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COMMERCIAL LAW
Business Organizations; Piercing the Corporate Veil

Question: Gesolgon and Santos were hired as Customer Service

Representatives of CyberOne AU, an Australian company. A year later, they
were asked by the Chief Executive Officer (CEO) to become dummy directors
and/or incorporators of CyberOne PH to which they agreed. Sometime later,
they were constrained to take an indefinite furlough. Hence, they filed a case
against CyberOne PH and CyberOne AU for illegal dismissal. CyberOne PH
denied that any employer-employee relationship existed, insisting that
Gesolgon and Santos were incorporators or directors and not regular
employees of CyberOne PH. They claimed that Gesolgon and Santos were
employees of CyberOne AU and that the NLRC had no jurisdiction over
CyberOne AU because it is a foreign corporation not doing business in the
Philippines. Can the doctrine of piercing the corporate veil be applied so as to
consider CyberOne AU as doing business in the Philippines through its local
subsidiary CyberOne PH?

Answer: The application of the doctrine of piercing the corporate veil is unwarranted.
The doctrine of piercing the corporate veil applies only in three basic instances,
namely: (a) when the separate distinct corporate personality defeats public
convenience, as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; (b) in fraud cases, or when the corporate entity is used to justify a
wrong, protect a fraud, or defend a crime; or (c) is used in alter ego cases, i.e., where a
corporation is essentially a farce, since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. First, no evidence was presented to prove that CyberOne PH was
organized for the purpose of defeating public convenience or evading an existing
obligation. Second, petitioners failed to allege any fraudulent acts committed by
CyberOne PH in order to justify a wrong, protect a fraud, or defend a crime. Lastly, the
mere fact that CyberOne PH's major stockholders are CyberOne AU and respondent
Mikrut does not prove that CyberOne PH was organized and controlled and its affairs
conducted in a manner that made it merely an instrumentality, agency, conduit or
adjunct of CyberOne AU. In order to disregard the separate corporate personality of a
corporation, the wrongdoing must be clearly and convincingly established. Since the
doctrine of piercing the corporate veil cannot be applied, this means that CyberOne AU
cannot be considered as doing business in the Philippines through its local subsidiary
CyberOne PH. (Gesolgon v. CyberOne PH., Inc., G.R. No. 210741, October 14,
2020, Hernando, J.)

Business Organizations; Decrease of Capital Stock

In August 1998, Sinophil entered into a Share Swap Agreement (Swap

Agreement) with Metroplex and Paxell. Under the Swap Agreement, Metroplex
and Paxell would transfer 40% of their shareholdings in Legend International
Resorts Limited (Legend) for a combined 35.5% stake in Sinophil.
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Sinophil and Belle executed a Memorandum of Agreement (Unwinding

Agreement) with Metroplex and Paxell rescinding the 1998 Swap Agreement.
After the execution of their Unwinding Agreement, Metroplex and Paxell were
unable to return 1.87 billion of the Sinophil shares while another two billion
Sinophil shares remained pledged by Metroplex in favor of International
Exchange Bank and Asian Bank.

The shareholders of Sinophil voted for the reduction of Sinophil's authorized

capital stock. On March 28, 2006, the CRMD and the CFD approved the first
amendment of the Articles of Incorporation of Sinophil, reducing its
authorized capital stock by 1.87 billion shares. The following day, the
approval of the reduction of Sinophil's authorized capital stock was disclosed
to the Philippine Stock Exchange, Inc. (PSE). The shareholders of Sinophil
again approved the proposal of the Board of Directors to reduce its
authorized capital stock by another one billion shares.

The CRMD and the CFD approved the second amendment of the Articles of
Incorporation of Sinophil which further reduced its authorized capital stock
by one billion shares. On June 30, 2008, the approval of the reduction of
Sinophil's authorized capital stock was likewise disclosed to the PSE.

Petitioners Yaw Chee Cheow (Yaw), Metroplex and Paxell filed a Petition for
Review Ad Cautelam Ex Abundanti before the SEC assailing the approval by
the CRMD and the CFD of the amendments by Sinophil of its Articles of
Incorporation.

The SEC found that the decrease in capital stock complied with the
requirements imposed by the Corporation Code, particularly Section 38. It
held that the equal or unequal reduction of a corporation's capital stock is a
matter solely between the stockholders and cannot be enjoined either by the
courts or the creditors. Moreover, the SEC found no basis to grant the prayer
for the issuance of a cease-and-desist order. Petitioners failed to raise valid
grounds for its issuance.

The Commission held that a cease-and-desist order could not be ultimately

issued because the grave and irreparable danger to the investing public that
petitioners fear is not present in the case. On appeal, the CA upheld the
findings of the SEC in toto.

1. Is the respondent’s decrease in capital stock legal and the SEC’s approval
thereof is legal?

2. Does the SEC have a ministerial duty to approve the decrease of a

corporation’s authorized capital stock?

Answer:

1. Yes. The decrease in respondent Sinophil's capital stock was legal and that the
public respondent SEC's approval thereof was proper.
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The list of requirements under Section 38 is altogether different from the list of legal
requirements presented by petitioners. In short, petitioners plainly did not comply with
the law. The Court agreed with the appellate court when it held that there is no validity
nor legal basis to the allegation that prior approval of all the stockholders is required
for the reduction in capital stock.

Here, a judicious perusal of the records of the case reveals that Sinophil submitted to
the SEC the following documents in support of its application for the decrease of its
authorized capital stock and in full compliance with the requirements laid down under
Section 38:

1. Certificate of Decrease of Capital Stock;

2. Director's Certificate;

3. Amended Articles of Incorporation;

4. Audited Financial Statements as of the last fiscal year stamped and received by the
Bureau of Internal Revenue and the SEC (as of December 31, 2004 and 2007);

5. Long Form Audit Report of the Audited Financial Statements (as of December 31,
2004 and 2007);

6. List of Creditors (Schedule of Liabilities as of December 31, 2004 and 2007), as

certified by the Accountant;

7. Written consent of Creditors;

8. Notice of Decrease of Capital; and

9. Affidavits of Publication of the Notice of Decrease of Capital.

Three stockholders' meetings were likewise held on February 18, 2002, June 3, 2005
and June 21, 2007 where the stockholders voted for the reduction of the corporation's
authorized capital stock.

2. Yes. SEC only has the ministerial duty to approve the decrease of a
corporation's authorized capital stock.

After a corporation faithfully complies with the requirements laid down in Section 38,
the SEC has nothing more to do other than approve the same.

Petitioners' allegation that it is the SEC that should determine the parties' rights under
the contracts executed, particularly the Swap Agreement, the Unwinding Agreement,
and the general proxy, has no basis. To stress, the SEC's only function here was
to determine the corporation's compliance with the formal requirements
under Section 38 of Corporation Code. (Metroplex Berhad v. Sinophil Corp.,
G.R. No. 208281, June 28, 2021, Hernando, J.)

Business Organizations; Doctrine of Apparent Authority

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Question: AA Company and BB Company entered into a Toll Agreement. Mr.

CC, AA’s Finance Manager, made verbal amendments as to the toll fees stated
in the agreement. AA Company claims that said amendments are not binding
on AA Company as Mr. CC has no authority to amend the original Toll
Agreement from AA Company’s board of directors. Are the acts of Mr. CC
binding?

Answer: Yes. As applied to corporations, the doctrine of apparent authority provides

that "a corporation is estopped from denying the officer's authority if it knowingly
permits such officer to act within the scope of an apparent authority, and it holds him
out to the public as possessing the power to do those acts." When a corporation
intentionally or negligently clothes its officer with apparent authority to act in its
behalf, it is estopped from denying its officer's apparent authority as to innocent third
parties who dealt with this officer in good faith. (Agro Food and Processing Corp.
v. Vitarich Corp., G.R. No. 217454, January 11, 2021, Hernando, J.)

Business Organizations; Doctrine of Estoppel; Foreign Corporations without

Legal Capacity to Sue in Philippine Courts

Question: May a domestic corporation invoke the foreign corporation’s lack of

juridical capacity to sue after entering into a contract with it?

Answer: No. The doctrine of estoppel states that the other contracting party may no
longer challenge the foreign corporation's personality after acknowledging the same by
entering into a contract with it. This principle is applied in order to "prevent a person
(or another corporation) contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes, chiefly in cases where such person
has received the benefits of the contract." By virtue of the doctrine of estoppel, a party
cannot take undue advantage by challenging the foreign corporation's personality or
legal capacity to sue when the former already acknowledged the same by entering into
a contract with the latter and derived benefits therefrom. (Magna Ready Mix
Concrete Corp. v. Andersen Bjornstad Kane Jacobs, Inc., G.R. No. 196158,
January 20, 2021, Hernando, J.)

Banking Laws; Doctrine of Apparent Authority

Question: What is the concept of the doctrine of apparent authority, with

special reference to banks?

Answer: The doctrine of "apparent authority", with special reference to banks, has
long been recognized in this jurisdiction. Apparent authority is derived not merely
from practice. Its existence may be ascertained through 1) the general manner in which
the corporation holds out an officer or agent as having the power to act, or in other
words, the apparent authority to act in general, with which it clothes him; or 2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, within or beyond the scope of his ordinary powers. (Allied Banking Corp. v.
Spouses Macam, G.R. No. 200635, February 1, 2021, Hernando, J.)

Banking Laws; Philippine Deposit Insurance Corporation; Authorization

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Question: Banco Filipino Savings and Mortgage Bank was placed under
receivership through MB Resolution No. 372.A after the BSP determined Banco
Filipino’s inability to continue operating and prohibited it from doing
business on March 17, 2011. Banco Filipino then assails the decision through
petition for certiorari before the RTC. The RTC granted the petition but on
appeal it was reversed on the ground of lack of jurisdiction by the RTC.
Without securing the authorization from PDIC to file an appeal to the SC,
Banco Filipino filed a petition for review on certiorari before the SC. Is Banco
Filipino required to secure authorization from PDIC before it can sue BSP?

Answer: Yes. A bank under receivership can only sue or be sued through its
receiver, the PDIC. Thus, a petition filed on behalf of a bank under
receivership that is neither filed through nor authorized by the PDIC must be
dismissed for want of jurisdiction. When a bank is ordered closed and placed
under the receivership of PDIC by the Monetary Board, PDIC is mandated to proceed
with the takeover and liquidation of the closed bank. PDIC shall immediately gather
and take charge of all the assets and liabilities of the bank, administer the same for the
benefit of its creditors, and exercise the general powers of a receiver under the Revised
Rules of Court. In its capacity as the receiver of the closed bank, the PDIC is authorized
to perform several functions in its behalf, including bringing suits to enforce liabilities
to or recoveries of the closed banks, hiring or retaining private counsels as may be
necessary, and exercising such other powers as are inherent and necessary for the
effective discharge of the duties of the corporation as a receiver. In contrast, the
powers and functions of the directors, officers, and stockholders of a closed
bank under receivership are deemed suspended upon takeover by the PDIC.
(Banco Filipino v. BSP, G.R. No. 200642, April 26, 2021, Hernando, J.)

Insurance Law; Non-Disclosure of Co-Insurance

Question: ABC Corporation is a domestic corporation engaged in the

manufacture of various plastic products. Said corporation took out Fire Policy
Insurance from X Insurance Company in the amount of P10,000,000.00. The
properties insured were the pieces of machinery and equipment, tools, spare
parts and accessories stored at their warehouse. In addition to this, ABC
secured another fire insurance policy from Y Insurance Corporation for
P7,000,000.00 covering the same pieces of machinery and equipment.
Subsequently, ABC also obtained a Fire Insurance Policy from Z Guarantee
Corp. covering the same machinery and equipment. Sometime in December, a
fire broke out in the compound where ABC’s warehouse is located causing
damage and loss on ABC’s properties covered by the fire insurance policies.
Consequently, ABC filed insurance claims with the insurance companies but it
was denied on the ground of ABC’s violation of Policy No. 3 or the
non-disclosure of co-insurance. Can the violation of non-disclosure of
co-insurance result in forfeiture of all the benefits under the insurance
policies?

Answer: Yes, the insurers can validly deny the insurance claim of the petitioner for
violation of Policy Condition No. 3. It is a well-settled rule that where the insurance
policy specifies as a condition the disclosure of existing co­ insurers, non-disclosure
thereof is a violation that entitles the insurer to avoid the policy. This condition is
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common in fire insurance policies and is known as the "other insurance clause". The
rationale behind the incorporation of "other insurance" clause in fire policies is to
prevent over-insurance and thus avert the perpetration of fraud. When a property
owner obtains insurance policies from two or more insurers in a total amount that
exceeds the property's value, the insured may have an inducement to destroy the
property for the purpose of collecting the insurance. The public as well as the insurer
is interested in preventing a situation in which a fire would be profitable to the insured.
(Multi-Ware Manufacturing Corporation v. Cibeles Insurance Corporation, G.R.
No. 230528, February 1, 2021, Hernando, J.)

Insurance Law; Prescription

Question: When should a prescription run in an insurance claim?

Answer: To determine the prescription of the subject insurance claim, Article 63 of

the Insurance Code as well as Condition No. 27 of the two fire insurance policies
should be considered.

Section 63 of the Insurance Code states that:

Sec. 63. A condition, stipulation or agreement in any policy of insurance, limiting the
time for commencing an action thereunder to a period of less than one year from the
time when the cause of action accrues, is void.

On the other hand, Condition No. 27 of the parties' fire insurance policies provides:

27. Action or suit clause - If a claim be made and rejected and an action or suit be not
commenced either in the Insurance Commission or any court of competent
jurisdiction within twelve (12) months from receipt of notice of such rejection, or in
case of arbitration taking place as provided herein, within twelve (12) months after due
notice of the award made by the arbitrator or arbitrators or umpire, then the claim
shall for all purposes be deemed to have been abandoned and shall not thereafter be
recoverable hereunder.

In the case of Sun Insurance Office, Ltd. v. Court of Appeals which involved an

insurance policy that contained the same condition of bringing a suit within a period of
twelve months, it was interpreted therein that the 12-month period stated in the
insurance policy referred to the period of one year, with a view that the said insurance
policy was stipulated pursuant to Section 63 of the Insurance Code (Alpha Plus
International Enterprises Corp. v. Philippine Charter Insurance Corp. G.R. No.
203756, February 10, 2021, Hernando, J.)

Transportation Law; Breach of Contract of Carriage

Question: Respondent Dr. Piongco was invited by UN-WHO as a keynote

speaker in Kazakhstan for 2 days. He secured his visa and ticket for his
flight, which will be from Manila to Singapore, then from Singapore he will
take 2 connecting flights to Kazakhstan.
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Upon his arrival in NAIA, he checked in his luggage which contains a copy of
his speech, materials, and other personal items. He arrived in Kazakhstan
without anyone from KLM, Lufthansa or Turkish Airlines assisting him. His
luggage is nowhere to be found.

Despite having successfully delivered the speech, he did not have any proper
attire, visual aid, or any material. He wrote to KLM, Singapore Airlines and
Lufthansa months after, demanding compensation for the lost luggage.

RTC awarded moral and exemplary damages, holding KLM solely liable for
wrongfully transferring his luggage to LH10381 instead of LH3346. The CA
agreed with RTC since there has been a breach of contract of carriage, but had
modified damages for being excessive.

Was there gross negligence, bad faith, and willful misconduct in relation to
the loss of Dr. Piongco’s suitcase so that the latter can be entitled to award of
damages?

Answer: Yes. The nature of the business which involves the transportation of persons
or goods makes a contract of carriage imbued with public interest. It is therefore
bound to observe not just the due diligence of a good father of a family but that of
"extraordinary" care in the vigilance over the goods as required under Article 1733 of
the Civil Code.

Both the trial court and the appellate court already found KLM to have acted in bad
faith in dealing with Dr. Piongco. Bad faith is a factual question which is beyond the
purview of this petition under Rule 45. Thus, the Court is not obliged to go over the
evidence once more and recalibrate them for purposes of this appeal. (KLM Royal
Dutch Airlines v. Dr. Jose M. Tiongco, G.R. No. 212136, October 4, 2021,
Hernando, J.)

Intellectual Property Code; Registration of Marks

Question: On May 29, 2007, ZZZ Electronics Co., Inc. (ZZZ Electronics) filed a
trademark application for registration of the "ZZZ" mark under Class 35 of
the Nice Classification for use in the business of manufacturing, assembling,
importing, and selling electronic equipment or apparatus. Taiwan ZZZ
Corporation, Ltd. (Taiwan ZZZ), who has a similar brand name, did not oppose
the application. Certificate of Registration No. 4-2007-005421 was then issued
to ZZZ electronics.

On August 16, 2007, ZZZ electronics filed a Trademark Application for the
mark "www.zzz.ph" under Class 35 for use in the business of manufacturing,
assembling, importing, and selling electronic equipment or apparatus.

Taiwan ZZZ opposed the said application on the following grounds that: 1) the
application violates Section 123.1(d) of the IP Code which proscribes the
registration of a mark identical with a registered mark belonging to a
different proprietor with an earlier filing or priority date; 2) the registration
of "www.zzz.ph" will cause grave and irreparable injury to Taiwan ZZZ’s
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goodwill, reputation, and business using the ZZZ brand; 3) that the trademark
application violates the rule in the Implementing Rules and Regulations (IRR)
of the IP Code requiring a specific description of goods, business or services;
and 4) that "www.zzz.ph" does not function as a mark. 

Does ZZZ electronics have the right to register and use the mark
"www.zzz.ph"?

Answer: Yes, ZZZ electronics has the right to register and use the mark “www.zzz.ph”

As a rule, a certificate of registration of a mark is prima facie evidence of the validity of

the registration, the registrant's ownership of the mark, and of the registrant's
exclusive right to use the same in connection with the goods or services and those that
are related thereto specified in the certificate. The said presumption may be challenged
if it can be shown that the certificate of registration is not reflective of ownership of
the holder, such as when: (1) the first registrant has acquired ownership of the mark
through registration but subsequently lost the same due to non-use or abandonment
(e.g., failure to file the Declaration of Actual Use); (2) the registration was done in bad
faith; (3) the mark itself becomes generic; (4) the mark was registered contrary to the
IP Code (e.g., when a generic mark was successfully registered for some reason); or (5)
the registered mark is being used by, or with the permission of, the registrant so as to
misrepresent the source of the goods or services on or in connection with which the
mark is used.

In this case, ZZZ electronics, having been issued a Certificate of Registration, is the
registered owner of the "ZZZ" mark under Class 35, specifically for "the business of
manufacturing, importing, assembling, or selling electronic equipment or apparatus".
This certificate of registration vests ZZZ electronics the exclusive right to use the "ZZZ"
mark in relation to the services covered by the registration. Unless and until the said
registration of ZZZ electronics is nullified or cancelled through the proper proceeding,
the rights emanating from the said registration should be respected. (Kolin
Electronics Co., Inc. v. Taiwan Kolin Corp. Ltd., G.R. Nos. 221347 & 221360-61,
G.R. No. 221347, December 1, 2021, Hernando, J.)

Intellectual Property Code; Effect of Compromise Agreement in Infringement

Cases

Question: San Paulo Alpargatas S.A. (SPASA) is the owner and manufacturer of
the footwear brand “Havaianas” and distributed in the Philippines.
Meanwhile, Kentex Manufacturing (Kentex) is the producer of footwear with a
brand name of “Havana”. SPASA filed a complaint against Kentex with the IPO
for trademark infringement. After trial, the IPO ruled against Kentex, on
appeal with the CA it was reversed. While the case was pending with the SC,
both SPASA and Kentex entered into a compromise agreement. Thus, SPASA
prayed that the court take cognizance of the compromise between the party.
Rule on the case.

Answer: In view of the execution of the Settlement Agreement between the opposing
parties and the Undertaking of Ong King Guan, along with Mary Grace Ching and Beato
Ang, the instant petition was rendered moot and academic. Since the parties entered
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into the said Settlement Agreement, the effect is to put the litigation between them to
an end, Notably, SPASA itself, through its Manifestation dated September 20, 2019,
prayed that the Court take notice of the existence of the Settlement Agreement and
posited that the CA's assailed February 10, 2012 Decision became moot and academic
pursuant thereto. In fine, "where the issues have become moot and academic, there
ceases to be any justiciable controversy and where there is no substantial relief to
which petitioner will be entitled, courts will decline jurisdiction. The Court, thus,
abstains from expressing its opinion in a case, such as this, where no substantial legal
relief is necessary." Stated differently, the Court will no longer render a ruling
notwithstanding the relevance of the issues raised. (San Paulo Alpargatas S.A. v.
Kentex Manufacturing Corp., G.R. No. 202900, February 17, 2021, Hernando,
J.)

Unfair Competition

Question: Elidad Kho (Elidad) and Violeta Kho (Violeta) were charged with
Unfair Competition by Summerville General Merchandising & Co., Inc.,
(Summerville) before the City Prosecutor's Office of Manila for unfair
competition because the former sold or disposed to the public facial cream
products using tools, implements and equipment in its production, labeling
and distribution, which give and depict the general appearance of the Chin
Chun Su facial cream products and likely influence the purchasers to believe
that the same are those of the said Summerville. Is there a violation of unfair
competition?

Answer: Yes. The essential elements of an action for unfair competition are:
(1) confusing similarity in the general appearance of the goods, and (2) intent
to deceive the public and defraud a competitor. The confusing similarity may or
may not result from similarity in the marks, but may result from other external factors
in the packaging or presentation of the goods. Likelihood of confusion of goods or
business is a relative concept, to be determined only according to peculiar
circumstances of each case. The element of intent to deceive and to defraud may be
inferred from the similarity of the appearance of the goods as offered for sale to the
public.

Here, petitioners' product which is a medicated facial cream sold to the public is
contained in the same pink oval-shaped container which had the mark "Chin Chun Su,"
as that of respondent. While petitioners indicated in their product the manufacturer's
name, the same does not change the fact that it is confusingly similar to respondent's
product in the eyes of the public. (Kho v. Summerville General Merchandising &
Co., Inc., G.R No. 213400, August 4, 2021, Hernando, J.)

Corporate Rehabilitation

Question: The Croods Co is famous for its variety of products that went viral
to the market. But when a new president took over their country, it hit a
financial struggle due to the changes in the market. Consequently, it
mortgaged its properties to LenLen Financing as a security for a loan.
Eventually, The Croods Co cannot pay its obligations anymore and applied for
a petition for corporate rehabilitation with the RTC, which was granted. Saruh,
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who was one of the creditors, had a heated disagreement with the other
creditor that led to a physical fight. Consequently, he was not included
anymore in the meetings to settle the obligations of The Croods Co. As a
consequence, Saruh filed a Motion for the Rehabilitation Receiver to Take
Possession, Custody and Control of the Mortgage Trust Indenture Properties
with the RTC. While the Motion was pending, the rehabilitation of The Croods
Co was a success and the rehabilitation proceedings were terminated. Should
Saruh withdraw the said Motion?

Answer: Yes. In view of the successful rehabilitation of The Croods Co and the
termination of the rehabilitation proceedings, as well as the discharge of the
rehabilitation receiver from his duties, the motion of Sarah is now moot and academic.
A moot and academic case is one that ceases to present a justiciable controversy by
virtue of supervening events, so that a declaration thereon would be of no practical
value. As a rule, courts decline jurisdiction over such a case, or dismiss it on ground of
mootness. (Deutsche Bank AG London v. Kormasinc, Inc., G.R. Nos. 201700 &
201777, April 18, 2022, Hernando, J.)

Liquidation

Question: Luffy is an Insurance Company who was placed under liquidation

by the Insurance Commission. When Nami and Shanks heard the news, they
remembered that they are clients of Luffy who took out a fire insurance policy
over their properties. Luffy then filed a complaint for interpleader with the
RTC to determine who between Nami and Shanks and the Bureau of Internal
Revenue who has superior rights over their properties. Luffy alleged that
Nami and Shanks had attached the condominium units to cover their claim for
the balance of their insurance proceeds after they had obtained a judgment in
their favor, while the BIR issued a warrant of distraint and/or levy on the real
and personal properties of Luffy, and a notice of tax lien covering the said
properties, to answer for Luffy's tax liabilities. Who has the superior rights
over the property?

Answer: Nami and Luffy have superior rights over the property. It is settled that
execution is enforced by the fact of levy and sale. As a result of such execution, title
over the subject property vests immediately in the purchaser, subject only to the right
to redeem the property within the period provided by law. While the right acquired by
the purchaser at an execution sale is inchoate, and does not become absolute until
after the expiration of the redemption period without the right of redemption having
been exercised, the purchaser's right is still entitled to protection, and must be
respected until extinguished by redemption. If there is a failure to redeem the subject
property within the period allowed by law, the redemptioner is divested of its rights
over the property. Nami and Shanks’ claim is a special preferred credit under Article
2242 (7) of the Civil Code, and thus superior to BIR's tax claim which is only an
ordinary preferred credit. (Bureau of Internal Revenue v. Tico Insurance Co., Inc.,
G.R. No. 204226, April 18, 2022, Hernando, J.)

Liability of drawee-bank
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Question: Who is liable in case of unauthorized payments to a person other than the
payee or his order?

Answer: In the normal course of things, however, case law provides that in
cases of unauthorized payments to a person other than the payee or his
order, the drawee bank is liable for the amount of the checks; in turn, the
drawee bank may seek reimbursement from the collecting bank. The case
of BDO Unibank, Inc. v. Lao (BDO Unibank) discusses the nature of liability of the two
banks in cases of unauthorized payments of checks:

The liability of the drawee bank is based on its contract with the drawer and its duty to
charge to the latter's accounts only those payables authorized by him. A drawee bank
is under strict liability to pay the check only to the payee or to the payee's order. When
the drawee bank pays a person other than the payee named in the check, it does not
comply with the terms of the check and violates its duty to charge the drawer's account
only for properly payable items.

On the other hand, the liability of the collecting bank is anchored on its guarantees as
the last endorser of the check. Under Section 66 of the Negotiable Instruments Law, an
endorser 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; and
that the instrument is at the time of his endorsement valid and subsisting."

It has been repeatedly held that in check transactions, the collecting bank 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. If any of the warranties made by the
collecting bank turns out to be false, then the drawee bank may recover from it up to
the amount of the check.

As stated, the drawee bank becomes liable pursuant to its breach of

obligation as regards its depositor (drawer) in paying the amount of the check
to a person other than the payee or his order. The drawee bank is under strict
liability to pay the check only to the payee or his order.

On the other hand, the collecting bank assumes the liabilities of a general
indorser when it presents a check to the drawee bank for payment. Thus, if
any of these warranties turn out to be false, the collecting bank becomes
liable to the drawee bank for any payments made on the check by virtue of the
false warranties.

Pursuant to the rule, the drawee bank should reimburse the amount to the drawer;
subsequently, the drawee bank may seek reimbursement from the collecting bank.
(The Real Bank (A Thrift Bank), Inc. v. Maningas, G.R. No. 211837, March 16,
2022, Hernando, J.)