against B for a sum of money. To satisfy the judgment, A sought the garnishment of the bank deposit of B with China Bank. The Bank refused. (a) May a writ of garnishment he issued against the bank deposit of B? Reasons. (b) What are the exceptions to the prohibition against disclosure of bank deposits? A: (a) Yes, a writ of garnishment may be issued against the bank deposit of B with China Bank. The Law on Secrecy of Bank Deposits is merely against inquiry or disclosure of information relative to the funds or property in the custody of the bank. (b) The exceptions to the prohibitions against disclosure of bank deposits include (1) Upon the written permission of the depositor; (2) In cases of impeachment; (3) Upon order of a competent court in cases of bribery or dereliction of duty or where the money deposited or invested is the subject matter of litigation; (4) In anti-graft cases; and (5) When authorized by the Monetary Board if it has reasonable ground to believe that such account is being used or was used to commit a bank fraud. 9) Q: X, a public official, is charged with violation of the Anti-Graft Law for unexplained wealth. The prosecuting official learned that X maintains safety deposit boxes at Union Bank. May the officials of the bank be subpoenaed and examined about the safety deposit boxes? A: Yes, the officials of the bank may be subpoenaed and examined about the safety deposit boxes. The prohibition against inquiry or disclosure of bank accounts under the Secrecy of Bank Deposits Law does not apply to the case. Even if the safety deposit box is not considered a bank deposit, the answer is still in the affirmative because the law provides that one of the exception to the secrecy of bank deposits is upon order of the court in cases of bribery or dereliction of duty of public officials. Also, in the case of Banco Filipino vs. Purisima (161 SCRA 576), the Supreme Court said that the Anti-Graft and Corrupt Practices Act intends to provide an additional ground for the examination of bank deposits without violating the Secrecy of Bank Deposits Law by allowing inquiry into "illegally" or "not legitimately" acquired property. 10) Q: a. Manosa, a newspaper columnist, while making a deposit in a bank, overheard a pretty bank teller informing a co-employee that Gigi, a well-known public official has just few hundred pesos in her bank account and that her next check will in all probability bounce. Manosa wrote this information in his newspaper column. Thus, Gigi filed a complaint with the office of the city fiscal

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of Manila for unlawfully disclosing information about her bank account. Will the said suit prosper? Explain your answer. b. Suppose that Gigi is charged with unlawfully acquiring wealth under RA 1379 and that the fiscal issued a subpoena duces tecum for the records of the bank of Gigi. May Gigi validly oppose the said issuance of the ground that the same violates the law on secrecy of bank deposits. Explain your answer. A: a. The Secrecy of Bank Deposits Act prohibits, subject to exclusionary clauses, any person from examining, inquiring, or looking into all deposits of whatever nature with banks or banking institutions in the Philippines which by law are declared absolutely confidential in nature. Manosa, who merely overheared what appeared to be a vague remark of a bank employee to a coemployee and writing the same in his column is neither the inquiry or disclosure contemplated by law. b. Among the instances excepted from the coverage of the secrecy of Bank deposits act are anti-graft cases. Hence, Gigi may not validly oppose the issuance of a subpoena duces tecum for the bank records on her.

INTELLECTUAL PROPERTY LAW

COPYRIGHT; INFRINGEMENT [1988, 1989, 1997, 1998] Rule: Copyright, in the strict sense of the term, is purely a statutory right. Being a mere statutory grant, the rights are limited to what the statute confers. It may be obtained and enjoyed only with respect to the subjects and by the persons, and on terms and conditions specified in the statute. Accordingly, it can cover only the works falling within the statutory enumeration or description. (PEARL & DEAN (PHIL.), INCORPORATED vs. SHOEMART, INCORPORATED, and NORTH EDSA MARKETING, INCORPORATED) 1) Q: The Victoria Hotel chain reproduces videotapes, distributes copies thereof to its hotels and makes them available to hotel guests for viewing in the hotel guest rooms. It charges a separate nominal fee for the use of the videotape player. 1) Can the Victoria Hotel be enjoined for infringing copyrights and held liable for damages? 2) Would it make any difference if Victoria Hotel does not charge any fee for the use of the videotape?

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A: 1) Yes. Victoria Hotel has no right to use such video tapes in its hotel business without the consent of the creator/owner of the copyright. 2) No. The use of the videotapes is for business and not merely for home consumption. (Filipino Society of Composers, Authors & Publishers, Inc. 148 SCRA 461, P.D. 1988) 2) Q: Solid Investment House (SOLID) commissioned Mon Blanco and his son Steve, both noted artists to paint a mural for the Main Lobby of the new building of SOLID for a contract price of P2 Million. a) Who owns the mural? Explain. b) Who owns the copyright of the mural? Explain. A: a) SOLID owns the mural. SOLID was the one who commissioned the artists to do the work and paid for the work in the sum of P2 million. b) Unless there is a stipulation to the contrary in the contract, the copyright shall belong in joint ownership to SOLID and Mon Blanco and his son Steve. (Sec. 178.4, IPC)

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3) Q: In an action for damages on account of infringement of a copyright, the defendant (the alleged pirate) raised the defense that he was unaware that what he had copied was a copyright material. Would this defense be valid? A: No. An intention to pirate is not an element of infringement. Hence, an honest intention is no defense to an action for infringement. Alternative answer: Yes. The owner of the copyright must make others aware that the material in question is under or covered by a copyright. This is done by the giving of such notice at a prominent portion of the copyright material. When the alleged pirate is thus made aware thereof, his act of pirating the copy material will constitute infringement. 4) Q: Juan Xavier wrote and published a story similar to an unpublished copyrighted story of Manoling Santiago. It was, however conclusively proven that Juan Xavier was not aware that the story of Manoling Santiago was protected by copyright. Manoling Santiago sued Juan Xavier for infringement of copyright. Is Juan Xavier liable? A: Yes. Juan Xavier is liable for infringement of copyright. It is not necessary that Juan Xavier is aware that the story of Manoling Santiago was protected by copyright, because intent to infringe is immaterial. The work of Manoling Santiago is protected from the time of its creation. 5) Q: May a person have photocopies of some pages of the book Professor Rosario made without violating the copyright law? A: Yes. The private reproduction of a published work in a single copy, where the reproduction is made by a natural person exclusively for research and private study, is permitted, without the authorization of the owner of the copyright in the work. (Sec. 187.1, IPC) 6) Q: Miss Soils wrote a script for Regal Films for the movie "One Day-Isang Araw." Ms. Badiday, while watching the movie in Ermita Theater, discovered that the story of the movie is exactly similar to an unpublished copyrighted autobiography which she wrote. Ms. Badiday sued Miss Solis for infringement of copyright. It was however conclusively proven that Miss Solis was not aware that the autobiography of Ms. Badiday was protected by a copyright. Is Miss Solis liable? State briefly your reasons. A: Yes, Miss Solis may he held liable. Animus furandi or intention to pirate is not an element of infringement; hence, an honest intention is no defense to an action for infringement (13 C.J. 1121). 7) Q: Felix copyrighted the oil painting showing the oath taking of President C. Aquino and Vice-President S. Laurel after the EDSA revolution. Val engaged an artist to paint the same scene for use as picture postcards. Val then started sending the picture postcards to his friends abroad. Is. there a violation of Felix's copyright? Reasons. A: While Felix can have a copyright on his own painting which is expressive of his own artistic interpretation of the event he has portrayed, the scene or the event itself, however, is not susceptible to exclusive ownership. Accordingly, there would be no violation of Felix's copyright if another painter were to do a similar work. 8) Q: X copyrighted a scientific research paper consisting of 50 pages dealing with the Tasadays. Y wrote a 100-page review of X's paper criticizing X's findings and dismissing X's story as a hoax. Y's review literally reproduced 90% of X's paper. Can X sue Y for infringement of his copyright? Reasons. A: The Law provides that to an extent compatible with fair practice and justified by scientific, critical, informatory or educational purpose, it is permissible to make quotations or excerpts from a work already made accessible to the public. Such quotations may be utilized in their original form or in translation. Viewed from the foregoing, a review by another that literally reproduced 90 %"

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of the research work done by X may no longer he considered as fair play, and X can sue Y for the violation of the copyright. 9) Q: If today a person is granted a copyright for a book, for how long will the copyright be valid? If said person uses a pseudonym, how would this affect the length of the copyright? A: A copyright endures during the lifetime of the creator and for 50 years after his death. In case he uses a pseudonym, the copyright shall last until the end of 50 years following the date of the first publication of the work. PATENT; PATENTABLE WORKS [1981, 1989] Rule: To be able to effectively and legally preclude others from copying and profiting from the invention, a patent is a primordial requirement. No patent, no protection. The ultimate goal of a patent system is to bring new designs and technologies into the public domain through disclosure. Ideas, once disclosed to the public without the protection of a valid patent, are subject to appropriation without significant restraint. (PEARL & DEAN (PHIL.), INCORPORATED vs. SHOEMART, INCORPORATED, and NORTH EDSA MARKETING, INCORPORATED) 1) Q: Ferdie is a patent owner of a certain invention. He discovered that this invention is being infringed by Johann. 1) What are the remedies available to Ferdie against Johann? 2) If you were the lawyer of Johann in the infringement suit, what are the defenses that your client can assert? A: 1) See Section 71, RA 8293, IPC. 2) See Section 81, IPC 2) Q: X invented a method of improving the tenderness of meat by injecting an enzyme solution into the live animal shortly before a slaughter. Is the invention patentable? A: To be patentable, the invention must be new, involve an inventive step and industrially applicable. Among those that cannot be patented are processes which are not directed to making or improving a commercial product. Viewed in the above light, X may lawfully patent his invention. 3) Q: X invented a bogus coin detector which can be used exclusively on self-operating gambling devices otherwise known as one-armed bandits. Can X apply for a patent? Reasons. A: X may not apply for the patent since the gambling device mentioned in the problem itself is prohibited and against public order. But if the machine is used in legalized gambling such as in cases of exclusive use of casinos established by the government, such device can be patented. TRADEMARK; INFRINGEMENT; UNFAIR COMPETITION; TEST OF DOMINANCY [1980,1982, 1983, 1985, 1987, 1994, 1996] Rule: Infringement of trademark is a form of unfair competition. The universal test question for infringement is whether the public is likely to be deceived. Actual probable deception and confusion on the part of the customers by reason of defendants practices must always appear. (ASIA BREWERY INC. VS. COURT OF APPEALS, 224 SCRA 437) 1) Q: Laberge, Inc. manufactures and markets after-shave lotion, shaving cream, deodorant, talcum powder and toilet soap, using the trademark PRUT, which is registered with the Philippine Patent Office. Laberge does not manufacture briefs and underwear and these items are not specified in the certificate of registration. JG, who manufactures briefs and underwear, wants to know whether, under our laws, he can use and register the trademark PRUTE for his merchandise. What is your advice? A: Yes. The trademark registered in the name of Laberge, Inc. covers only after-shave lotion, shaving cream, deodorant, talcum powder and toilet soap. It does not cover briefs and underwear. The limit of the trademark is stated in the certificate issued to Laberge, Inc. It does not include briefs and underwear which are different products protected by Laberges trademark.

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JG can register the trademark PRUTE to cover its briefs and underwear. (Faberge, Inc. v. IAC, 215 SCRA 316) 2) Q: Sony is a registered trademark for TV, stereo, radio, cameras, betamax and other electronic products. A local company, Best manufacturing, Inc. produced electric fans which it sold under the trademark SONY without the consent of Sony. Sony sued Best Manufacturing for infringement. Decide the case. A: In order that a case for infringement of trademark can prosper, the products on which the trademark is used must be of the same kind. The electric fans produced by Best Manufacturing cannot be said to be similar to such products such as TV, stereo and radio sets or cameras or betamax products of Sony. 3) Q: X, a dealer of low grade oil, to save on expenses, uses the containers of different companies. Before marketing to the public his low grade oil, X totally obliterates and erases the brands or marks stenciled on the containers. Y brings an action against X for unfair competition upon its discovery that its containers have been used by X for his low grade oil. Is there unfair competition? State briefly your reasons. A: There is no unfair competition. Unfair competition is passing off of one's goods as those of another and requires fraudulent intent on the part of the user. These elements are not present in the problem. 4) Q: In what way is an infringement of trademark similar to that which pertains to unfair competition? A: Infringement of trademark and unfair competition is similar in that: (1) they both involve misrepresentation by one person that his goods or his business are the goods or the business of another; (2) they are both actionable torts under the IPC. 5) Q: K-9 Corporation, a foreign corporation alleging itself to be the registered owner of trademark K-9 and logo K filed an Inter-Partes case with the Intellectual Property Office against Kanin Corporation for the cancellation of the latters mark K-9 and logo K During the pendency of the case before the IPO, Kanin Corporation brought suit against K-9 Corporation before the RTC for infringement and damages. Could the action before the RTC prosper? Why? A: Yes, it could. The earlier institution of an Inter Partes case for the cancellation of a mark with the Bureau of Legal Affairs of the IPO cannot effectively bar the adverse party from filing a subsequent action for infringement with the regular courts in connection with the same registered mark. Firstly, the certificate of registration upon which the infringement case is based remains valid and subsisting for as long as it has not been cancelled by the IPO or by an infringement court. Secondly, the issues dealt with in the two forums are different. Thirdly, the infringement case and should proceed independently from the cancellation of the case so as to afford redress and injunctive writs to the owner of the certificate of registration. (Shangri-La, Intl vs. CA) 6) Q: A: What is the distinction between infringement and unfair competition? The distinctions are as follows: a) Infringement of trademark is the unauthorized use of a trademark, whereas unfair competition is the passing off of ones goods as those of another; b) Fraudulent intent is unnecessary in infringement of trademark, whereas fraudulent intent is essential in unfair competition; c) The prior registration of the trademark is a prerequisite to an action for infringement of trademark, whereas registration of the trademark is not necessary in unfair competition. (Del Monte Corp. vs. CA, 181 SCRA 410) What is the test of dominancy?

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A: The test of dominancy requires that if the competing trademark contains the main or essential features of another and confusion and deception is likely to result, infringement takes place. Duplication or imitation is not necessary; nor is it necessary that the infringing label should suggest an effort to imitate. Similarity in size, form and color, while relevant, is not conclusive (Asia Brewery vs. CA, 224 SCRA 437) 8) Q: N Corporation manufactures rubber shoes under the trademark Jordann which hit the Philippine market in 1985, and registered its trademark with the Bureau of Patents, Trademarks and Technology Transfer (BPTTT) in 1990. PK Company also manufactures rubber shoes with the trademark Javorski which it registered with the BPTTT in 1978. In 1992, PK Co adopted and copied the design of N Corporations Jordann rubber shoes both as to shape and color, but retained the trademark Javorski on its products. May PK Company be held liable to N Corporation? Explain. A: PK Company may be held liable for unfairly competing against N Corporation. By copying the design, shape and color of N Corporations Jordann rubber shoes and using the same in its rubber shoes trademarked Javorski, PK Company is obviously trying to pass off its shoes for those of N Corporation. It is of no moment that the trademark Javorski was registered ahead of the trademark Jordann. Priority in registration is not material in an action for unfair competition as distinguished from an action for infringement of trademark. The basis of an action for unfair competition is confusing and misleading similarity in general appearance not similarity of trademarks. (Converse Rubber Corp. vs. Jacinto Rubber & Plastics Co., Inc , 97 SCRA 158)

SPECIAL LAWS
WAREHOUSE RECEIPTS LAW [1980, 1982, 1983, 1986, 1988, 1989, 1998, 1999, 2000] Rule: Any deposit made with a bonded warehouseman must necessarily be governed by the provisions of Act No. 3893. The kind or nature of the receipts issued by him for the deposits is not very material, much less decisive. Though it is desirable that receipts issued by a bonded warehouseman should conform to the provisions of the Warehouseman Receipts Law, said provisions are not mandatory, and indispensable in the sense that if they fell short of the requirement of the Warehouse Receipts Act, then the commodities delivered for storage become ordinary deposits and will not be governed by the provisions of the Bonded Warehouse Act. Under Section 1 of the Warehouse Receipts Act, the issuance of a warehouse receipt in the form provided by it is merely permissive and directory and not obligatory. (GONZALES VS. GO TIONG)

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1) Q: A purchased from S, 150 cavans of palay on credit. A deposited the palay in Ws warehouse. W issued to A a negotiable warehouse receipt in the name of A. Thereafter, A negotiated the receipt to B who purchased the said receipt for value and in good faith. 1) Who has a better right to the deposit, S the unpaid vendor, or B the purchaser of the receipt for value and in good faith? Why? 2) When can the warehouseman be obliged to deliver the palay to A? A: 1) B has a better right than S. The right of the unpaid seller, S, to the goods was defeated by the act of A in endorsing he receipt to B. 2) The warehouseman can be obliged top deliver the palay to A if B negotiates back the receipt to A. In that case, A becomes a holder again of the receipt, and A can comply with Sec. 8 of the Warehouse Receipts Law. 2) Q: X deposited 1,000 sacks of wheat f1our with Luzon Warehouse Company, for which he was issued a negotiable receipt. Y was able to get hold of the receipt forged the signature of X, presented the receipt to Luzon Warehouse and was able to withdraw the wheat flour. What are the rights of X?

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A: If under the terms of the negotiable warehouse receipt, the goods are deliverable to the depositor or to his order, X may proceed against Luzon Warehouse and/or Y. Without the valid indorsement of X to the holder or in blank, the warehouseman is liable to X for conversion in the misdelivery. If however, by the terms of the negotiable warehouse receipt, the goods are deliverable to bearer (either because it is so expressed in the warehouse receipt or because of a blank indorsement by the person to whose order the goods are deliverable), X may only proceed against Y. The Warehouseman is not liable for conversion where the goods are delivered to a person in possession of a bearer negotiable warehouse receipt. (See Sec. 9, par. C, and Sec. 10 Warehouse Receipts Law). 3) Q: When may a warehouseman be liable for any loss or injury to the goods stored in his warehouse although he is not negligent? A: He may be liable in the following cases: a. Where he has expressly agreed to be liable for any loss even where he is not negligent; or b. If the warehouseman has violated the contract, like when he agrees to store the goods in a particular place and stores them in another place c. Where the loss takes place after the warehouseman has converted the goods.

COMMERCIAL LAW

4) Q: Luzon Warehousing Corporation (LWC) received from Pedro 200 cavans of rice for deposit in its warehouse for which a negotiable receipt was issued. While the goods were stored in said warehouse, Cicero obtained a judgment against Pedro for the recovery of a sum of money. The sheriff proceeded to levy upon the goods on a writ of execution and directed the warehouseman to deliver the goods. Is the warehouseman under obligation to comply with the sheriffs order? A: No. There was a valid negotiable receipt as there was a valid delivery of 200 cavans of rice for deposit. In such case, the warehouse man (LWC) is not obliged to deliver the 200 cavans of rice deposited to any person, except the one who can comply with Section 8 of the Warehouse Receipts Law, namely: 1) surrender the receipt of which he is a holder; 2) willing to sign a receipt for the delivery of the goods; and 3) pays the warehousemans liens, that is, his fees and advances, if any. The sheriff cannot comply with these requisites, especially the first, as he is not the holder of the receipt. 5) Q: A Warehouse Company received for safekeeping 1000 bags of rice from a merchant. To evidence the transaction, the Warehouse Company issued a receipt expressly providing that the goods be delivered to the order of said merchant. A month after, a creditor obtained judgment for a sum of money against the said merchant. The sheriff proceeded to levy on the rice and directed the Warehouse Company to deliver to him the deposited rice. 1) What advice will you give the Warehouse Company? Explain your answer. 2) Assuming that a week prior to the levy, the receipt was sold to a rice mill on the basis of which it filed a claim with the sheriff. Would the rice mill have better rights to the rice than the creditor? Explain your answer. A: 1) The 1000 bags of rice were delivered to the Warehouse Company by a merchant, and a negotiable receipt was issued therefore. The rice cannot thereafter, while in the possession of the Warehouse Company, be attached by garnishment or otherwise, or be levied upon an execution unless the receipt be first surrendered to the warehouseman, or its negotiation enjoined. The Warehouse Company cannot be compelled to deliver the actual possession of the rice until the receipt is surrendered to it or impounded by the court. 2) Yes. The rice mill, as a holder for value of the receipt, has a better right to the rice than the creditor. It is the rice mill that can surrender the receipt which is in its possession and can comply with the other requirements which will oblige the warehouseman to deliver the rice, namely, to sign a receipt for the delivery of the rice, and to pay the warehousemans liens and fees and other charges.

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6) Q: Mr. Bakal deposited with a warehouseman two crates of goods for which he received two warehouse receipts (one for each crate) -one being a negotiable warehouse receipt and the other a non-negotiable warehouse receipt. Title to both warehouse receipts were transferred on December 1, 1985 to Mr. Tigas. The warehouseman was not notified of the transfer of the receipts. Meanwhile, Mr. Tapang, a judgment creditor of Mr. Bakal, served a notice of levy over the goods on the warehouseman. (a) Between Mr. Tigas and Mr. Bakal, who would have preference over the goods covered by the negotiable warehouse receipt? Reasons. (b) Who would have preference over the goods covered by the non-negotiable warehouse receipt? Reasons. A: (a) Mr. Tigas would have preference over the goods covered by the negotiable warehouse receipt (assuming that there was proper negotiation to him). In negotiation, the transferees rights over the goods vests from the very moment of transfer and the transferee there upon acquires the direct obligation of the warehouseman to hold the goods for him. (b) Mr. Tapang, in this case, would have preference over the goods since the transferee of a non-negotiable warehouse receipt merely acquires (1) rights no better than those of the transfereor and (2) the direct obligation of the warehouseman only upon notice to him of the transfer (see Secs. 41-43, W.R.L.; see also Arts. 1513-1515, Civil Code) CHATTEL MORTGAGE [1980, 1983, 1986, 1988, 1989, 1994, 1996, 1997, 1999] Rule: A chattel mortgage may be "an accessory contract" to a contract of loan, but that fact alone does not make a third-party mortgagor solidarily bound with the principal debtor in fulfilling the principal obligation that is, to pay the loan. The signatory to the principal contract-loan-remains to be primarily bound. It is only upon the default of the latter that the creditor may have recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the amount of the loan. And the liability of the third-party mortgagors extends only to the property mortgaged. Should there be any deficiency, the creditor has recourse on the principal debtor. (CERNA VS. CA) 1) Q: Eastern Motors, Inc. (EMI), an automotive dealer, sold a Toyota station wagon to Alran Tuason, payable in 10 monthly installments. The installments were evidenced by a promissory note and secured by a mortgage on the car. EMI assigned the credit to Island Finance Corporation (IFC), subject to IFC's right of recourse to EMI if the car buyer (Tuason) was unable to pay the credit in full. Upon Tuason's default, IFC foreclosed on the mortgage. Since a deficiency remained, IFC sought to collect the same from EMI. Is IFC justified in doing so? Reason out your answer. A: IFC is not justified in collecting the deficiency from EMI. An assignee is merely a successorin-interest of the assignor and, therefore, unless otherwise expressed in the deed of assignment, the right of recourse stipulated in favor of IFC must be deemed confined only to a case where the car buyer is unable to pay the credit in full. By foreclosing on the car, the right to the deficiency is lost and no further amount is thus due from the car buyer. 2) Q: To secure the payment of an earlier loan of P20,000 as well as subsequent loans which her friend, Noreen would extend to her, Karen executed in favor of Noreen a chattel mortgage over her car. Is the mortgage valid? A: A chattel mortgage cannot effectively secure after incurred obligations. While a stipulation to include after-incurred obligations in a chattel mortgage is itself not invalid, the obligation cannot, however, be deemed automatically secured by that mortgage 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 1508, Belgian Catholic missionaries v. Magallanes Press 49 Phil. 647)

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3) Q: Ritz bought a new car on installments which provided for an acceleration clause in the event of default. To secure payment of the unpaid installments, as and when due, he constituted two chattel mortgages, i.e., one over his very old car and the other covering the new car that he had just bought, as aforesaid, on installments. After Ritz defaulted on three installments, the seller-mortgagee foreclosed on the old car. The proceeds of the foreclosure were not enough to satisfy the due obligation; hence, he similarly sought to foreclose on the new car. Would the sellermortgagee be legally justified in foreclosing on this second chattel mortgage? A: No. The two (2) mortgages were executed to secure the payment of the unpaid installments for the purchase of a new car. When the mortgage on the old car was foreclosed, the sellermortgagee is deemed to have renounced all other rights. A foreclosure of additional property, that is, the new car covered by the second mortgage would be a nullity. 4) Q: Carmakers, Inc. sold a motor vehicle on installment basis to Chari Paredes. The transaction was reflected on a promissory note executed by Chari in favor of Carmakers 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 Adelantado Finance Corporation take action against both Carmakers, Inc. and Chari? Why? A: No, it could not take action against both of them. Adelantado Finance Corporation could only take action against Chari, and not Carmakers, Inc. The assignment of the promissory note was sans recourse (without recourse), thus precluding recourse against the assignor. Adelantado Finance Corporation could only take action against Chari, subject, however, to the rules of Article 1484 of the Civil Code or the Recto Law, the sale being one of personal property on an installment basis. 5) Q: To pay for her loan obtained from Stela, Liza constituted in Stelas favor a chattel mortgage over an electric generator. Cecil, a creditor of Liza, levied on attachment the generator. Stela filed a third party claim. Cecil opposed the claim. Rule on their conflicting claims. A: The third party claim of Stela should be granted. The chattel mortgage in Stelas favor is a preferred lien, having been constituted previous to the levy on attachment by Liza. Thus, Stelas mortgage lien enjoys priority over Lizas attachment lien. REAL ESTATE MORTGAGE [1991, 1999, 2001] 1) Q: To secure the payment of his loan of P200,000.00. A excecuted in favor of the Angeles Banking Corp., in one document, a real estate mortgage over three (3) lots registered in his name and a chattel mortgage over his three cars and one isuzu cargo truck. Upon his failure to pay the loan on due date, the bank foreclosed the mortgage on the three lots which where subsequently sold for only 99,000.00 at the foreclose sale. Thereafter, the bank filed an ordinary action for the collection of the deficiency. A contended that the mortgage contract he executed was indivisible and consequently, the bank had no legal right to foreclose only the real estate mortgage and leave out the chattel mortgage and then sue him for a supposed deficiency judgment. If you were the judge, would you sustain the contention of A. A: If I were the judge, I would dismiss the action as being premature since the proper remedy would be to complete the foreclose of the mortgages and only thereafter can there be an action for collection of any deficiency. In Caltex vs. IAC the remedies on a secured debt, said the court are either an action to collect or to foreclose a contact of real security. These remedies are alternative, although an action for any deficiency is not precluded, subject to certain exceptions such as those stated in article 1484 of the civil code by a foreclosure on the mortgages. While the factual settings in the case of Suria v. IAC (June 30, 1987) are not similar to the facts given in the problem. The supreme court implied that foreclose as a remedy in secured obligations must first be availed of by a creditor in preference to other remedies that might also be invoked by him. Alternative Answer:

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The indivisibility of a contact of real security, such as a real estate mortgage or a chattel mortgage, only means that a division or a partial payment of a secured obligation does not warrant a corresponding division or proportionate reduction of the security given. A creditor in such secured debts may pursue the remedy of foreclosure, in part or in full or file an ordinary action for collection on any amount due. A favorable judgment can warrant an issue of a writ of execution on any property not exempt from execution, belonging to the judgment debtor. There should be no legal obstacle for a creditor to waive in full or in part, his rights to foreclosure on contracts of real security. 2) Q: 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 registry. 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 annotated at the back of the title. Due to business reverses, debtor failed to pay his creditors. The chattel mortgage was foreclosed when the debtor failed to reimburse the surety company for payments made on the bond. In the foreclosure sale, the surety company was awarded the house as the highest bidder. Only after the foreclosure sale did the surety company learn of the real estate mortgage in favor of the lending investor on the lot and improvement thereon. Immediately, it filed a complaint praying for the exclusion of the house from the real estate mortgage. It was submitted that as the chattel mortgage was executed and registered ahead, it was superior to the real estate mortgage. On the suggestion that a chattel mortgage on a house a real property was a nullity, the surety company countered that when the chattel mortgage was executed, debtor was not yet the owner of the lot on which the house was built. Accordingly, the house was a personal property and a proper subject of a chattel mortgage. 1) Discuss the validity of the position taken by the surety company. 2) 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.

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A: 1) The house is always a real property even though it was constructed on a land not belonging to the builder. However, the parties may treat it as a personal property and constitute a chattel mortgage thereon. Such mortgage shall be valid and binding but only on the parties. It will not bind or affect third parties. 2) The lending investor has a better claim to the house. The real estate mortgage covering the house and lot was duly registered and binds the parties and third persons. On the other hand, the chattel mortgage on the house securing the credit of the surety company did not affect the rights of third parties such as the lending investor despite registration of the chattel mortgage. 3) No. The chattel mortgage over the house which was foreclosed did not affect the rights of third parties like the lending investor. Since third parties are not bound by the chattel mortgage, they are not also bound by any enforcement of its provisions. The foreclosure of such chattel mortgage did not bolster or add anything to the position of the surety company. 3) Q: Borrower obtained a loan against the security of a mortgage on a parcel of land. While the mortgage was subsisting, borrower leased for fifty years the mortgaged property to Land Development Company (LDC). The mortgage was duly advised of the lease. Thereafter, LDC constructed on the mortgaged property an office condominium.

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Borrower defaulted on his loan and mortgagee foreclosed the mortgage. At the foreclosure sale, the mortgagee was awarded the property as the highest bidder. The corresponding Certificate of Sale was executed and after the lapse of one year, title was consolidated in the name of the mortgagee. Mortgagee then applied with the Regional Trial Court for the issuance of a writ of possession not only over the land but also the condominium building. The mortgagee contended that the mortgage included all accessions, improvements and accessories found on the mortgaged property. LDC countered that it had built on the mortgaged property with the prior knowledge of mortgagee which had received formal notice of the lease. a) How would you resolve the dispute between the mortgagee and LDC? b) Is the mortgagee entitled to the lease rentals due from LDC under the lease agreement? A: a) The mortgagee has a better right than LDC. The mortgage extends to improvements introduced on the land, with the declarations, amplifications, and limitations established by law, whether the estate remains in the possession of the mortgagor or passes into the hand of a third person (Article 2127 Civil Code). The notice given by LDC to the mortgagee was not enough to remove the building from coverage of the mortgage considering that the building was built after the mortgage was constituted and the notice was only as regards the lease and not as to the construction of the building. Since the mortgagee was informed of the lease and did not object to it, the mortgagee becomes bound by the terms of the lease when it acquired the property as the highest bidder. Hence, the mortgagee steps into the shoes of the mortgagor and acquires the rights of the lessor under Article 1678 of the Civil Code. This provision gives the lessor the right to appropriate the condominium building but after paying the lessee half of the value of the building at that time. Should the lessor refuse to reimburse said amount, the lessee may remove the improvement even though the land will suffer damage thereby. b) The lease rentals belong to the mortgagor. However, the mortgage extends to rentals not yet received when the obligation becomes due and the mortgage may run after the said rentals for the payment of the mortgage debt. 4) Q: Primetime Corporation (the Borrower) obtained a. P10 million, five-year term loan from Universal Bank (the Bank) in 1996. As security for the loan and as required by the Bank, the Borrower gave the following collateral security in favor of the Bank: a) A real estate mortgage over the land and building owned by the Borrower and located in Quezon City; b) The joint and several promissory note of Mr. Primo Timbol, the President of the Borrower; and c) A real estate mortgage over the residential house and lot owned by Mr. Timbol, also located in Quezon City. Because of business reverses, neither the Borrower nor Mr. Timbol was able to pay the loan. In June 2001, the Bank extrajudicially foreclosed the two real estate mortgages, with the Bank as the only bidder in the foreclosure sale. On September 16, 2001, the certificates of sale of the two properties in favor of the Bank were registered with the Register of Deeds of Quezon City. Ten months later, both the Borrower and Mr. Timbol were able to raise sufficient funds to redeem their respective properties from the Bank, but the Bank refused to permit redemption on the ground that the period for redemption had already expired, so that the Bank now has absolute ownership of both properties. The Borrower and Mr. Timbol came to you today, September 15, 2002, to find out if the position of the Bank is correct. What would be your answer? State your reasons. A: a) With respect to the real estate mortgage over the land and building owned by the Borrower, Primetime Corporation, a juridical body, the period of redemption is only three (3) months, which period already expired. c) As to the real estate mortgage over the residential house and lot owned by Mr. Timbol, the period of redemption is one (1) year from the date of registration of the certificate of sale, which period has not yet expired in this case.

COMMERCIAL LAW

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BULK SALES LAW [1982, 1984, 1997, 1999, 2000, 2001]

San Beda COMMERCIAL

1) Q: The Board of Directors of Union Corporation, with the unanimous authority of its stockholders in a meeting duly called for the purpose, sold to Victory Corporation for P880 million substantially all of the companys assets consisting of pieces of machinery, fixtures, and equipment used in the alcoholic beverage business of the company. Acme Bottlers, Inc., creditorsupplier of the bottle requirements of Union Corporation, now questions the sale as fraudulent and therefore null and void, contending that it learned of the sale only from the column of Leticia Locsin at the Daily Globe. (a) Is Acme Bottlers, Inc. corrct in alleging that the said sale is null and void? (b) What are the rights and liabilities of Victory Corporation? A: (a) No, the allegation of ACME Bottlers, Inc., that the sale is null and void cannot be sustained. The Corporation Code expressly authorizes corporations to sell all or substantially all of its assets under the conditions therein expressed which had been complied with according to the facts stated in the problem. The Bulk Sales Law, upon the other hand, cannot be successfully invoked as the legal basis for the nullity of the sale as the Act applies only to the conveyance in bulk of stocks in trade. Had the law been applicable to the creditors before the sale would have been required under the Bulk Sales Law for its validity (Secs. 3-4, Act No. 3952, as amended). (b)Victory Corporation has acquired rights as lawful buyer in the sale of Unions corporate assets. If as alleged by ACME Bottlers, Inc., the sale is fraudulent and it is rescinded on that ground, the rescission would only be to the extent that there is prejudice to the creditors. Assuming further, that the rescission, infact, takes place, Victory Corp. may go after the seller for breach of sale or warranty as the ultimate facts would warrant (see Articles 1381, 1384-1385, 1547, 1548, 1555, Civil Code). Alternative Answer to: (a) Yes, Acme Bottlers, Inc. is correct in alleging that the sale is null and void. Since the transaction is a sale of all or substantially all of the companys assets, it falls under the Bulk Sales Act. The company has not complied with the requirements of notifying the creditors and furnishing the buyer under oath a list of sellers creditors. Hence the transaction is fraudulent and void irrespective of the good or bad faith of the buyer (Chin Asing v. Uy Genco Co., 40 O.G. 4th Supp. 42)

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2) Q: Stanrus, Inc., a department with outlets in Makati, Mandaluyong and Quezon City, is contemplating to refurbish and renovate its Makati store in order to introduce the most modern and state of the art equipment in merchandise display. To carry out its plan, it intends to sell all of the existing fixtures and equipment (display cases, wall decorations, furniture, counters, etc.) to Crossroads Department Store. Thereafter, it will buy and install new fixtures and equipment and continue operations. Crossroads wants to know from you as counsel: 1) Whether the intended sale is bulk sale. 2) How can it protect itself from future claims of creditors of Stanrus? A: 1) Yes. The sale involves all fixtures and equipment, not in the ordinary course of trade and regular prosecution of business of Stanrus, Inc. (Sec. 2, Act No. 3952, as amended) 2) Crossroads should require from Stanrus, Inc., submission of a written waiver of the Bulk Sales Law by the creditors as shown by verified statements or to comply with the requirements of the Bulk Sales Law, that is, the seller must notify his creditors of the terms and conditions of the sale, and also, before receiving from the vendee any part of the purchase price, deliver to such vendee a written sworn statement of the names and addresses of all his creditors together with the amount of the indebtedness due to each. (Sec. 2 Act No. 3952, as amended) 3) Q: Company X, engaged in the business of manufacturing car parts and accessories, operates a factory with equipment machinery and tools for this purpose. The manufactured goods are sold

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wholesale to distributors and dealers throughout the Philippines. Company X was among the business entities adversely hit by the 1997 Asian business crisis. Its sales dropped with the decline in car sales and its operating costs escalated, while its creditor banks and other financial institutions tightened their loan portfolios. Company X was faced with the dismal choice of either suspending its operations or selling its business. It chose latter. Having struck a deal with Company Z, a more viable entity engaged in the same business, Company X sold its entire business to the former without much fanfare or any form of publicity. In fact, evidence exists that the transactions was furtively entered into avoid the prying eyes of Company Xs creditors. The creditor banks and other financial institutions sued Company X violation of the Bulk Sales Law. Decide. A: Company X violated the Bulk Sales Law when it sold its entire business to Company Z furtively to avoid the prying eyes of its creditors. Its manufactured goods are sold wholesale to distributors and dealers. The sale of all or substantially all of its stocks, not in the ordinary course of business, constitutes bulk sale. The transaction being a bulk sale, entering into such transaction without complying with the requirements of the Bulk Sales Law, Company X violated said Law. Alternative answer: The suit filed by the creditor banks and other financial institutions against Company X will not prosper. The transaction between Company X and Company Z is not bulk sales. The sale of his whole business by a manufacturer is not a bulk sale. Company X did not violate the Bulk Sales Law. INSOLVENCY LAW [1980, 1981, 1982, 1988, 1996, 1996, 1997, 1998, 2002] 1) Q: Is the issuance of an order, declaring a petitioner in a voluntary insolvency proceeding insolvent, mandatory upon the court? A: Assuming that the petition was in due form and substance and that the assets of the petitioner are less than his liabilities, the court must adjudicate the insolvency (Section 18, Insolvency Law). 2) Q: What are the effects of a judgment of insolvency in voluntary insolvency cases?

COMMERCIAL LAW

A: The adjudication or declaration of insolvency by the court, after hearing or default shall have the following effects: 1. Forbid the payment to the debtor of any debt due to him and the delivery to him of any property belonging to him; 2. Forbid the transfer of any property by him: and 3. Stay all civil proceedings against the insolvent but foreclosure may be allowed (Section 18 and 24, Insolvency Law). 3) Q: Union Corporation was declared insolvent by order of the court. All creditors of Union were asked to file their claims and attend a meeting to elect the assignee in insolvency. Merchant Finance Corporation (MFC) has a claim for P500,000, which is secured by a mortgage on a piece of land worth P1 million. MFC seeks your advice as counsel whether it should participate in the foregoing proceedings. What advice would you give MFC? A: I would advise MFC that, having a contractual mortgage (the value of the mortgaged property being well over the secured obligation), it should refrain from participating in the proceedings and instead pursue its preferential right to foreclose the mortgage. 4) Q: A: 1) Distinguish between suspension of payments and insolvency. 2) Distinguish between voluntary insolvency and involuntary insolvency. 1)
SUSPENSION OF PAYMENT The debtor has sufficient property but he foresees the impossibility of meeting his debts as they fall due. INSOLVENCY The debtor does not have sufficient property to pay his debts.

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The purpose is to suspend or delay the payment of debts. The amount of indebtedness is not affected. The number of creditors is immaterial.

San Beda COMMERCIAL

The purpose is to discharge the debtor from the payment of certain debts. Some of the creditors may receive less than their credits. In case of involuntary insolvency, 3 or more creditors are required.

2) VOLUNTARY Filed by the debtor Only one creditor is required No requirement for creditors INVOLUNTARY Filed by 3 or more creditors 3 or more creditors are required Requirements for creditors: a. Residents of the Phils.; b. their credits or demand must have accrued in the Phils.; c. must not have been a creditor by assignment within 30 days prior to the filing of the petition Venue: Place where he has resided 6 mos. prior to Place where the debtor has residence the filing of petition No need for the commission of any of the Debtor must have committed any of the acts of insolvency acts of insolvency Amount of indebtedness must exceed Amount of indebtedness must not be less P1,000 than P1,000 Adjudication of insolvency: Debtor deemed insolvent through an order Debtor considered insolvent upon the of adjudication after filing of the petition issuance by the court of an order after due hearing declaring him insolvent Bond is not required Bond is required Procedure: 1. Petition by debtor 1. Petition by creditors 2. Court order declaring him insolvent 2. Answer by debtor 3. Publication and service to creditors of 3. Trial the court order 4. Court order declaring debtor 4. Creditors meeting for election of an insolvent assignee 5. Publication and service to 5. Conveyance of the assets to the creditors of the court order assignee 6. Creditors meeting for election of 6. Liquidation and payment of creditors an assignee 7. Composition 7. Conveyance of the assets to the 8. Discharge of the insolvent debtor (not assignee applicable to corporations) 8. Liquidation and payment of 9. Objections to discharge, if any creditors 9. Composition 10. Discharge of the insolvent (not applicable to corporations) 11. Objections to discharge, if any

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5) Q: On June 16, 1995, Vicente obtained a writ of preliminary attachment against Carlito. The levy on Carlitos property occurred on June 25, 1995. On July 29, 1995, another creditor filed a petition for involuntary insolvency against Carlito. The insolvency court gave due course to the petition. In the meantime, the case filed by Vicente proceeded, and resulted in a judgment award in favor of Vicente.

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May the judgment obtained by Vicente be enforced independently of the insolvency proceedings? Explain. A: Yes. The judgment obtained by Vicente can be enforced independently of the insolvency proceedings. Under Section 32 of the Insolvency Law, the assignment to the assignee of all the real and personal property, estate and effects of the debtor made by the clerk court shall vacate and set aside any judgment entered in any action commenced within 30 days immediately prior to the commencement of insolvency proceedings. In this case, however, the action filed by Vicente against Carlito was commenced by Vicente not later than June 16, 1995 (the facts in this point are not clear) when Vicente obtained a writ of preliminary attachment against Carlito or more than 30 days before the petition for involuntary insolvency was filed against Carlito by his other creditor. (i.e., on July 29, 1995). (Radiola-Toshiba Phil., Inc. vs. IAC, 199 SCRA 373) 6) Q: An insolvent debtor, after lawful discharge following an adjudication of insolvency, is released from, generally, all debts, claims, liabilities and demands which are or have been proved against his estate. Give five (5) obligations of the insolvent debtor that survive. A: The five (5) obligations of the insolvent debtor that survive are as follows: 1) Taxes and assessments due the government, national or local; 2) Obligations arising from embezzlement or fraud; 3) Obligations of any person liable with the insolvent debtor for the same debt, either as a solidary co-debtor, surety, guarantor, partner, indorser or otherwise; 4) Alimony or claim for support; and 5) Debts not provable against the estate (such as after incurred obligations) of, or not included in the schedule submitted by the insolvent debtor.

COMMERCIAL LAW

7) Q: As of June 1, 2002, Edzo Systems Corporation (Edzo) was indebted to the following creditors: 1) Ace Equipment Supplies - for various personal computers and access6ries sold to Edzo on credit amounting to P300,000.00. 2) Handyman Garage - for mechanical repairs (parts and service) performed on Edzos company car amounting to P10,000.00. 3) Joselyn Reyes former employee of Edzo - sued Edzo for unlawful termination of employment and was able to obtain a final judgment against Edzo for P100,000.00. 4) Bureau of Internal Revenue - for unpaid value-added taxes' amounting to P30,000.00. 5) Integrity Bank - which granted Edzo a loan in 2001 in the amount of P500,000.00. The loan was not secured by any asset of Edzo, but it was guaranteed unconditionally and solidarily by Edzo's President and controlling stockholder, Eduardo Z. Ong, as accommodation surety. The loan owed to Integrity Bank fell due on June 15, 2002. Despite, pleas for extension of payment by Edzo, the bank demanded immediate payment. Because the bank threatened to proceed against the surety, Eduardo Z. Ong, Edzo decided to pay up all of its obligations to Integrity Bank. On June 20, 2002, Edzo paid to Integrity Bank the full principal amount of P500,000.00, plus accrued interests amounting to P55,000.00. As a result, Edzo had hardly any cash left for operations and decided to close its business. After paying the unpaid salaries of its employees, Edzo filed a petition for insolvency on July 1, 2002. In the insolvency proceedings in court, the assignee in insolvency sought to invalidate the payment made by Edzo to Integrity Bank for being a fraudulent transfer because it was made within 30 days before the filing of the insolvency petition. In defense, Integrity Bank asserted that the payment to it was for a legitimate debt that was not covered by the prohibition because it was "a valuable pecuniary consideration made in good faith," thus falling within the exception specified in the Insolvency Law. a) As judge in the pending insolvency case, how would you decide the respective contentions of the assignee in insolvency and of Integrity Bank? Explain. b) Based on the same facts as stated in the preceding question, how would you, as judge in the insolvency proceedings, rank the respective credits or claims of the five (5) creditors mentioned above in terms of preference or priority against each other? A: a) The contention of the assignee in Insolvency is correct. The payment made by Edzo to Integrity Bank was a fraudulent preference or payment, being made within thirty (30) days before the filing of the insolvency petition.

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San Beda COMMERCIAL

b) The order of preference shall be: 1) The claim of Handyman Garage for P10,000.00 has a specific lien on the car repaired. 2) The remaining four (4) claims have preference or priority against each other in the following order: a) No. 4 - claim of the BIR for unpaid value-added taxes; b) No. 3 - claim of Joselyn Reyes for unlawful termination; c) No. 1 - claim of Ace Equipment Supplies as an unpaid seller; and d) No. 5 - claim of Integrity Bank. TRUST RECEIPTS LAW [1980, 1982, 1997, 2003] Rule: A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the letter of Credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt. (Vintola vs. Insular Bank) 1) Q: Mr. Noble, as the President of ABC Trading, Inc. executed a trust receipt in favor of BPI Bank to secure the importation by his company of certain goods. After release and sale of the imported goods, the proceeds from the sale were not turned over to BPI. Would BPI be justified in filing a case for estafa against Noble? A: BPI would be justified in filing a case for estafa under PD 115 against Noble. The fact that the trust receipt issued in favor of a bank, instead of a seller, to secure the importation of the goods did not preclude the application of the Trust Receipt Law. Under the law,any officer or employee of a corporation responsible for the violation of a trust receipt is subject to the penal liability thereunder (Sia v. People, 166 SCRA 655) 2) Q: PB & Co., Inc., a manufacturer of steel and steel products, imported certain raw materials for use by it in the manufacture of its products. The importation was effected through a trust receipt arrangement with AB Banking Corporation. When it applied for the issuance by AB Banking Corporation of a letter of credit, PB & Co., Inc. did not make any representation to the bank that it would be selling what it had imported. It failed to pay the bank. When demand was made upon it to account for the importation, to return the articles, or to turn over the proceeds of the sale thereof to the bank, PB & Co., Inc. also failed. The bank sued PB & Co.s President, who was the signatory to the trust receipt for estafa. The president put up the defense that: 1) he could not be made liable because there was no deceit resulting in the violation of the trust receipt. He also submitted that ; 2) there was no violation of the trust receipt because the raw materials were not sold but used by the corporation in the manufacture of its products. Would those defenses be sustainable? Why? A: The first defense is not sustainable. In a prosecution for violation of the Trust Receipts law (P.D. No. 115), the absence of deceit is not legally consequential considering that the offense is punished as malum prohibitum regardless of the existence of intent or malice. PD 115 is an exercise of police power enacted to punish the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of the bank. The second contention is likewise not sustainable. In Allied Bank vs. Ordoez, it was recognized that the Trust Receipts Law applies; 1) whether the goods subject of the trust receipt are destined for sale or not; 2) whether the goods are for use in manufacture or not; or 3) even if the goods would be used to repair and maintain equipment used in business. 3) Q: A buys goods from a foreign supplier using his credit line with a bank to pay for the goods. Upon arrival of the goods at the pier, the bank requires A to sign a trust receipt before A is allowed to take delivery of the goods. The trust receipt contains the usual language. A disposes of the goods and receives payment but does not pay the bank. The bank files a criminal action against A for violation of the Trust Receipts Law. A asserts that the Trust Receipt is only to secure his debt and

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that a criminal action cannot lie against him because that would be violative of his constitutional right against imprisonment for non payment of a debt. Is he correct? A: No. Violation of a trust receipt is criminal as it is punished as estafa under Article 315 of the Revised Penal Code. There is a public policy involved which is to assure the entruster with the reimbursement of the amount advanced or the balance thereof for the goods subject of the trust receipt. The execution of the trust receipt or the use thereof promotes the smooth flow of commerce as it helps the importer or buyer of the goods covered thereby. TRUTH IN LENDING ACT [1986, 2000] 1) Q: Embassy Appliances sells home theater components that are designed and customized as entertainment centers for consumers within the medium-to-high price bracket. Most, if not all, of these packages are sold on installment basis, usually by means of credit cards allowing a maximum of 36 equal monthly payments. Preferred credit cards of this type are those issued by banks, which regularly hold mall-wide sales blitzes participated in by appliance retailers like Embassy Appliances. You are a buyer of a home theater center at Embassy Appliances. The salesclerk who is attending to you simply swipes your credit card on the electronic approval machine (which momentarily prints out your charge slip since you have unlimited credit) tears the slip from the machine, hands the same over to you for your signature, and without more, proceeds to arrange for the delivery and installation of your new home theater system. You know you will receive a statement on your credit card purchases from the bank containing an option to pay only a minimum amount, which is usually 1/36 of the total price you were charged for your purchase. Did Embassy Appliances comply with the provisions of the Truth in Lending Act (RA 3765)? A: There is no need for Embassy Appliances to comply with the Truth in Lending Act. The transaction is not on sale on installment basis. Embassy Appliances is a seller on cash basis. It is the credit card company which allows the buyer to enjoy the privilege of paying the price on installment basis. 2) Q: Dana Gianina purchase on a 36 month installment basis the latest model of the Nissan Sentra Sedan car from the Jobel Cars, Inc. In addition to the advertised selling price, the latter imposed finance charges consisting of interests, fees and service charges. It did not, however, submit to Dana a written statement setting forth therein the information required by the Truth in Lending Act (RA 3765). Nevertheless, the conditional deed of sale which the parties executed mentioned that the total amount indicated therein included such finance charges. a. Has there been substantial compliance of the aforesaid act? A: There was no substantial compliance with the Truth in Lending Act. The law provides that the creditor must make full disclosure of the credit cost. The statement that the total amount due includes the principal and the financial charges, without specifying the amounts due on each portion thereof would be insufficient and unacceptable. 3) Q: If your answer to the foregoing question is in the negative, what is the effect of the violation on the contract. A: A violation of the Truth in Lending Act will not adversely affect the validity of the contract itself. 4) Q: In the event of a violation of the Act, what remedies may be availed of by Dana?

COMMERCIAL LAW

Red Notes in Commercial Law

A: The violation of the Truth in Lending Act would allow Dana to refuse payment of financial charges or if already paid, to recover the same. Dana may also institute criminal charges against the creditor.