BARQ&A

IN
COMMERCIAL LAW

2023 Edition

DEAN NILO T. DIVINA

 Philippines Copyright 2023

By

DEAN NILO T. DIVINA

ALL RIGHTS RESERVED

No portion of this handbook may be copied or reproduced in

book, pamphlets, outlines or notes, whether printed, typewrit­
ten, mimeographed, machine copied, or in any other form, for
sale or distribution, without the written permission/consent of
the Author.

Any copy of this book without bearing the corresponding

Serial Number and original signature of the Author on this
page, either proceeds from an illegitimate source or is in
possession of one who has no authority to dispose thereof.

No. ---------------

ISBN 978-621-02-1966-1

Published and Printed by

CENTRAL BOOK SUPPLY, INC.

927 Quezon Avenue, Quezon City, Philippines
E-mail: info@central.com.ph
 TABLE OF CONTENTS

Page

2009 BAR EXAMINATION ........................ ..

PART I ....... ..
II ......... ..
III ........ ..
IV ........ ..
V ......... ..
VI ............................................................... .. 1
VII ................................................................... ..11
VII I ..... .................................................................. .. 13
..

IX ...................................................................... ..14

PART II ...... .. ................. ..15

X ...................................................................... ..15
XI ................................................................... ..16
XII ...................................................................... ..18
XIII ...................................................................... ..19
XI V ..... .. ...................................................................... ..2O
XV ................................................................... ..22
XVI .......................................................................... ..23
XVII ...................................................................... ..24
XVIII ....26
XIX ...... .. ...................................................................... ..28

2010 BAR EXAMINATION ......................... .. ................. ..3O

I ...................................................................... ..3O
II ............ ..... .................................................. .. 32
III ........ .. ....34
IV ................................................................ ..36
V ................................................................ ..38
VI ........ .. ....4O
 TABLE OF CONTENTS

Page

VII ............................................................................... ..43

VIII ............................................................................. ..45
IX ........................................................ .. ....47
X ................................................................................. ..48
XI ............................................................................. ..49
XII ......................................................................... ..51
XIII ........................................................................ ..51
XIV ....................................................................... ..53
XV ......................................................................... ..54
XVI .......................................................................... ..55
XVII .................................................... .. ....56

2011 BAR EXAMINATION ........................................ .. ....58

Set A ........................................................... .. ....58

2012 BAR EXAMINATION ........................................ .. ..122

MULTIPLE CHOICE QUESTIONS (MCQS) ..122
ESSAY-TYPE QUESTIONS ....................... .. ..185
I ................................................................................. ..185
II ............................................................................... ..187
III .............................................................................. ..189
IV .............................................................................. ..19O
V ............................................................................... ..191
VI .............................................................................. ..193
VII ............................................................................. ..195
VIII ........................................................................... ..198

2013 BAR EXAMINATION ......................................... .. ..ZOO

ESSAY QUESTIONS .................................. .. ..ZOO
I ................................................................................. ..ZOO
II ............................................................................... ..201
III .............................................................................. ..202
IV .............................................................................. ..203
V ............................................................................... ..204
VI .............................................................................. ..206
VII ............................................................................. ..207

iv
 TABLE OF CONTENTS

Page

VIII ........................................................... .. 208

IX .............................................................. ..21O
X .................................................................. ..213
MULTIPLE CHOICE QUESTIONS ................................. ..215

2014 BAR EXAMINATION .......................................... ..232

I . . . . . . . . . ........ . ..........
. . . . . . . . . . ... . . . . . . . ..232
. . . . . . . . . . . . . . . . .

II .................................................................. ..233
III ................................................................. ..234
IV .............................................................. ..235
V .................................................................. ..237
VI ................................................................. ..237
VII ............................................................. ..238
VIII .............................................................. ..24O
IX ................................................................. ..241
X ............................................................... ..242
XI ................................................................. ..243
XII ................................................................ ..Z44
XIII . . . . ..245 ......... . . . . . . . . . . . . ...

XIV .............................................................. ..246

XV . . . . . ..247 .......... . . . . . . . . . . . ...

XVI . . . . . . . . . . . . . .. .. 248
. . . . . . . . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . . .

XVII ............................................................. ..Z48

XVIII ........................................................... ..25O
.

XIX ............................................................... ..251

XX ................................................................ ..253
XXI ............................................................... ..255
XXII ............................................................. ..257
XXIII ........................................................... ..Z59
.

}CXIV . ........................................................... ..Z59

XXV .. ........................................................... ..261
XXVI . ........................................................... ..263
XXVII ........................................................... ..265
XXVIII ........................................................... ..267
XXIX . ...267

V
 TABLE OF CONTENTS

Page

20 1 5 BAR EXAMINATION .......................................... ..269

I ........................................................... ..269
II ........................................................... ..27O
III ........................................................... ..271
IV ................. .. ...273
V ........................................................... ..275
VI ........................................................... ..276
VII ........................................................... ..278
VIII ........................................................... ..279
IX ........................................................... ..281
X ........................................................... ..282
XI ........................................................... ..283
XII ........................................................... ..284
XIII ........................................................... ..286
XIV ...286
XV ........................................................... ..288
XVI ........................................................... ..Z9O

2016 BAR EXAMINATION ................ .. ...292

I . . . .. ..292
.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....

II . .. . . . ..292
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

III .. . . ........ ..
. . . . ...... . . . .. .....
. . . ..293 . . . . . . . . . . . . . . . . . . . . . . . .

IV .. .
. . . . . . ..
. . . . . . . . . . . . . . . . . . ..295
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

V . . . ....
. . ..... .......
. . . . . . . . . . . . . . . . . ..296
. . . . . . . . . . . . . . . . . . . . . . . .

VI . . .....
. . ....... ........ .
. . . . . . . . . . . . . . . . ..297
. . . . . . . . . . . . . . . . . . . .

VII . .......
. . ........ ........ ..
. . . . . . . . . . . . . ..297 . . . . . . . . . . . . . . . . . . .

VIII ........................................................... ..298

IX . . . . . . . . ............ . . . . . . .......... .. . . . . . . .............. . . . ..3OO
X ... .. . . . . .............. . . . . .. ........... ..301 . . . . . .............. . . .

XI .. ..302
.. . . . . . . . ........... . . . . . . ............ . . . . . . . . . . ........ . . .

XII . ...303
XIII ........................................................... ..304
XIV ...305
XV . . ...
. ........... ..
. . . ......... .. . . . . . . . . . . ..306
. . . . . . . . . . . . . . . . .

XVI ........................................................... ..307

XVII ...308

vi
 TABLE OF CONTENTS

Page

XVIII ..310
XIX ........................................................... ..311
XX ........................................................... ..313

2017 BAR EXAMINATION .......................................... ..315

I ........................................................... ..315
A ........................................................... ..315
B ........................................................... ..316
II ........................................................... ..317
A ........................................................... ..317
B ........................................................... ..318
III ........................................................... ..32O
A ........................................................... ..32O
B ........................................................... ..321
IV ........................................................... ..323
V ........................................................... ..324
A ........................................................... ..324
B ........................................................... ..325
C ........................................................... ..3Z6
VI ........................................................... ..328
A ........................................................... ..328
B ........................................................... ..329
VII ........................................................... ..33O
A ........................................................... ..33O
B ........................................................... ..331
VIII ................ ..332
A ........................................................ .. 332
B ........................................................... ..333
IX ........................................................... ..334
A ........................................................... ..334
B ........................................................... ..335
X ........................................................... ..336
XI ........................................................... ..337
XII ........................................................... ..339

vii
 TABLE OF CONTENTS

Page

20 1 8 BAR EXAMINATION .......................................... ..341

I ........................................................... .. 341
II ........................................................... .. 343
III ........................................................... ..345
IV ........................................................... .. 349
V ........................................................... ..351
VI ........................................................ ..352
VII ........................................................... ..354
VIII ........................................................................... ..356
IX ........................................................... ..359
X ........................................................... ..361
XI ........................................................... .. 362
XII ........................................................... ..365
XIII ........................................................... ..368
x1v'fIIIIIIIIIIIIIII ........................................................... ..37O
XV ........................................................... ..372
XVI ................................................ .. 375
XVII ........................................................... ..376
XVIII ......................... ..379

2019 BAR EXAMINATION .......................................... ..381

PART I ................. .. ......................... ..381
A1 ........................................................... ..381
A.2. ................................................ .. 383
A3 ........................................................... ..384
A4 ........................................................... ..385
A5 ........................................................... ..387
A6 ........................................................... ..389
A7 ........................................................... ..391
A8 ........................................................... ..391
A9 ........................................................... ..393
A.1O. ........................................................... ..394
PART II ................ .. ........................................................... ..396
B.11. ................. ..396
B.12. ........................................................ ..398
B.13. ........................................................... ..399

viii
 TABLE OF CONTENTS

Page

B.14. ............. .. ..405

B.15 ..406
B.16 ..408
B.17 ..409
B.18. ............. .. ..411
B.19. ............. .. ..412
B.2O ..414

2020 BAR EXAMINATION ........................................ .. ..417

A.1. ........................................................... ..417
A.2. ........................................................... ..417
A.3. ........................................................... ..419
A.4. ........................................................... ..42O
A.5 ........................................................... ..421
A.6. ........................................................... ..422

2022 BAR EXAMINATION ........................................ .. ..424

1. ............................................................................... ..424
2 ... ............................................................. . .425

......................... ..431

............................................................ ..435
..436
..438
1O ........................................................... ..441
11 ........................................................... ..442
12 ........................................................... ..443

—oO0—

ix
BAR EXAMS IN COMMERCIAL LAW
Dean Nilo T. Divina

2009 BAR EXAMINATION

PART I

TRUE or FALSE. Answer TRUE if the statement is

true, or FALSE if the statement is false. Explain
your answer in not more than two (2) sentences.
(5%)

[a]The Denicola Test in intellectual property

law states that if design elements of an article re-
ect a merger of aesthetic and functional consid-
erations, the artistic aspects of the work cannot be
conceptually separable from the utilitarian as-
pects; thus, the article cannot be copyrighted.
Answer:
True. Applying the Denicola Test in Brandir In-
ternational, Inc. v. Cascade Pacic Lumber Co. (834
F.2d 1142, 1988 Copr.L.Dec. P26), the United States

1
2 BAR Q & A IN COMMERCIAL LAW

Court of Appeals for the Second Circuit held that the

aesthetic or artistic aspects of a work may be copy-
righted only if they can be separated from the utili-
tarian element.

[b] If the Ombudsman is convinced that

there is a violation of law after investigating a
complaint alleging illicit bank deposits of a public
officer, the Ombudsman may order the bank con-
cerned to allow in camera inspection of bank re-
cords and documents.

Answer:

False.
In the case of Marquez vs. Desierto (G.R. No.
135882, June 27, 2001), the Supreme Court held that
the Ombudsman can only examine bank deposit ac-
counts upon compliance with the following requi-
sites:
a. There is a case pending before a court of
competent jurisdiction;
b. The account holder and the bank official
must be infomied of the examination;
c. The account to be examined must be
clearly identified; and,
d. The examination must be limited to the ac-
count specified.
If there is no pending case yet, but only an in-
vestigation by the Ombudsman, any order for the
examination of the bank account is premature.
 2009 BAR EXAMINATION 3

[c] Even if the seller and the buyer in a sale

in bulk violate the Bulk Sales Law, the sale would
still be valid.
Answer:

False. When the Bulk Sale Law is violated, the

sale, transfer or mortgage shall be deemed fraudu-
lent and void (Section 4 of Act No. 3952) However,
the civil liabilities arising from the transaction re-
main enforceable between or among the parties
thereto. The buyer holds the sold properties in trust
for the sellers’ creditors with the right to demand
return of the purchase price plus damages.

[d] Dividends on shares of stocks can only be

declared out of unrestricted retained earnings of
the corporation.

Answer:
True. Dividends cannot be declared out of the capi-
tal. Otherwise, such declaration of dividend will vio-
late the trust fund doctrine.

[e] A bank under receivership can still grant

new loans and accept new deposits.
Answer:
False. Du.ring the receivership, the bank is for-
bidden to do business. Its assets and properties
shall be gathered and administered by the receiver
for the benefit of the ban.k’s creditors. Granting new
loans and accepting new deposits would constitute
doing business for the bank in the ordinary course of
4 BAR Q & A IN COMMERCIAL LAW

business which is contrary to the purpose and na-

ture of a receivership proceeding. (Section 30 of RA
7653)

II
Atlantis Realty Corporation (ARC), a local firm
engaged in real estate development, plans to sell
one of its prime assets — a three-hectare land val-
ued at about P100-million. For this purpose, the
board of directors of ARC unanimously passed a
resolution approving the sale of the property for
P75-million to Shangrila Real Estate Ventures
(SREV), a rival realty firm. The resolution also
called for a special stockholders meeting at which
the proposed sale would be up for ratification.
Atty. Edric, a stockholder who owns only one
(1) share in ARC, wants to stop the sale. He then
commences a derivative suit for and in behalf of
the corporation, to enjoin the board of directors
and the stockholders from approving the sale.
[a] Can Atty. Edric, who owns only one (1)
share in the company, initiate a derivative suit?
Why or why not? (2%)
Answer:
Yes, Atty. Edric can initiate a derivative suit on
behalf of the corporation to enforce its corporate
right or cause of action to stop the sale of the prop-
erty for a price which is clearly disadvantageous to
the corporation. Derivative suit is a remedy avail-
able to the stockholder to assail and nullify the
 2009 BAR EXAMINATION 5

wrongful acts committed by the very directors and

officers entrusted with the management of the cor-
poration and therefore, not expected to rectify their
wrongful acts even though the same are prejudicial
to the corporation. The suing stockholder will then
take the cudgels for the corporation to protect its
interest.
[b] If suchsuit is commenced, would it
a
constitute an intra-corporate dispute? If so, why
and where would such a suit be filed? If not, why
not? (2%)

Answer:
Yes, such suit would constitute an intra-
corporate dispute under the Supreme Court-issued
Interim Rules of Procedure for Intra-Corporate Con-
troversy (Rule I, Section 1 (4). Independently of said
rules, derivative suit is in the nature of intra-
corporate controversy because it is a suit initiated
by a stockholder against other stockholders who are
officers and directors of the same corporation and
pertains to the enforcement of their rights and obli-
gations under the Corporation Code. Such suit
should be filed in the RTC of the city where the
principal office of the corporation is located (Section
5 of the Interim Rules)

[c] Will the suit prosper? Why or why not?

(3%)

Answer:
No. The suit will not prosper. In the case of V1'l-
lamor, Jr. v. Umale (G.R. Nos. 172843 & 172881, Sep-
6 BAR Q & A IN COMMERCIAL LAW

tember 24, 2014), the Supreme Court held that an

intra-corporate dispute is dismissible unless the fol-
lowing are alleged in the complaint: a) the stock-
holder is suing on behalf of the corporation to en-
force a corporate right or cause of action; b) plaintiff
must be a stockholder at the time the cause of ac-
tion accrued and at the time of ling unless the
cause of action is continuing in nature in which case
it is enough that he is a plaintiff at the time of filing;
c) exhaustion of intra-corporate remedies to obtain
the relief he desires under the corporation's articles
of incorporation and by-laws; d) no appraisal right is
available and e) complaint is not a nuisance or har-
assment suit. Here, the first two elements are al-
leged but the rest were not.

III
Antarctica Life Assurance Corporation (ALAC)
publicly offered a specially designed insurance
policy covering persons between the ages of 50 to
75 who may be aficted with serious and debili-
tating illnesses. Quirico applied for insurance cov-
erage, stating that he was already 80 years old.
Nonetheless, ALAC approved his application.
Quirico then requested ALAC for the issuance
of a cover note while he was trying to raise funds
to pay the insurance premium. ALAC granted the
request. Ten days after he received the cover note,
Quirico had a heart seizure and had to be hospital-
ized. He then filed a claim on the policy.
[a] Can ALAC validly deny the claim on the
ground that the insurance coverage, as publicly
 2009 BAR EXAMINATION 7

offered, was available only to persons 50 to 75

years of age? Why or why not? (2%)

Answer:

No. By approving the application of Quirico who

disclosed that he was already 80 years old, ALAC
has waived its age requirement. Hence, ALAC is
now precluded from raising such defense of age of
the insured.

[b]Did ALAC’s issuance of a cover note re-

sult in the perfection of an insurance contract be-
tween Quirico and ALAC? Explain. (3%)

Answer:
Yes. The issuance of a cover note resulted in the
perfection of the contract of insurance. Cover notes
are issued to bind the insurer temporarily pending
issuance of the policy (Section 52 of the Insurance
Code, as amended). They are valid for a period of
sixty days. No separate premium is to be paid on a
cover note. Within sixty days after issuance of the
cover note, a policy shall be issued in lieu thereof,
including within its terms the identical insurance
bond under the cover note and the premiums there-
for.

IV
Cecilio is planning to put up a grocery store in
the subdivision where he and his family reside. To
promote this proposed business venture, he told
his wife and three children to send out promo-
8 BAR Q & A IN COMMERCIAL LAW

tional text messages to all the residents in the

subdivision. Cecilio’s family members did as in-
structed, and succeeded in reaching, through text
messages, more than 80% of the residents in the
subdivision.
Is Cecilio habitually engaged in commerce
even if the grocery store has yet to be established?
Explain your answer. (3%)
Answer:

Yes. Cecilio is already habitually engaged in

commerce even if the grocery store has yet to be es-
tablished when per his instruction the members of
his family reached through text messages more than
80% the residents of the subdivision where they re-
side. Under Article 3 of the Code of Commerce, the
“legal presumption of habitually engaging in com-
merce shall exist from the moment the person who
intends to engage therein announced through circu-
lars, newspapers, handbills, posters exhibited to the
public, or in any other manner whatsoever, an es-
tablishment which has for its object some commer-
cial operation." Promotional text messages will fall
under “announcement in any other manner whatso-
ever."

V
Lorenzo drew a bill of exchange in the
amount of P100,000.00 payable to Barbara or or-
der, with his wife, Diana, as drawee. At the time
the bill was drawn, Diana was unaware that Bar-
bara is Lorenzo's paramour.
 2009 BAR EXAMINATION 9

Barbara then negotiated the bill to her sister,

Elena, who paid for it for value, and who did not
know who Lorenzo was. On due date, Elena pre-
sented the bill to Diana for payment, but the latter
promptly dishonored the instrument because, by
then, Diana had already learned of her husband's
dalliance.
[a] Was the bill lawfully dishonored by
Diana? Explain. (3%)

Answer:

No, the bill was not lawfully dishonored by

Diana. Elena, to whom the instrument was negoti-
ated, was a holder in due course inasmuch as she
paid value therefor in good faith. Hence, Elena is en-
titled to receive the face value of the bill of ex-
change.

[b] Does the illicit cause or consideration ad-

versely affect the negotiability of the bill? Explain.
(3%)

Answer:
No, illicit cause or consideration does not ad-
versely affect the negotiability of the bill. An in-
strunient is negotiable if on its face it conforms to
the elements of negotiability under Section 1 of the
Negotiable Instruments law. Legality of considera-
tion is not one of these elements. Thus, an instru-
ment may be negotiable even though the considera-
tion is unlawful.
10 BAR Q & A IN COMMERCIAL LAW

VI
Global Transport Services, Inc. (GTSI) oper-
ates a eet of cargo vessels plying interisland
routes. One of its vessels, MV Dona Juana, left the
port of Manila for Cebu laden with, among other
goods, 10,000 television sets consigned to
Romualdo, a TV retailer in Cebu.
When the vessel was about ten nautical miles
away from Manila, the ship captain heard on the
radio that a typhoon which, as announced by
PAG-ASA, was on its way out of the country, had
suddenly veered back into Philippine territory.
The captain realized that MV Dona Juana would
traverse the storm's path, but decided to proceed
with the voyage. True enough, the vessel sailed
into the storm. The captain ordered the jettison of
the 10,000 television sets, along with some other
cargo, in order to lighten the vessel and make it
easier to steer the vessel out of the path of the ty-
phoon. Eventually, the vessel, with its crew intact,
arrived safely in Cebu.
Will you characterize the jettison of
Romualdo's TV sets as an average? If so, what
kind of an average, and why? Against whom does
Romualdo have a cause of action for indemnity of
his lost TV sets? Explain.
Answer:
The jettison of Romua1do’s TV sets resulted in a
general average loss because the elements of gen-
eral average are present: a) there was a common
danger to the ship and the cargoes after they have
 2009 BAR EXAMINATION 11

been loaded; b) some of the cargoes were sacrificed

deliberately for the common safety; and c) the vessel
and other cargoes were successfully saved. The
general average loss of Romualdo entitles him to
compensation or indemnification from the ship-
owner and the owners of the cargoes saved by the
jettison.

VII
Maharlikang Pilipino Banking Corporation
(MPBC) operates several branches of Maharlikang
Pilipino Rural Bank in Eastern Visayas. Almost all
the branch managers are close relatives of the
members of the Board of Directors of the corpora-
tion. Many undeserving relatives of the branch
managers were granted loans. In time, the
branches could not settle their obligations to de-
positors and creditors.
Receiving reports of these irregularities, the
Supervising and Examining Department (SED) of
the Monetary Board prepared a detailed report
(SED Report) specifying the facts and the chronol-
ogy of events relative to the problems that beset
MPBC rural bank branches. The report concluded
that the bank branches were unable to pay their
liabilities as they fell due, and could not possibly
continue in business without incurring substantial
losses to its depositors and creditors.
[a] May the Monetary Board order the clo-
sure of the MPBC rural banks relying only on the
SED Report, without need of an examination? Ex-
plain. (3%)
12 BAR Q & A IN COMMERCIAL LAW

Answer:

Yes. Under Republic Act No. 7653, otherwise

known as the New Central Bank Act, prior notice
and hearing are no longer required and a report
made by the head of he SED suffices for a bank to be
closed. The purpose of the law is to make the clo-
sure of the bank summary and expeditious for the
protection of the public interest (Rural Bank of San
Miguel vs. Monetary Board, G.R. No. 150886, Febru-
ary 16, 2007)

[b] If MPBC hires you lawyer because the

as
Monetary Board has forbidden it from carrying on
its business due to its imminent insolvency, what
action will you institute to question the Monetary
Board's order? Explain. (3%)

Answer:

The order of the Monetary Board may be ques-

tioned through a petition for certiorari with the
Court of Appeals on the ground that the action was
arbitrary and made in bad faith tantamount to grave
abuse of discretion amounting to lack or excess of
jurisdiction. The petition for certiorari may only be
filed by the stockholders of record representing at
least majority of the outstanding capital stock
within 10 days from receipt by the board of directors
of the MPBC of the order directing the closure of the
bank or the appointment of a conservator or re-
ceiver. (Central Bank of the Philippines vs. Court of
Appeals, 208 SCRA 652)
 2009 BAR EXAMINATION 13

VIII
When is there an ultra vires act on the part of
[a] the corporation; [b] the board of directors; and
[c] the corporate officers. (3%)

Answer:
a. Under Section 45 of the Corporation Code
(“Code”), no corporation shall possess or
exercise any corporate power except
those conferred by the Code or by its arti-
cles of incorporation and except such as
are necessary or incidental to the exercise
of the powers so conferred. When the cor-
poration does an act or engages in an ac-
tivity which is outside of its express, im-
plied or incidental powers set out in the
Code and its articles of incorporation, the
act is deemed to be ultra vires.

b. The Board commits an ultra vires act

when it engages in an activity without the
raticatory or affirmative vote of the
stockholders in those instances where the
Corporation Code so requires such vote or
in cases where corporate powers are re-
served solely to the stockholders.
c. When a corporate officer enters into a con-
tract on behalf of the corporation without
having been so expressly or impliedly au-
thorized by the laws of the Corporation or
by the board of Directors, even when the
act or contract falls within the corpora-
14 BAR Q & A IN COMMERCIAL LAW

tion’s express, implied or incidental

power, then the unauthorized act of the
corporate officer is deemed to be ultra
vires.

IX

What are the so-called exempt securities un-

der the Securities Regulation Code (“SRC”)? (2%)
Answer:

Under Section 9 of the SRC, the so-called ex-

empt securities are:
a. Those issued or guaranteed by the gov-
ernment of the Philippines or any of its po-
litical subdivisions or agencies;
b. Those issued or guaranteed by the gov-
ernment of any foreign country with which
the Philippines has diplomatic relations, or
any other state on the basis of reciprocity,
although the Securities and Exchange
Cominission may require compliance with
the form and content of disclosures;
c. Those issued by the receiver or by the
trustee in a bankruptcy duly approved by
the proper adjudicatory board;
d. Those involving the sale or transfer which
is by law, under the regulation of the Of-
fice of the Insurance Commission, Housing
and Land Use Regulatory Board, or the Bu-
reau of Internal Revenue; and
 2009 BAR EXAMINATION 15

e. Those issued by banks, except its own

shares.
f. Other securities as may be classified by
the SEC.

PART II

TRUE or FALSE. Answer TRUE if the statement is

true, or FALSE if the statement is false. Explain
your answer in not more than two (2) sentences.
(5%)

[a] A loan agreement which provides that

the debtor shall pay interest at the rate deter-
mined by the bank's branch manager violates the
disclosure requirement of the Truth in Lending
Act.

Answer:
True. This is contrary to the duty of the creditor
to disclose prior to the consummation of the transac-
tion the interests, charges and other figures indicat-
ing in detail the true cost of the credit granted to the
debtor.

Under the Warehouse Receipts Law, a

[b]
warehouseman loses his lien upon the goods
when he surrenders possession thereof.
16 BAR Q & A IN COMMERCIAL LAW

Answer:

True. A warehouseman’s lien is possessory in

nature. When a warehouseman surrenders posses-
sion, he thereby loses his lien on the goods.

[c] A document, dated July 15, 2009, that

reads: "Pay to X or order the sum of P5,000.00 five
days after his pet dog, Sparky, dies. Signed Y." is a
negotiable instrument.

Answer:

True. The relevant element of negotiability here

is whether the promise to pay is determinable or
conditional. An instrmnent is payable at a deter-
minable future time if it is expressed to be payable
on or at a fixed period after the occurrence of an
event which is certain to happen, though the time of
happening be uncertain. (Section 4 of NIL). The dy-
ing of the dog is a day which is certain to come al-
though the time of the happening is uncertain.

XI

Gaudencio, a store owner, obtained a P1-

million loan from Bathala Financing Corporation
(BFC). As security, Gaudencio executed a “Deed of
Assignment of Receivables," assigning 15 checks
received from various customers who bought mer-
chandise from his store. The checks were duly in-
dorsed by Gaudencio's customers.
The Deed of Assignment contains the follow-
ing stipulation:
 2009 BAR EXAMINATION 17

“If, for any reason, the receivables or

any part thereof cannot be paid by the obli-
gors, the ASSIGNOR unconditionally and ir-
revocably agrees to pay the same, assuming
the liability to pay, by way of penalty, three
percent (3%) of the total amount unpaid, for
the period of delay until the same is fully
paid."
When the checks became due, BFC deposited
them for collection, but the drawee banks dishon-
ored all the checks for one of the following rea-
sons: “account closed," “payment stopped," “ac-
count under garnishment,” or “insufficiency of
funds.” BFC wrote Gaudencio notifying him of the
dishonored checks, and demanding payment of
the loan. Because Gaudencio did not pay, BFC
filed a collection suit.
In his defense, Gaudencio contended that [a]
BFC did not give timely notice of dishonor (of the
checks); and [b] considering that the checks were
duly indorsed, BFC should proceed against the
drawers and the indorsers of the checks.
Are Gaudencio’s defenses tenable? Explain.
(5%)

Answer:
No. Gaudencio’s defenses are untenable. The
cause of action of BFC arose from the non-payment
of loan. The checks merely serve as collateral to se-
cure the payment of the loan. Under the Deed of As-
signment, Gaudencio bound himself to pay for the
receivables if for any reason they cannot be paid by
18 BAR Q &A IN COMMERCIAL LAW

the obligors. (Great Asian Sales Corporation vs.

Court ofAppeals, 381 SCRA 557)

XII

Ciriaco leased a commercial apartment from

Supreme Building Corporation (SBC). One of the
provisions of the one-year lease contract states:
“ 18. xx x The LESSEE shall not insure
against re the chattels, merchandise, tex-
tiles, goods and effects placed at any stall or
store or space in the leased premises with-
out rst obtaining the written consent of
the LESSOR. If the LESSEE obtains re in-
surance coverage without the consent of the
LESSOR, the insurance policy is deemed as-
signed and transferred to the LESSOR for
the latter’s benet."

Notwithstanding the stipulation in the con-

tract, without the consent of SBC, Ciriaco insured
the merchandise inside the leased premises
against loss by fire in the amount of P500,000.00
with First United Insurance Corporation (FUIC).
A day before the lease contract expired, fire
broke out inside the leased premises, damaging
Ciriaco’s merchandise. Having learned of the in-
surance earlier procured by Ciriaco, SBC de-
manded from FUIC that the proceeds of the insur-
ance policy be paid directly to it, as provided in
the lease contract.
Who is legally entitled to receive the insur-
ance proceeds? Explain. (4%)
 2009 BAR EXAMINATION 19

Answer:

Ciriaco, not SBC, is entitled to receive the pro-

ceeds of the insurance policy. A contract of insur-
ance is personal in nature. In agreeing to be bound
by the insurance contract, each party has in mind
the character, credit and conduct of the other. SBC
is not privy to the contract signed by Ciriaco and
FUIC. FUIC approved the insurance contract bear-
ing in mind the personal qualifications of Ciriaco.
The stipulation that the policy is deemed assigned
and transferred to SBC does not bind FUIC. Besides,
such stipulation is void because SBC has no insur-
able interest in the merchandise of Ciriaco. (Spouses
Cha vs. Court of Appeals, G.R. No. 124520, August
18, 1997)

XIII
XXX Corporation (XXX) and its sister com-
pany, YYY Corporation (YYY), are both under ju-
dicial receivership. The receiver has the option to
sell all or substantially all of the properties of YYY
to XXX, or simply merge the two corporations.
Under either option, the requirements under the
Corporation Code have to be complied with.
The receiver seeks your advice on whether
the Bulk Sales Law will apply to either, or both,
options. What will your advice be? Explain. (4%)

Answer:
I will advise the receiver that the Bulk Sales
Law does not apply to both options. Section 8 of the
20 BAR Q & A IN COMMERCIAL LAW

Bulk Sales Law expressly provides that it will not

apply to executors, administrators, receivers, and
assignees in insolvency, or public officers, acting
under judicial process. In this case, the receiver is
acting under judicial process.

XIV
After disposing of his last opponent in only
two rounds in Las Vegas, the renowned Filipino
boxer Sonny Bachao arrived at the Ninoy Aquino
International Airport met by thousands of hero-
worshipping fans and hundreds of media photog-
raphers. The following day, a colored photograph
of Sonny wearing a black polo shirt embroidered
with the 2-inch Lacoste crocodile logo appeared on
the front page of every Philippine newspaper.
Lacoste International, the French firm that
manufactures Lacoste apparel and owns the La-
coste trademark, decided to cash in on the univer-
sal popularity of the boxing icon. It reprinted the
photographs, with the permission of the newspa-
per publishers, and went on a world-wide blitz of
print commercials in which Sonny is shown wear-
ing a Lacoste shirt alongside the phrase "Sonny
Bachao just loves Lacoste. ”
When Sonny sees the Lacoste advertisements,
he hires you as lawyer and asks you to sue Lacoste
International before a Philippine court:
[a] For trademark infringement in the Phil-
ippines because Lacoste International
 2009 BAR EXAMINATION 21

used his image without his permission;

(2%)

[bl For copyright infringement because of

the unauthorized use of the published
photographs; (2%) and

[<1] For injunction in order to stop Lacoste

International from featuring him in their
commercials. (2%)

Will these actions prosper? Explain.

[<1] Can Lacoste International validly invoke

the defense that it is not a Philippine
company and, therefore, Philippine
courts have no jurisdiction? Explain.
(2%)

Answer:
8. Sonny Bachao cannot sue for infringement
of trademark. An action for trademark in-
fringement will not lie unless the trademark
is registered with the Intellectual Property
Office. The photographs showing Bachao
wearing a Lacoste shirt were not registered
as a trademark.
b. Sonny Bachao cannot sue for infringement
of copyright for the unauthorized use of the
photographs. The copyright to the photo-
graphs belong to the photographer or to the
newspaper company which published them
if the photographers are employees of the
former.
22 BAR Q & A IN COMMERCIAL LAW

c. The complaint for injunction to stop La-

coste Intemational from featuring him in its
advertisements will prosper. A contrary
rule amounts to violation of Bachao’s right
to privacy.
d. No. A foreign corporation with license to do
business is subject to Philippine courts’ ju-
risdiction. It is a condition for the grant of
its license to do business in the Philippines.
If has no license to do business, it can not
sue or intervene in any action before our
courts or administrative tribunal but it may
be sued or proceeded against on any cause
of action recognized under Philippine laws
(Section 133 of the Corporation Code)

XV

On September 15, 2007, XYZ Corporation is-

sued to Paterno 800 preferred shares with the fol-
lowing terms:
“The Preferred Shares shall have the
following rights, preferences, qualifica-
tions, and limitations, to wit:
1. The right to receive a quarterly
dividend of One Per Centum (1%), cumu-
lative and participating;
2. These shares may be redeemed,
by drawing of lots, at any time after two
(2) years from date of issue, at the option
of the Corporation; x x x."
 2009 BAR EXAMINATION 23

Today, Paterno sues XYZ Corporation for spe-

cific performance, for the payment of dividends
on, and to compel the redemption of, the preferred
shares, under the terms and conditions provided
in the stock certificates. Will the suit prosper? Ex-
plain. (3%)

Answer:
The suit will prosper if XYZ Corporation has suf-
ficient unrestricted retained earnings. Otherwise,
Paterno cannot compel XY Z Corporation to pay divi-
dends. Holders of preferred shares are not creditors
of the corporation and their preference as to divi-
dends only applies if the corporation declares divi-
dends out of the corporation’s surplus profits. (Re-
public Planters Bank vs. Agana, GR No. 51765,
March 3, 1997)
Paterno can not compel the corporation to re-
deem the shares because based on the terms of is-
suance, the redemption is at the option and discre-
tion of the Corporation.

XVI
Philippine Palaces Realty (PPR) had been rep-
resenting itself as a registered broker of securities,
duly authorized by the Securities and Exchange
Commission (SEC). On October 6, 1996, PPR sold
to spouses Leon and Carina one (1) timeshare
of Palacio del Boracay for US$7,500.00. However,
its Registration Statement became effective only
on February 11, 1998 after the SEC issued a reso-
24 BAR Q & A IN COMMERCIAL LAW

lution declaring that PPR was authorized to sell

securities, including timeshares.
On March 30, 1998, Leon and Carina wrote
PPR rescinding their purchase agreement and
demanding the refund of the amount they paid,
because the Palacio del Boracay timeshare was
sold to them by PPR without the requisite license
or authority from the SEC. PPR contended that
the grant of the SEC authority had the effect of
ratifying the purchase agreement (with Leon and
Carina) of October 6, 1996.
Is the contention of PPR correct? Explain.
(3%)

Answer:

The contention of PPR is not correct. Timeshare

certificates are considered securities (Timeshare
Realty vs. Lao, G.R. No. 158941, February 11, 2008)
Under Section 8 of the Securities Regulation Code,
no securities shall be sold or offered for sale or dis-
tribution in the Philippines without a registration
statement duly filed and approved by the SEC. The
permit to sell should be issued before the actual sale
or distribution of the securities. The permit does not
retroact to the date of the actual sale.

XVII
Triple A Corporation (Triple A) was incorpo-
rated in 1960, with 500 founders’ shares and 78
common shares as its initial capital stock sub-
scription. However, Triple A registered its stock
and transfer book only in 1978, and recorded
 2009 BAR EXAMINATION 25

merely 33 common shares as the corporation's is-

sued and outstanding shares.
[a] In 1982, Juancho, the sole heir of one of
the original incorporators filed a petition with the
Securities and Exchange Commission (SEC) for the
registration of his property rights over 120 foun-
ders‘ shares and 12 common shares. The petition
was supported by a copy of the Articles of Incor-
poration indicating the incorporators’ initial capi-
tal stock subscription. Will the petition be
granted? Why or why not? (3%)

Answer:

Yes. The articles of incorporation defines the

charter of the corporation and the contractual rela-
tionship between the State and the corporation, the
State and the stockholders, and between the corpo-
ration and the stockholders. Its contents are thus
binding upon both the corporation and the stock-
holders, conferring on Juancho a clear right to have
his stockholding recorded. The stock and transfer
book can not be used as the sole basis for detennin-
ing shares issued to stockholders more so when the
articles of incorporation show a significantly larger
amount of shares issued and outstanding compared
to that listed in the stock and transfer book. (Lanuza
vs. Court of Appeals, G.R. No. 131394, March 28,
2005)

[b] On May 6, 1992, a special stockholders’

meeting was held. At this meeting, what would
have constituted a quorum? Explain. (3%)
26 BAR Q & A IN COMMERCIAL LAW

Answer:

A quorum consists of the majority of the voting

shares of the corporation Thus, the quorum for such
meeting would be 289 shares or a majority of the
578 shares issued and outstanding as indicated in
the articles of incorporation. This includes the 33
common shares reected in the stocks and transfer
book, there being no mention or showing of any
transaction effected from the time of Triple A's in-
corporation in 1960 up to the said meeting.

[c] What is a stock and transfer book? (1%)

Answer:

A stock and transfer book is a book which re-

cords all stocks in the name of the stockholders al-
phabetically arranged; the installments paid or un-
paid on all stocks for which subscriptions have been
made, and the date of payment of any installment; a
statement of every alienation, sale or transfer of
stock made, the date thereof, and by and to whom
made; and such other entries as the by-laws may
prescribe. (Section 74 of the Corporation Code)

XVIII
One of the passenger buses owned by Conti-
nental Transit Corporation (CTC), plying its usual
route, figured in a collision with another bus
owned by Universal Transport, Inc. (UTI). Among
those injured inside the CTC bus were: Romeo, a
stow away; Samuel, a pickpocket then in the act
of robbing his seatmate when the collision oc-
 2009 BAR EXAMINATION 27

curred; Teresita, the bus driver's mistress who

usually accompanied the driver on his trips for
free; and Uriel, holder of a free riding pass he won
in a rafe held by CTC.
[a] Will a suit for breach of contract of car-
riage filed by Romeo, Samuel, Teresita and Uriel
against CTC prosper? Explain. (3%)
Answer:

Romeo carmot sue for breach of contract of car-

riage for the simple reason that there was no valid
contract of carriage between a stowaway, who se-
cures passage through fraud, and the carrier.
Samuel and Teresita cannot sue for breach of
contract of carriage. They were never accepted by
the carrier as passengers. Samuel did not board the
bus to be transported but to commit robbery. Tere-
sita did not board the bus to be transported but to
accompany the driver while he was performing his
work
Uriel can sue for breach of contract of carriage.
He was a passenger although he was being trans-
ported gratuitously (Article 1768 of the Civil Code)

[b] What, if any, are the valid defenses that

CTC and UTI can raise in the respective actions
against them? Explain. (3%)

Answer:
With respect to Romeo, Samuel and Teresita,
since there was no pre-existing contractual relation-
ship between them and CTC, CTC can raise the de-
28 BAR Q 8- A IN COMMERCIAL LAW

fense that it exercised the due diligence of a good

father of a family in the selection and supervision of
its driver.
It can raise the same defense against Uriel if
there is a stipulation that exempts it from liability
for simple negligence, but not for willful acts or
gross negligence (Article 1758 of the Civil Code)
CTC can also raise against all the plaintiffs the
defense that the collision was due exclusively to the
negligence of the driver of UTI which constitutes a
fortuitous event, because it was unforeseen and
there was no concurrent or contributory negligence
on the part of its own driver.
CTC can also raise against Samuel the defense
that he was engaged in an illegal act at the time of
the collision, for which he can be held liable for
damages based on quasi-delict.
Since UTI had no pre-existing contractual rela-
tionship with any of the plaintiffs, it can raise the
defense that it exercised due diligence in the selec-
tion and supervision of its driver, that the collision
was due to force majeure, and that Samuel was
committing an illegal act at the time of the collision.

XIX
Under the Securities Regulation Code, what is
the Margin Trading Rule? (2%)
Answer:
Under the Margin Trading Rule, no registered
broker or dealer, or member of an exchange shall ex-
 2009 BAR EXAMINATION 29

tend credit on any security an amount greater than

whichever is higher of:
a) 65% of the current market price of the secu-
rity;
b) 100% of the lowest market price of the se-
curity during the preceding 36 calendar
months, but not more than 75% of the cur-
rent market price. (Section 48 of the Securi-
ties Regulation Code)
The purpose of the Margin Trading Rule is to
prevent excessive use of credit for the purchase and
carrying of securities. It is a counter to broker's de-
sire to generate more sales by encouraging clients
to buy securities on credit.
 2010 BAR EXAMINATION

Briey describe the following types of banks:

(2% each)
A. universal bank
B. commercial bank
C. thrift bank
D. rural bank
E. cooperative bank

Answer:

A. A universal bank is a commercial bank

which has the power of an investment
house and the power to invest in the equity
of non-allied enterprises (Section 23 of the
RA 8791, otherwise known as the new
General Banking Act). It is otherwise
known as an expanded commercial bank
B. A commercial bank is a bank that can:
a. Accept drafts;
b. Issue letters of credit;
c. Discount and negotiate promissory
note, bills of exchange, and other evi-
dence of debt;
d. Accept or create demand deposits;

30
 2010 BAR EXAMINATION 31

e. Receive other types of deposits, as

well as deposit substitutes;
f. Buy and sell foreign exchange, as well
as gold or silver bullion;
g. Acquire marketable bonds and other
debts securities; and
h. Extend credit, subject to such rules
promulgated by the Monetary Board.
(Section 29 of GBL)
A thrift bank is one established as a sav-
ings and mortgage bank, a stock savings
and loan association, or a private develop-
ment bank, for the purpose of:
a. Accumulating the savings of deposi-
tors and investing them together with
capital loans secured by bonds, mort-
gages in real estate and insured im-
provements thereon chattel mortgage,
bonds and other forms of security, or
in loans for personal or household fi-
nance, whether secured or unsecured,
or in financing for homebuilding and
home development, in readily market-
able and debt securities, in commer-
cial papers and account receivables,
drafts, bill of exchange, acceptance or
notes, arising out of commercial
transactions or in outlets determined
by the Monetary Board as necessary
in the furtherance of national eco-
nomic objectives;
b. Providing short-tenn working capital,
medium and long-term financing, to
32 BAR Q & A IN COMMERCIAL LAW

business engaged in agriculture, ser-

vices, industry and housing; and
c. Providing diversified financial and al-
lied services for its chosen market and
constituencies especially for small
and medium enterprises and indi-
viduals (Section 3 of RA 7906).
D. A rural bank is one established to provide
credit facilities to farmers and merchants or
their cooperatives and, in general, to the
people of the rural communities (Section 2
of RA 7353)
E. A cooperative bank is a bank organized
under the Cooperative Code to provide fi-
nancial and credit services to cooperatives.

II
A. How do you characterize the legal rela-
tionship between a commercial bank and its
safety deposit box client? (2%)

Answer:

A contract for the use of safety deposit box is a

special kind of deposit. The relationship between a
commercial bank and its safety deposit box client is
that of a bailee and bailor, the bailment being for
hire and mutual benefit. (Sia vs. Court of Appeals,
G.R. No. 102970, May 13, 1993)

B. Is a stipulation in the contract for the use

of a safety deposit box relieving the bank of liabil-
ity in connection with the use thereof valid? (2%)
 2010 BAR EXAMINATION 33

Answer:

The stipulation relieving the bank of liability in

connection with the use of the safety deposit box is
void as it is against law and public policy.

C. Differentiate “bank deposits" from “de-

posit substitutes." (2%)

Answer:
Bank deposits are funds obtained by a bank
from the public which are relent by such bank to its
own borrowers. They are governed by the law on
loans. They give rise to creditor-debtor relationship
between the bank, as debtor and the depositors, as
creditors. Deposit substitutes are alternative fonns
of obtaining funds from the public, other than de-
posits, through the issuance, endorsement, or ac-
ceptance of debt instruments for the own account of
the borrower, for the purpose of relending or pur-
chasing of receivables and other obligations. These
instruments may include, but need not be limited to,
bankers acceptances, promissory notes, participa-
tions, certificates of assigmnent and similar instru-
ments with recourse, and repurchase agreements.

D. Why are banks required to maintain re-

serves against their deposits and deposit substi-
tutes? State one of three purposes for these re-
serves. (2%)
34 BAR Q & A IN COMMERCIAL LAW

Answer:

Any one of the following purposes for requiring

banks to maintain reserves against their deposits
and deposit substitutes will suffice:
1. To control the volume of money arising from
the credit operations of the banking system;
2. To provide the banks reserves which they
can tap in case of inadequate liquidity to
service withdrawals of bank deposits;
3. To help Govemment to nance its operation;

III
Andante Realty, a marketing company that
promotes and facilitates sales of real property
through leverage marketing, solicits investors
who are required to be a Business Center Owner
(BCO) by paying an enrollment fee of $250. The
BCO is then entitled to recruit two other investors
who pay $250 each. The BCO receives $90 from
the $250 paid by each of his recruits and is cred-
ited a certain amount for payments made by in-
vestors through the initial efforts of his Business
Center. Once the accumulated amount reaches
$5,000, the same is used as down payment for the
real property chosen by the BCO.
A. Does this multi-level marketing scheme
constitute an “investment contract” under the Se-
curities Regulation Code? Define an “investment
contract." (2%)
 2010 BAR EXAMINATION 35

Answer:

Yes. The multi-level marketing scheme consti-

tutes an “investment contract". (Power Homes
Unlimited vs. SEC, 546 SCRA 567) Under the Securi-
ties and Regulation Code, an “investment contract"
is a contract, transaction or scheme whereby a per-
son invests his money in a cormnon enterprise with
the expectation of profits primarily from the efforts
of another.

B. What procedure must be followed under

the Securities Regulation Code to authorize the
sale or offer for sale or distribution of an invest-
ment contract? (2%)
Answer:
Prior to the sale or offering for sale or distribu-
tion to the public of an investment contract, the ls-
suer must file a registration statement with and ob-
tain a permit to sell from the Securities and Ex-
change Commission in accordance with Section 8 of
the Securities and Regulation Code.

C. What are the legal consequences of fail-

ure to follow this procedure? (2%)
Answer:
The failure to follow this procedure shall give
rise to criminal, civil and administrative liabilities.
The penal sanction, upon conviction, includes a fine
P50,000 to P5,000,000 and/or imprisonment of 7-12
years). It carries also civil liabilities such that the
purchaser can recover from the seller (i) the consid-
36 BAR Q & A IN COMMERCIAL LAW

eration paid with interest thereon, less the amount

of any income received on the purchased securities,
upon the tender of such securities, or (ii) damages if
the purchaser no longer owns such securities. Fur-
thermore, the Securities and Exchange Commission
may issue a cease and desist order to enjoin the sale
of the unregistered securities and impose adminis-
trative sanctions against the Issuer and its respon-
sible directors, officers and agents.

IV
Venezia is a famous international fashion
chain with outlets in Makati, Ortigas, and Manila.
It has complied with the minimum capitalization
required under the Retail Trade Nationalization
Act and carries on retail business worth more than
$3 million for each of its outlets. As its Manila out-
let is not doing very well, it decides to sell all of its
business there consisting of remaining inventory,
furniture and fixtures and other assets to its com-
petitor.
A. Venezia’s Manila outlet constitutes one-
third (1/3) of its total business. Should it comply
with the requirements of the Bulk Sales Law?
Why or why not? (2%)
Answer:
Venezia need not comply with the requirements
of the Bulk Sales Law as the sale does not constitute
a sale of all or substantially all of its business. While
the law does not define what sale of substantially
all of the business mean, this should be read in con-
 2010 BAR EXAMINATION 37

junction with the Corporation Code that the sale is

considered substantially all if after the sale, the
seller can not continue with the business for which
it was organized. In this case, Venezia is still in
business despite the sale of its Manila outlet inven-
tory.

B. If instead of selling its Manila outlet,

Venezia merely mortgages its assets there, would
it need to comply with the requirements of the
Bulk Sales Law? (2%)
Answer:

For the same reasons stated in the answer to

(1) above, Venezia need not comply with the re-
quirements of the Bulk Sales Law. While the bulk
sales also covers mortgage, the same should like-
wise involve all or substantially all of the business
or assets of the seller.

C. What are the legal consequences of a fail-

ure to comply with the requirements of the Bulk
Sales Law? (2%)

Answer:
Failure to comply with the requirements of a
Bulk Sales Law renders the sale, transfer, mortgage,
or assignment fraudulent and void, and makes any
person found guilty of violating any provision of the
Bulk Sales Law punishable by imprisonment for not
less than 6 months nor more than 5 years, or a ne
in an amount not exceeding P5,000, or both such
imprisonment and fine in the discretion of the court.
38 BAR Q & A IN COMMERCIAL LAW

A. What contractual stipulations are re-

quired in all technology transfer agreements? (2%)

Answer:

The following stipulations are required in all

technology transfer agreements:
a. The laws of the Philippines shall govern its
interpretation and in the event of litigation,
the venue shall be the proper court in the
place where the licensee has its principal
place of business;
b. Continued access to improvements in tech-
niques and processes related to the tech-
nology shall be made available during the
period of the technology transfer arrange-
ment;
c. In case it shall provide for arbitration, the
Procedure of Arbitration of the Arbitration
Law of the Philippines or the Arbitration
Rules of the International Chamber of
Commerce (ICC) or the Rules of Concilia-
tion and Arbitration of the International
Chamber of Commerce shall apply and the
venue of arbitration shall be the Philippines
or any neutral country;
d. The Philippine taxes on all payments relat-
ing to the technology transfer agreement
shall be borne by the licensor. (Section 88
of the IPC)
 2010 BAR EXAMINATION 39

Enumerate three (3) stipulations that are

B.
prohibited in technology transfer agreements.
(3%)

Answer:

The following stipulations are prohibited in

technology transfer agreements:
a. Those pursuant to which the licensor re-
serves the right to fix the sale or resale
prices of the products manufactured on the
basis of the license;
b. Those that contain restrictions regarding
the volume and structure of production;
c. Those that prohibit the use of competitive
technologies in no-exclusive agreement;

C. Can an article of commerce serve as a trade-

mark and at the same time enjoy patent and
copyright protection? Explain and give an ex-
ample. (2%)

Answer:

Yes, because an article of commerce may have

different objector purpose which can be separately
covered by the three intellectual property rights.
A stamped or marked container of goods can be
registered as a trademark. The ornamental design
appearing on the container of goods can be copy-
righted if it can be conceptually separated from the
utilitarian aspect of the container. Such design if it
can be used as pattern for industrial product or
handicraft can also be covered by a patent for indus-
40 BAR Q & A IN COMMERCIAL LAW

trial design. Thus, a container of goods which has

an original omamental design can be registered as a
trademark, can be copyrighted, and can be regis-
tered as an industrial design.

VI
Union Mines, Inc. has total assets of P60 mil-
lion with 210 stockholders holding at least 100
shares each.
The company has two principal stockholders,
ABC which owns 60% of the shares of stock, and
XYZ which owns 17%.
ABC in turn is owned to the extent of 21.31%
by Acme, Inc.; 29.69% by Golden Boy, Inc.; 9% by
XYZ; and the rest by individual stockholders.
None of the parties is a publicly-listed com-
pany.
XYZ now proposes to buy Acme’s and Golden
Boy’s shares in ABC, which would give it direct
control of ABC and indirect control of Union
Mines.
Is the proposed acquisition by XYZ subject to
the mandatory tender offer rule? Why or why not?
What is a tender offer and when is it mandatory?
(5%)

Answer:

Yes, the proposed acquisition is subject to

mandatory tender offer rule. A tender offer is a pub-
licly announced intention by a person (acting alone
 2010 BAR EXAMINATION 41

or in concert with other persons) to acquire the eq-

uity securities of a public company. A tender offer is
meant to protect minority stockholders against any
scheme that dilutes the share value of their invest-
ments. It gives them the chance to sell their shares
for the same price and under the same terms offered
to the majority stockholders, provided that such
price is supported by a fairness opinion prepared by
an independent public accountant.
Under the Securities Regulation Code and its
implementing rules, a mandatory tender offer is re-
quired:
a. When at least 35% of the outstanding
shares of a public company is to be ac-
quired in one transaction or a series of
transaction during a 12-month period; or
b. Even if any acquisition is less than 35%
threshold but the result thereof is the own-
ership of more than 51% of the total out-
standing shares of a public company. (Rule
19.2.5)

The mandatory tender offer rule also applies

even if the acquisition, direct or indirect, is less than
35% when the purchase would result in ownership
of over 51% of the total outstanding equity securities
of a public company (Cemco Holdings Inc. vs. Na-
tional Life Insurance Company of the Philippines,
G.R. No. 171815, August 7,2007)
In this case, Union Mines is clearly a public
company, since it has a total asset of P60 Million
with 210 stockholders holding at least 100 shares
each. A public company is defined as a corporation
42 BAR Q & A IN COMMERCIAL LAW

listed on the stock exchange, or a corporation

amounts to at least P50 Million, with at least 200
stockholders holding not less than 100 shares each
of such corporation.
XYZ's acquisition of shares of Acme, Inc. and
Golden Boy, Inc., taken separately, does not reach
35% threshold and therefore on that score is not sub-
ject to mandatory tender offer. However, since, XYZ
already owns 9% of ABC. Its acquisition of the
shares of Acme and Golden Boy will result in XY Z
owning 60% of ABC. This means that it will now in-
directly own approximately 36% of ABC. However,
when the acquisitions are added to XYZ’s 17% share
ownership in Union Mines, they meet the more-
than-51% threshold for mandatory tender offer.
NB As of this writing, the SEC-revised definition
of tender offer is a publicly announced intention by a
person acting alone or in concert with others to ac-
quire outstanding equity securities of a public com-
pany or outstanding equity securities of an associ-
ate or related company of such public company
which controls the said public company.
Likewise, mandatory tender offers include:
19.2.1. Any person or group of persons acting
in concert, who intend to acquire 15% of equity se-
curities in a public company in one or more transac-
tions within a period of 12 months shall file a decla-
ration to that effect with the Commission.
19.2.2. Any person or group of persons acting
in concert, who intends to acquire 35% of the out-
standing voting shares or such outstanding voting
shares that is sufficient to gain control of the board
in a public company in one or more transactions
 2010 BAR EXAMINATION 43

within a period of 12 months, shall disclose such in-

tention and contemporaneously make a tender offer
for the percentage sought to all holders of such se-
curities within the said period.
19.2.3 Any person or group of persons acting
in concert, who intends to acquire 35% of the out-
standing voting shares or such outstanding voting
shares that is sufficient to gain control of the board
in a public company directly from one or more
stockholders shall be required to make tender offer
for all the outstanding voting shares.
19.2.4. If any acquisition would result in own-
ership of over 50% of the total outstanding equity
securities of a public company, the acquirer shall be
required to make a tender offer for all the out-
standing equity securities to all remaining stock-
holders of the said company at a price supported by
a fairness opinion provided by an independent fi-
nancial advisor or equivalent third party. The ac-
quirer in such tender offer shall be required to ac-
cept all securities tendered.

VII
Marlon deposited with LYRIC Bank a money
market placement of P1 million for a term of 31
days. On maturity date, one claiming to be Marlon
called up the LYRIC Bank account officer and in-
structed him to give the manager's check repre-
senting the proceeds of the money market place-
ment to Marlon's girlfriend Ingrid.
The check, which bore the forged signature of
Marlon, was deposited in Ingrid’s account with
44 BAR Q & A IN COMMERCIAL LAW

YAMAHA Bank. YAMAHA Bank stamped a guar-

anty on the check reading: “All prior endorse-
ments and/or lack of endorsement guaranteed."
Upon presentment of the check, LYRIC Bank
funds the check. Days later, Marlon goes to LYRIC
Bank to collect his money market placement and
discovers the foregoing transactions.
Marlon thereupon sues LYRIC Bank which in
turn files a third-party complaint against YA-
MAHA Bank. Discuss the respective rights and li-
abilities of the two banks. (5%)
Answer:

This is similar to the case of BPI vs. Court of

Appeals, 216 SCRA 51 where the Supreme Court
held that a bank which allowed the pre-termination
of a money market placement without making verifi-
cation with the client and comparing the signature
in the letter pre-terminating the money market
placement with the specimen signature of the client
on file and without requiring the surrender of the
promissory note evidencing the money market
placement is considered negligent, more so in this
case, where the instruction was made by a swindler
who impersonated the client with a money market
placement in a bank. The bank to whom the swin-
dler deposited the cashier’s check representing the
proceeds of the money market placement was also
negligent when it approved the opening of the ac-
count with only a tax account number as means of
identification. The drawee bank, however, whose
negligence is greater and the proximate cause of the
 2010 BAR EXAMINATION 45

loss should bear sixty per cent of the loss while the
collecting bank should bear forty per cent thereof.

VIII
Your client Dianne approaches you for legal
advice on putting up a medium-sized restaurant
business that will specialize in a novel type of cui-
sine. As Dianne feels that the business is a little
risky, she wonders whether she should use a cor-
poration as the business vehicle, or just run it as a
single proprietorship. She already has an existing
corporation that is producing meat products prof-
itably and is also considering the alternative of
simply setting up the restaurant as a branch office
of the existing corporation.
A. Briefly explain to your client what you
see as the legal advantages and disadvantages of
using a separate corporation, a single proprietor-
ship, or a branch of an existing corporation for the
proposed restaurant business. (3%)

Answer:
If Dianne will set up a separate corporation, her
liability for its obligations will be limited to the
amount of her subscription in the absence of bad
faith or gross negligence in conducting affairs of the
corporation showing that there is a ground to disre-
gard its separate juridical personality. If she were to
operate a single proprietorship, her liability for its
obligations goes beyond the capital of the business.
Her personal properties may be held answerable for
the liability of the single proprietorship since it has
46 BAR Q &A IN COMMERCIAL LAW

no separate legal personality from Dianne, as pro-

prietor.
The fonnation and the operation of a corpora-
tion require a great deal of paper work and record-
keeping and subject to compliance with various SEC
rules and regulations. This is not the situation in the
case of a single proprietorship.
If she were to set-up the restaurant as a branch
office an existing corporation, it will allow her to ex-
pand the business of the corporation without the
cost of incorporation. However, all the assets of the
existing corporation will be liable for all obligations
of the restaurant business.

B. If you advise your client to use a corpora-

tion, what officer positions must the corporation
at least have? (2%)
Answer:

It must have a president, treasurer, and a secre-

taiy.

C. What particular qualifications, if any, are

these officers legally required to possess under
the Corporation Code? (2%)
Answer:
The President is required to be a director and a
shareholder of the corporation. The secretary must
be a resident and citizen of the Philippines. The
treasurer must be a resident of the Philippines. The
President and treasurer are not required to be Fili-
 2010 BAR EXAMINATION 47

pino citizens unless the corporation is engaged in

nationalized industry.

IX

To secure a loan of P10 million, Mario mort-

gaged his building to Armando. In accordance
with the loan arrangements, Mario had the build-
ing insured with First Insurance Company for P10
million, designating Armando as the beneficiary.
Armando also took an insurance on the build-
ing upon his own interest with Second Insurance
Company for P5 million.
The building was totally destroyed by fire, a
peril insured against under both insurance poli-
cies. It was subsequently determined that the fire
had been intentionally started by Mario and that
in violation of the loan agreement, he had been
storing inflammable materials in the building.
A. How much, if any, can Armando recover
from either or both insurance companies? (2%)
Answer:

Armando can receive P5 Million from Second

Insurance Company. As mortgagee, he had an in-
surable interest in the building to the extent of the
amount of the mortgage debt.
Armando cannot collect anything from First In-
surance Company. First Insurance Company is not
liable for the loss of the building because it was
caused by the insured himself. In an insurance pol-
icy obtained by the mortgagor with the mortgagee
48 BAR Q & A IN COMMERCIAL LAW

as designated beneficiary, any act on the part of the

insured affects the beneficiary.

B. What happens to the P10 million debt of

Mario to Armando? Explain. (3%)

Answer:

Since Armando would have collected P5 Million

from Second Insurance Company, this amount
should be considered as partial payment of the loan.
Armando can only collect the balance of P5 Million.
Second Insurance Company can recover from Mario
the amount of P5 Million it paid, because it became
subrogated to the rights of Armando.

Enrique obtained from Seguro Insurance

Company a comprehensive motor vehicle insur-
ance to cover his top of the line Aston Martin. The
policy was issued on March 31, Z010 and, on even
date, Enrique paid the premium with a personal
check postdated April 6, 2010.
On April 5, 2010, the car was involved in an
accident that resulted in its total loss.
On April 10, 2010, the drawee bank returned
Enrique’s check with the notation “Insufficient
Funds." Upon notification, Enrique immediately
deposited additional funds with the bank and
asked the insurer to redeposit the check.
 2010 BAR EXAMINATION 49

Enrique thereupon claimed indemnity from

the insurer. Is the insurer liable under the insur-
ance coverage? Why or why not? (3%)

Answer:

The insurer is liable under the insurance policy.

By accepting a post-dated check, the insurer effec-
tively extended credit for the payment of the insur-
ance premium. Credit extension is one of the excep-
tions to the rule that an insurance is not efficacious
with a valid insurance payment. In this case, the
loss occurred within the credit period. It does not
matter that the check was eventually dishonored.
(Capital Insurance & Surety Company vs. Plastic Era
Co., Inc., G.R. No. L-23375, July 18, 1975)

XI

Paolo, the owner of an ocean-going vessel, of-

fered to transport the logs of Constantino from
Manila to Nagoya. Constantino accepted the offer,
not knowing that the vessel was manned by an
irresponsible crew with deep-seated resentments
against Paolo, their employer.
Constantino insured the cargo of logs against
both perils of the sea and barratry. The logs were
improperly loaded on one side, thereby causing
the vessel to tilt on one side. On the way to Na-
goya, the crew unbolted the sea valves of the ves-
sel causing water to ood the ship hold. The ves-
sel sank.
50 BAR Q & A IN COMMERCIAL LAW

Constantino tried to collect from the insur-

ance company which denied liability, given the
unworthiness of both the vessel and its crew.
Constantino countered that he was not the
owner of the vessel and he could therefore not be
responsible for conditions about which he was in-
nocent.
A. Is the insurance company liable? Why or
why not? (3%)

Answer:

No. The insurance company is not liable be-

cause the loss of the cargo was due to the perils of
the ship, that is, incompetence of the vessel's crew.
There is an also an implied warranty in every marine
insurance that the ship is seaworthy. A ship is un-
seaworthy if it is not manned by competent crew as
in this case. There was a breach of warranty, be-
cause the logs were improperly loaded and the crew
was irresponsible. It is the insured's responsibility,
not the insurer, to look for a seaworthy vessel. It
would have been different if the policy obtained is
an all risks marine insurance policy in which case
the insurer is liable for the losses caused by the irre-
sponsible crew. (Roque vs. Intermediate Appellate
Court, G.R. No. L-66935, Novernber 11, 1985).

B. What is “barratry" in marine insurance? (2%)

Answer:

Barratry is any willful misconduct on the part of

the master or the crew in pursuance of some unlaw-
 2010 BAR EXAMINATION 51

ful or fraudulent purpose without the consent of the

owner and to the prejudice of the interest of the
owner.

XII
When OCCIDENTAL Bank folded up due to in-
solvency, Manuel had the following separate de-
posits in his name: P200,000 in savings deposit;
P250,000 in time deposit; P50,000 in a current ac-
count; P1 million in a trust account; and P3 million
in money market placement. Under the Philippine
Deposit Insurance Corporation Act, how much
could Manuel recover? Explain. (2%)

Answer:
Manuel can recover P500,000 because this is
the total of his savings deposit, time deposit and
current account. The trust account and the money
market placements are not considered insured de-
posits.

XIII
While vacationing in Boracay, Valentino sur-
reptitiously took photographs of his girlfriend
Monaliza in her skimpy bikini. Two weeks later,
her photographs appeared in the Internet and in a
national celebrity magazine.
Monaliza found out that Valentino had sold
the photographs to the magazine and, adding in-
sult to injury, uploaded them to his personal blog
on the Internet.
52 BAR Q & A IN COMMERCIAL LAW

A. Monaliza filed a complaint against Valen-

tino for damages based on, among other grounds,
violation of her intellectual property rights. Does
she have any cause of action? Explain. (2%)

Answer:

No. Monaliza cannot sue Valentino for violation

of her intellectual property rights. While photo-
graphs are copyrightable works, the owner of the
copyright is the photographer not the person sub-
ject of the photograph. She may sue Valentino in-
stead for violation of her right to privacy for having
surreptitiously taken her photographs and then sell-
ing the same to a magazine and uploading them in
the internet.

B. Valentino's friend Francesco stole the

photographs and duplicated them and sold them
to a magazine publication. Valentino sued Fran-
cesco for infringement and damages. Does Valen-
tino have any cause of action? Explain. (2%)
Answer:

No. Valentino cannot sue Francesco for in-

fringement, because he has already sold the photo-
graphs to a magazine publication company.
C. Does Monaliza have any cause of action
against Francesco? Explain. (2%)
 2010 BAR EXAMINATION 53

Answer:
Yes. Monaliza can also sue Francesco for viola-
tion of her right to privacy but not for infringement
of any intellectual property right.

XIV
An importer of Christmas toys loaded 100
boxes of Santa Claus talking dolls aboard a ship in
Korea bound for Manila. With the intention of
smuggling one-half of his cargo, he took a bill of
lading for only 50 boxes. On the voyage to Manila,
50 boxes were jettisoned to save the more pre-
cious cargo.

A. Is the importer entitled to receive any in-

demnity for average? Explain. (2%)
Answer:
On the assmnption that there is a common risk
to the vessel and the cargo and that the vessel or
part of the cargoes must be deliberately sacrificed
to save the rest, the importer is entitled to receive
indemnity for general average but only for the value
of the cargoes which he declared in the bill of lad-
ing. Indemnity for general average is conditioned on
the existence on board of the cargoes which can be
proven by means of the bill of lading.

B. What are the types of averages in marine

commerce? (3%)
54 BAR Q & A IN COMMERCIAL LAW

Answer:

The types of averages are particular and gen-

eral average. Particular averages include all ex-
penses and damages caused to the vessel or to the
cargo which did not inure to the common benefit
and profit of all the persons interested in the vessel
and the cargo. General averages include all dam-
ages and expenses which are deliberately caused to
save the vessel, its cargo, or both at the same time,
from real and known maritime risk.

XV

The Supreme Court has held that fraud is an

exception to the “independence princip1e” gov-
erning letters of credit. Explain this principle and
give an example of how fraud can be an excep-
tion. (3%)

Answer:

The “independence principle" provides that the

rights and obligations of the parties to a letter of
credit are independent of the right and obligations
of the parties to the underlying transaction. Thus,
the beneficiary of the letter of credit, which is able
to comply with the documentary requirements un-
der the letter of credit, must be paid by the issuing
or confirming bank, notwithstanding any issue on
the fulfillment or non-fulfillment of main contract
underlying the letter of credit transaction, say a con-
tract of sale of goods where the buyer is not satis-
fied with the quality and/or quantity of the goods
which the seller delivered. The Supreme Court in
 2010 BAR EXAMINATION 55

Transeld Philippines, Inc. v. Luzon Hydro Corpora-

tion, 443 SCRA 307 (2004) for the first time declared
that fraud is an exception to the independence prin-
ciple. Under the fraud exception principle, the bene-
ficiary of the letter of credit may be enjoined from
collecting on the letter of credit, if he committed
fraud not in relation to the performance of his obli-
gation under the underlying contract but with re-
spect to the independent character of the credit, as
when he presents to the issuing or confirming bank
spurious or fraudulent documents that contain ma-
terial facts that, to his knowledge, are untrue.

XVI
For years, Y has been engaged in the parallel
importation of famous brands, including shoes
carrying the foreign brand MAGIC. Exclusive dis-
tributor X demands that Y cease importation be-
cause of his appointment as exclusive distributor
of MAGIC shoes in the Philippines.
Y counters that the trademark MAGIC is not
registered with the Intellectual Property Office as
a trademark and therefore no one has the right to
prevent its parallel importation.
A. Who is correct? Why? (2%)
Answer:
On the assumption that the manufacturer did
not authorize Y to import and sell the shoes carrying
the brand “Magic“, X is correct. The importation and
sale by Y of MAGIC shoes constitute unfair competi-
56 BAR Q & A IN COMMERCIAL LAW

tion. Trademark registration is not necessary in an

action for unfair competition. By selling the shoes
despite the exclusive distributorship right of X, Y is
effectively passing off to its customers that the
shoes are manufactured by the manufacturer with
whom X has entered into a sole distributorship
agreement.

B. Suppose the shoes are covered by a Phil-

ippine patent issued to the brand owner, what
would your answer be? Explain. (2%)
Answer:

The patentee has the sole right to carry out, and

prevent the importation of the patented product. X
can thus prevent Y’s parallel importation of the
shoes. The importation of the patented product
without authorization of the patent holder consti-
tutes patent infringement.
Shoes, however, are not patentable because
there lack of the elements of novelty and incentive
step.

XVII
Dr. Nobel discovered a new method of treat-
ing Alzheimer's involving a special method of di-
agnosing the disease, treating it with a new medi-
cine that has been discovered after long experi-
mentation and field testing, and novel mental
isometric exercises. He comes to you for advice on
how he can have his discoveries protected.
 2010 BAR EXAMINATION 57

Can he legally protect his new method of di-

agnosis, the new medicine, and the new method
of treatment? If no, why? If yes, how? (4%)
Answer:

Dr. Nobel can be protected by a patent for the

new medicine as it falls within the scope of Section
21 of the Intellectual Property Code. But, no patent
protection can be extended to the new method of
diagnosis and method of treatment. By express pro-
vision of law, methods for treatment of the human
body by surgery or therapy and diagnostic methods
practiced on the human body are non-patentable
inventions. (Section 22.2 of the IPC)
 2011 BAR EXAMINATION

Set A

(1) P rode a Sentinel Liner bus going to Ba-

guio from Manila. At a stop-over in Tarlac, the bus
driver, the conductor, and the passengers disem-
barked for lunch. P decided, however, to remain in
the bus, the door of which was not locked. At this
point, V, a vendor, sneaked into the bus and of-
fered P some refreshments. When P rudely de-
clined, V. attacked him, resulting in P suffering
from bruises and contusions. Does he have cause
to sue Sentinel Liner?

(A) Yes, since the carrier's crew did nothing to

protect a passenger who remained in the
bus during the stop-over.
(B) No, since the carrier's crew could not have
foreseen the attack.
(C) Yes, since the bus is liable for anything that
goes wrong in the course of a trip.

(D) No, since the attack on P took place when

the bus was at a stop-over.
Answer:

(A) Yes, since the carrier's crew did nothing to

protect a passenger who remained in the
bus during the stopover.

58
 2011 BAR EXAMINATION 59

(2) A cargo ship of X Shipping, Co. ran

aground off the coast of Cebu during a storm and
lost all its cargo amounting to Php50 Million. The
ship itself suffered damages estimated at Php80
Million. The cargo owners filed a suit against X
Shipping but it invoked the doctrine of limited li-
ability since its vessel suffered Php80 Million
damage, more than the collective value of all lost
cargo. Is X Shipping correct?

(A) Yes, since under that doctrine, the value of

the lost cargo and the damage to the ship
can be set-off.
(B) N0, since each cargo owner has a separate
and individual claim for damages.
(C) Yes, since the extent of the ship's damage
was greater than that of the value of the
lost cargo.
(D) No, since X Shipping neither incurred a to-
tal loss nor abandoned its ship.

Answer:
(D) No, since X Shipping neither incurred a to-
tal loss nor abandoned its ship.
(3) A writes a promissory note in favor of his
creditor, B. It says: “Subject to my option, I prom-
ise to pay B Phpl Million or his order or give Phpl
Million worth of cement or to authorize him to sell
my house worth Phpl Million. Signed, A." Is the
note negotiable?
60 BAR Q &A IN COMMERCIAL LAW

(A) No, because the exercise of the option to

pay lies with A, the maker and debtor.
(B) No, because it authorizes the sale of collat-
eral securities in case the note is not paid
at maturity.
(C) Yes, because the note is really payable to B
or his order, the other provisions being
merely optional.
(D) Yes, because an election to require some-
thing to be done in lieu of payment of
money does not affect negotiability.

Answer:

(A) No, because the exercise of the option to

pay lies with A, the maker and debtor.

(4) ABC Corp. increased its capital stocks

from Php10 Million to Php15 Million and, in the
process, issued 1,000 new shares divided into
Common Shares “B” and Common Shares “C.” T,
a stockholder owning 500 shares, insists on buy-
ing the newly issued shares through a right of pre-
emption. The company claims, however, that its
By-laws deny T any right of pre-emption. Is the
corporation correct?
(A) No, since the By-Laws cannot deny a share-
holder his right of pre-emption.
(B) Yes, but the denial of his pre-emptive right
extends only to 500 shares.
 2011 BAR EXAMINATION 61

(C) Yes, since the denial of the right under the

By-laws is binding on T.
(D) No, since pre-emptive rights are governed
by the articles of incorporation.

Answer:

(A) No, since the By-Laws cannot deny a share-

holder his right of pre-emption.

(5) M makes a promissory note that states:

“I, M, promise to pay Php5,000.00 to B or bearer.
Signed, M." M negotiated the note by delivery to
B, B to N, and N to O. B had known that M was
bankrupt when M issued the note. Who would be
liable to O?
(A) M and N since they may be assumed to
know of M's bankruptcy
(B) N, being O's immediate negotiator of a
bearer note
(C) B, M, and N, being indorsers by delivery of
a bearer note
(D) B, having known of M's bankruptcy

Answer:
(B) N, being O's immediate negotiator of a
bearer note

(6) Sdelivered 10 boxes of cellphones to Trek

Bus Liner, for transport from Manila to Ilocos Sur
on the following day, for which S paid the freight-
age. Meanwhile, the boxes were stored in the bus
62 BAR Q & A IN COMMERCIAL LAW

liner’s bodega. That night, however, a robber

broke into the bodega and stole S's boxes. S sues
Trek Bus Liner for contractual breach but the lat-
ter argues that S has no cause of action based on
such breach since the loss occurred while the
goods awaited transport. Who is correct?
(A) The bus liner since the goods were not lost
while being transported.
(B) S since the goods were unconditionally
placed with T for transportation.
(C) S since the freightage for the goods had
been paid.
(D) The bus liner since the loss was due to a
fortuitous event.

Answer:

(B) S since the goods were unconditionally

placed with T for transportation.

(7) X Corp. operates a call center that re-

ceived orders for pizzas on behalf of Y Corp.
which operates a chain of pizza restaurants. The
two companies have the same set of corporate of-
ficers. After 2 years, X Corp. dismissed its call
agents for no apparent reason. The agents filed a
collective suit for illegal dismissal against both X
Corp. and Y Corp. based on the doctrine of pierc-
ing the veil of corporate fiction. The latter set up
the defense that the agents are in the employ of X
Corp. which is a separate juridical entity. Is this
defense appropriate?
 2011 BAR EXAMINATION 63

(A) No, since the doctrine would apply, the two

companies having the same set of corpo-
rate officers.
(B) No, the real employer is Y Corp., the pizza
company, with X Corp. serving as an arm
for receiving its outside orders for pizzas.
(C) Yes, it is not shown that one company com-
pletely dominates the finances, policies,
and business practices of the other.
(D) Yes, since the two companies perform two
distinct businesses.
Answer:

(C) Yes, it is not shown that one company com-

pletely dominates the finances, policies,
and business practices of the other.

(8) A negotiable instrument can be indorsed

by way of a restrictive indorsement, which pro-
hibits further negotiation and constitutes the in-
dorsee as agent of the indorser. As agent, the in-
dorsee has the right, among others, to
(A) demand payment of the instrument only.
(B) notify the drawer of the payment of the in-
strument.
(C) receive payment of the instrument.
(D) instruct that payment be made to the
drawee.
64 BAR Q & A IN COMMERCIAL LAW

Answer:

(C) receive payment of the instrument.

(9) Under the Negotiable Instruments Law, a

signature by procuration operates as a notice that
the agent has but a limited authority to sign.
Thus, a person who takes a bill that is drawn, ac-
cepted, or indorsed by procuration is duty-bound
to inquire into the extent of the agent's authority
by:
(A) examining the agent’s special power of at-
tomey.
(B) examining the bill to determine the extent
of such authority.
(C) asking the agent about the extent of such
authority.
(D) asking the principal about the extent of
such authority.

Answer:

(B) examining the bill to determine the extent

of such authority.

(10) Under the Negotiable Instruments Law,

if the holder has a lien on the instrument which
arises either from a contract or by implication of
law, he would be a holder for value to the extent
of
(A) his successor's interest.
(B) his predecessor's interest.
 2011 BAR EXAMINATION 65

(C) the lien in his favor.

(D) the amount indicated on the instrument's
face.

Answer:

(C) the lien in his favor.

(11) The liability of a common carrier for the
goods it transports begins from the time of
(A) conditional receipt.
(B) constructive receipt.
(C) actual receipt.
(D) either actual or constructive receipt.

Answer:

(D) either actual or constructive receipt.

(12) On X's failure to pay his loan to ABC

Bank, the latter foreclosed the Real Estate Mort-
gage he executed in its favor. The auction sale
was set for Dec. 1, 2010 with the notices of sale
published as the law required. The sale was, how-
ever, cancelled when Dec. 1, 2010 was declared a
holiday and re-scheduled to Jan. 10, 2011 without
republication of notice. The auction sale then pro-
ceeded on the new date. Under the circumstances,
the auction sale is
(A) rescissible.
(B) unenforceable.
(C) void.
66 BAR Q & A IN COMMERCIAL LAW

(D) voidable.

Answer:

(C) void

(13) X executed a promissory note with a

face value of Php50,000.00, payable to the order of
Y. Y indorsed the note to Z, to whom Y owed
Php30,000.00. If X has no defense at all against Y,
for how much may Z collect from X?
( A) Php20,000.00, as he is a holder for value to
the extent of the difference between Y's
debt and the value of the note.
(B) Php30,000.00, as he is a holder for value to
the extent of his lien.
(C) Php50,000.00, but with the obligation to
hold Php20,000.00 for Y's benefit.
(D) None, as Z’s remedy is to run after his
debtor, Y.

Answer:

(C) Php50,000.00, but with the obligation to

hold Php20,000.00 for Y’s benefit.

('14) Under the Anti-Money Laundering Law,

a covered institution is required to maintain a sys-
tem of verifying the true identity of their clients
as well as persons purporting to act on behalf of
( ) those doing business with such clients.
( ) unknown principals.
 2011 BAR EXAMINATION 67

() the covered institution.

() such clients.

Answer

(D) such clients.

(15) It is settled that neither par value nor

book value is an accurate indicator of the fair
value of a share of stock of a corporation. As to
unpaid subscriptions to its shares of stock, as they
are regarded as corporate assets, they should be
included in the
(A) capital value.
(B) book value.
(C) par value.
(D) market value.

Answer:

(B) book value.

(15) P sold to M 10 grams of shabu worth

Php5,000.00. As he had no money at the time of
the sale, M wrote a promissory note promising to
pay P or his order Php5,000. P then indorsed the
note to X (who did not know about the shabu),
and X to Y. Unable to collect from P, Y then sued X
on the note. X set up the defense of illegality of
consideration. Is he correct?
(A) No, since X, being a subsequent indorser,
warrants that the note is valid and subsist-
ing.
68 BAR Q & A IN COMMERCIAL LAW

(B) No, since X, a general indorser, warrants

that the note is valid and subsisting.
(C) Yes, since a void contract does not give rise
to any right.
(D) Yes, since the note was born of an illegal
consideration which is a real defense.

Answer:

(B) No, since X, a general indorser, warrants

that the note is valid and subsisting.
(17) In a contract of carriage, the common
carrier is liable for the injury or death of a passen-
ger resulting from its employee’s fault although
the latter acted beyond the scope of his authority.
This is based on the
(A) rule that the carrier has an implied duty to
transport the passenger safely.
(B) rule that the carrier has an express duty to
transport the passenger safely
(C) Doctrine of Respondeat Superior.
(D) rule in culpa aqu1'11'a.na.

Answer:
(A) rule that the carrier has an implied duty to
transport the passenger safely.
(18) A holder in due course holds the in-
strument free from any defect of title of prior par-
ties and free from defenses available to prior par-
 2011 BAR EXAMINATION 69

ties among themselves. An example of such a de-

fense is —
(IX) fraud in inducement.
(B) duress amounting to forgery.
(C) fraud in esse contractus.
(D) alteration.

Answer:

(IX) fraud in inducement.

(19) In elections for the Board of Trustees of

non-stock corporations, members may cast as many
VOIZGS 8.8there are trustees to be elected but may not
cast more than one vote for one candidate. This
is true —
(F0 unless set aside by the members in plenary
session.
(B) in every case even if the Board of Trustees
resolves otherwise.
U3) unless otherwise provided in the Articles of
Incorporation or in the By-laws.
U9) in every case even if the majority of the
members decide otherwise during the elec-
tions.

Answer:

(C) unless othen/vise provided in the Articles of

Incorporation or in the By-laws.
70 BAR Q & A IN COMMERCIAL LAW

(20) The rule is that the valuation of the

shares of a stockholder who exercises his ap-
praisal rights is determined as of the day prior to
the date on which the vote was taken. This is
true-
(A) regardless of ar1y depreciation or apprecia-
tion in the share’s fair value.
(B) regardless of any appreciation in the
share’s fair value.
(C) regardless of any depreciation in the
share’s fair value.
(D) only if there is no appreciation or deprecia-
tion in the share’s fair value.
Answer:

(A) regardless of any depreciation or apprecia-

tion in the share’s fair value.
(21) T Shipping, Co. insured all of its vessels
with R Insurance, Co. The insurance policies
stated that the insurer shall answer for all dam-
ages due to perils of the sea. One of the insured's
ship, the MV Dona Priscilla, ran aground in the
Panama Canal when its engine pipes leaked and
the oil seeped into the cargo compartment. The
leakage was caused by the extensive mileage that
the ship had accumulated. May the insurer be
made to answer for the damage to the cargo and
the ship?
 2011 BAR EXAMINATION 71

(A) Yes, because the insurance policy covered

any or all damage arising from perils of the
sea.
(B) Yes, since there appears to have been no
fault on the part of the ship-owner and ship
captain.
(C) No, since the proximate cause of the dam-
age was the breach of warranty of seawor-
thiness of the ship.
(D) No, since the proximate cause of the dam-
age was due to ordinary usage of the ship,
and thus not due to a peril of the sea.

Answer:

(D) No, since the proximate cause of the dam-

age was due to ordinary usage of the ship,
and thus not due to a peril of the sea.

(22) X has been a long-time household

helper of Z. X’s husband, Y, has also been Z’s long-
time driver. May Z insure the lives of both X and Y
with Z as beneficiary?
(A) Yes, since X and Y render services to Z.
(B) No, since X and Y have no pecuniary inter-
est on the life of Z arising from their em-
ployment with him.
(C) No, since Z has no pecuniary interest in the
lives of X and Y arising from their employ-
ment with him.
(D) Yes, since X and Y are Z’s employees.
72 BAR Q & A IN COMMERCIAL LAW

Answer:

(C) No, since Z has no pecuniary interest in the

lives of X and Y arising from their employ-
ment with him.

(23) X, Co., a partnership, is composed of A

(capitalist partner), B (capitalist partner) and C (in-
dustrial partner). If you were partner A, who be-
tween B and C would you have an insurable inter-
est on, such that you may then insure him?

(A) No one, as there is merely a partnership

contract among A, B and C.
(B) Both B and C, as they are your partners.
(C) Only C, as he is an industrial partner.
(D) Only B, as he is a capitalist partner.

Answer:

(B) Both B and C, as they are your partners.

(24) X is the holder of an instrument payable

to him (X) or his order, with Y as maker. X then
indorsed it as follows: “Subject to no recourse, pay
to Z. Signed, X." When Z went to collect from Y, it
turned out that Y's signature was forged. Z now
sues X for collection. Will it prosper?

(A) Yes, because X, as a conditional indorser,

warrants that the note is genuine.
(B) Yes, because X, as a qualified indorser,
warrants that the note is genuine.
 2011 BAR EXAMINATION 73

(C) No, because X made a qualified indorse-

ment.
(D) No, because a qualified indorsement does
not include the warranty of genuineness.

Answer:

(B) Yes, because X, as a qualified indorser,

warrants that the note is genuine.

(25) A bill of exchange has T for its drawee,

U as drawer, and F as holder. When F went to T
for presentment, F learned that T is only 15 years
old. F wants to recover from U but the latter in-
sists that a notice of dishonor must first be made,
the instrument being a bill of exchange. Is he cor-
rect?

(A) Yes, since a notice of dishonor is essential

to charging the drawer.
(B) No, since T can waive the requirement of
notice of dishonor.
(C) No, since F can treat U as maker due to the
minority of T, the drawee.
(D) Yes, since in a bill of exchange, notice of
dishonor is at all times required.
Answer:
(C) No, since F can treat U as maker due to the
minority of T, the drawee.
(26) An insured, who gains knowledge of a
material fact already after the effectivity of the
74 BAR Q & A IN COMMERCIAL LAW

insurance policy, is not obliged to divulge it. The

reason for this is that the test of concealment of
material fact is determined

(A) at the time of the issuance of the policy.

(B) at any time before the payment of premium.
(C) at the time of the payment of the premium.
(D) at any time before the policy becomes ef-
fective.

Answer:

(D) at any time before the policy becomes ef-

fective.

(27) T, the captain of MV Don Alan, while

asleep in his cabin, dreamt of an Intensity 8 earth-
quake along the path of his ship. On waking up,
he immediately ordered the ship to return to port.
True enough, the earthquake and tsunami struck
three days later and his ship was saved. Was the
deviation proper?

(A) Yes, because the deviation was made in

good faith and on a reasonable ground for
believing that it was necessary to avoid a
peril.
(B) No, because no reasonable ground for
avoiding a peril existed at the time of the
deviation.
(C) No, because T relied merely on his sup-
posed gift of prophecy.
 2011 BAR EXAMINATION 75

(D) Yes, because the deviation took place

based on a reasonable belief of the captain.

Answer:

(B) No, because no reasonable ground for

avoiding a peril existed at the time of the
deviation.

(Z8) bill of exchange, wrote

X drawee of a
the words: “Accepted, with promise to make
payment within two days. Signed, X.” The drawer
questioned the acceptance as invalid. Is the accep-
tance valid?

(A) Yes, because the acceptance is in reality a

clear assent to the order of the drawer to
Pal’-
(B) Yes, because the fonn of the acceptance is
really immaterial.
(C) No, because the acceptance must be a
clear assent to the order of the drawer to
pal’-
(D) No, because the document must not ex-
press that the drawee will perform his
promise within two days.
Answer:

(A) Yes, because the acceptance is in reality a

clear assent to the order of the drawer to
139-37-
76 BAR Q & A IN COMMERCIAL LAW

(29) X came up with a new way of present-

ing a telephone directory in a mobile phone,
which he dubbed as the “iTel” and which uses
lesser time for locating names and telephone
numbers. May X have his “iTel” copyrighted in his
name?

(A) No, because it is a mere system or method.

(B) Yes, because it is an original creation.
(C) Yes, because it entailed the application of
X's intellect.
(D) No, because it did not entail any applica-
tion of X’s intellect.
Answer:

(A) No, because it is a mere system or method.

(30) wrote a promissory note
D, debtor of C,
payable to the order of C. C's brother, M, misrep-
resenting himself as C’s agent, obtained the note
from D, then negotiated it to N after forging C's
signature. N indorsed it to E, who indorsed it to F,
a holder in due course. May F recover from E?

(A) No, since the forgery of C's signature re-

sults in the discharge of E.
(B) Yes, since only the forged signature is in-
operative and E is bound as indorser.
(C) No, since the signature of C, the payee,
was forged.
(D) Yes, since the signature of C is immaterial,
he being the payee.
 2011 BAR EXAMINATION 77

Answer:

(B) Yes, since only the forged signature is in-

operative and E is bound as indorser.

(31) A material alteration of an instrument

without the assent of all parties liable thereon re-
sults in its avoidance, EXCEPT against a

(A) prior indorsee.

(B) subsequent acceptor.
(C) subsequent indorser.
(D) prior acceptor.

Answer:

(C) subsequent indorser.

(32) X constituted a chattel mortgage on a

car (valued at Phpl Million pesos) to secure a
P500,000.00 loan. For the mortgage to be valid, X
should have
(A) the right to mortgage the car to the extent
of half its value.
(B) ownership of the car.
(C) unqualied free disposal of his car.
(D) registered the car in his name.
Answer:
(C) unqualied free disposal of his car.
78 BAR Q & A IN COMMERCIAL LAW

(33) Bborrowed Phpl million from L and of-

fered to him his BMW car worth Php1 Million as
collateral. B then executed a promissory note that
reads: “I, B, promise to pay L or bearer the amount
of Phpl Million and to keep my BMW car (loan col-
lateral) free from any other encumbrance. Signed,
B.” Is this note negotiable?

(A) Yes, since it is payable to bearer.

(B) Yes, since it contains an unconditional
promise to pay a sum certain in money.
(C) N0, since the promise to just pay a sum of
money is unclear.
(D) No, since it contains a promise to do an act
in addition to the payment of money.
Answer:

(D) No, since it contains a promise to do an act

in addition to the payment of money.
(34) A bank can be placed under receiver-
ship when, if allowed to continue in business, its
depositors or creditors would incur

(A) probable losses

(B) inevitable losses
(C) possible losses
(D) a slight chance of losses
Answer:
(A) probable losses
 2011 BAR EXAMINATION 79

(35) EFG Foundation, Inc., a non-profit or-

ganization, scheduled an election for its six-
member Board of Trustees. X, Y and Z, who are
minority members of the foundation, wish to ex-
ercise cumulative voting in order to protect their
interest, although the Foundation's Articles and
By-laws are silent on the matter. As to each of the
three, what is the maximum number of votes that
he/she can cast?

(A) 6
(B) 9
(c) 12

(D) 3

Answer:
(A) 6

(36) If the drawer and the drawee are the

same person, the holder may present the instru-
ment for payment without need of a previous pre-
sentment for acceptance. In such a case, the
holder treats it as a
(A) non-negotiable instrument.
(B) promissory note.
(C) letter of credit.
(D) check.

Answer:
(B) promissory note.
so BAR Q &A IN COMMERCIAL LAW

(37) D draws a bill of exchange that states:

“One month from date, pay to B or his order
Php100,000.00. Signed, D." The drawee named in
the bill is E. B negotiated the bill to M, M to N, N
to 0, and O to P. Due to non-acceptance and after
proceedings for dishonor were made, P asked O to
pay, which O did. From whom may O recover?
(A) B, being the payee
(B) N, as indorser to O
(C) E, being the drawee
(D) D, being the drawer

Answer:

(D) D, being the drawer. O may recover from

any one of N, B and D because of their li-
ability as endorser and drawer, respec-
tively provided notice of dishonor given to
each of them

(38) T, an associate attorney in XYZ Law Of-

fice, wrote a newspaper publisher a letter disput-
ing a columnist's claim about an incident in the
attorney’s family. T used the law firm’s letterhead
and its computer in preparing the letter. T also re-
quested the firm’s messenger to deliver the letter
to the publisher. Who owns the copyright to the
letter?

(A) T, since he is the original creator of the con-

tents of the letter.
(B) Both T and the publisher, one wrote the let-
ter to the other who has possession of it.
 2011 BAR EXAMINATION 81

(C) The law office since T was an employee

and he wrote it on the rm's letterhead.
(D) The publisher to whom the letter was sent.

Answer:

(A) T, since he is the original creator of the con-

tents of the letter.

(39) E received goods from T for display and

sale in E's store. E was to turn over to T the pro-
ceeds of any sale and return the ones unsold. To
document their agreement, E executed a trust re-
ceipt in T’s favor covering the goods. When E
failed to turn over the proceeds from his sale of
the goods or return the ones unsold despite de-
mand, he was charged in court for estafa. E moved
to dismiss on the ground that his liability is only
civil. Is he correct?

(A) No, since he committed fraud when he

promised to pay for the goods and did not.
(B) No, since his breach of the trust receipt
agreement subjects him to both civil and
criminal liability for estafa.
(C) Yes, since E cannot be charged with estafa
over goods covered a trust receipt.
(D) Yes, since it was merely a consignment
sale and the buyer could not pay.

Answer:
82 BAR Q & A IN COMMERCIAL LAW

(B) No, since his breach of the trust receipt

agreement subjects him to both civil and
criminal liability for estafa.

(40)The authorized alteration of a ware-

house receipt which does not change its tenor ren-
ders the warehouseman liable according to the
terms of the receipt
(A) in its original tenor if the alteration is mate-
rial.
(B) in its original tenor.
(C) as altered if there is fraud.
(D) as altered.

Answer:

(B) in its original tenor.

(41) Any agreement binding upon the holder
to extend the time of payment or to postpone the
holder's right to enforce the instrument results in
the discharge of the party secondarily liable
unless made with the latter's consent. This
agreement refers to one which the holder made
with the
(A) principal debtor.
(B) principal creditor.
(C) secondary creditor.
(D) secondary debtor.
 2011 BAR EXAMINATION 83

Answer:
(A) principal debtor.

(42) Upon execution of a trust receipt over

goods, the party who is obliged to release such
goods and who retains security interest on those
goods, is called the
(A) holder.
(B) shipper.
(C) entrustee.
(D) entrustor.

Answer:
(D) entmstor.

(43) X, warehouseman, sent a text message

to Y, to whom X had issued a warehouse receipt
for Y's 500 sacks of corn, notifying him of the due
date and time to settle the storage fees. The mes-
sage stated also that if Y does not settle the ware-
house charges within 10 days, he will advertise
the goods for sale at a public auction. When Y ig-
nored the demand, X sold 100 sacks of corn at a
public auction. For X's failure to comply with the
statutory requirement of written notice to satisfy
his lien, the sale of the 100 sacks of corn is
(A) voidable.
(B) rescissible.
(C) unenforceable.
84 BAR Q & A IN COMMERCIAL LAW

(D) void.

Answer:

(D) void.

(44) On June 1, 2011, X mailed to Y Insur-

ance, Co. his application for life insurance, with
payment for years of premium enclosed in it. On
5
July 21, 2011, the insurance company accepted
the application and mailed, on the same day, its
acceptance plus the cover note. It reached X's
residence on August 11, 2011. But, as it happened,
on August 4, 2011, X figured in a car accident. He
died a day later. May X’s heirs recover on the in-
surance policy?
(A) Yes, since under the Cognition Theory, the
insurance contract was perfected upon ac-
ceptance by the insurer of X’s application.
(B) No, since there is no privity of contract be-
tween the insurer and X’s heirs.
(C) No, since X had no knowledge of the in-
surer’s acceptance of his application before
he died.
(D) Yes, since under the Manifestation Theory,
the insurance contract was perfected upon
acceptance of the insurer of X's application.

Answer

(C) No, since X had no knowledge of the in-

surer’s acceptance of his application before
he died.
 2011 BAR EXAMINATION 85

(45) A bill of exchange has D as drawer, E as

drawee and F as payee. The bill was then indorsed
to G, G to H, and H to I. I, the current holder pre-
sented the bill to E for acceptance. E accepted but,
as it later turned out, D is a fictitious person. Is E
freed from liability?
(A) No, since by accepting, E admits the exis-
tence of the drawer.
(B) No, since by accepting, E warrants that he
is solvent.
(C) Yes, if E was not aware of that fact at the
time of acceptance.
(D) Yes, since a bill of exchange with a ficti-
tious drawer is void and inexistent.

Answer:

(A) No, since by accepting, E admits the exis-

tence of the drawer.

(46) Due to his debt to C, D wrote a promis-

sory note which is payable to the order of C. C’s
brother, M, misrepresenting himself as agent of C,
obtained the note from D. M then negotiated the
note to N after forging the signature of C. May N
enforce the note against D?
(A) Yes, since D is the principal debtor.
(B) No, since the signature of C was forged.
(C) N0, since it is C who can enforce it, the
note being payable to the order of C.
as BAR Q & A IN COMMERCIAL LAW

( D) Yes, since D, as maker, is primarily liable

on the note.

Answer:

( B) No, since the signature of C was forged.

( 47) T Corp. has a corporate term of 20 years

under its Articles of Incorporation or from June 1,
1980 to June 1, 2000. On June 1, 1991 it amended
its Articles of Incorporation to extend its life by 15
years from June 1, 1980 to June 1, 2015. The SEC
approved this amendment. On June 1, 2011, how-
ever, T Corp decided to shorten its term by 1 year
or until June 1, 2014. Both the 1991 and 2011
amendments were approved by majority vote of
its Board of Directors and ratified in a special
meeting by its stockholders representing at least
2/3 o f its outstanding capital stock. The SEC, how-
ever, disapproved the 2011 amendment on the
ground that it cannot be made earlier than 5 years
prior to the expiration date of the corporate term,
whic h is June 1, 2014. Is this SEC disapproval cor-
rect?

(A) No, since the 5-year rule on amendment of

corporate tenn applies only to extension,
not to shortening, of tenn.
(B) Yes, any amendment affecting corporate
term cannot be made earlier than 5 years
prior to the corporation’s expiration date.
(C) No, since a corporation can in fact have a
corporate life of 50 years.
 2011 BAR EXAMINATION 87

(D) Yes, the amendment to shorten corporate

term carmot be made earlier than 5 years
prior to the corporation’s expiration date.

Answer:
(A) No, since the 5-year rule on amendment of
corporate term applies only to extension,
not to shortening, of tenn.

(48) B, while drunk, accepted a passenger in

his taxicab. B then drove the taxi recklessly, and
inevitably, it crashed into an electric post, result-
ing in serious physical injuries to the passengers.
The latter then filed a suit for tort against B's op-
erator, A, but A raised the defense of having exer-
cised extraordinary diligence in the safety of the
passenger. Is his defense tenable?

(A) Yes, as a common carrier can rebut the pre-

sumption of negligence by raising such a
defense.
(B) No, as in tort actions, the proper defense is
due diligence in the selection and supervi-
sion of the employee by the employer.
(C) No, as B, the common carrier's employee,
was obviously negligent due to his intoxi-
cation.
(D) Yes, as a common carrier can invoke ex-
traordinaiy diligence in the safety of pas-
sengers in tort cases.
88 BAR Q & A IN COMMERCIAL LAW

Answer:

(B) No, as in tort actions, the proper defense is

due diligence in the selection and supervi-
sion of the employee by the employer.

(49) X is a director in T Corp. who was

elected to a 1-year term on Feb. 1, 2010. On April
11, 2010, X resigned and was replaced by R, who
assumed as director on May 17, 2010. On Nov. 21,
2010, R died. S was then elected in his place. Until
which time should S serve as director?
(A) April11,2011.
(B) Feb. 1,2011.
(c) May 17, 2011.

(D) Nov.21,2011.

Answer:

(B) Feb. 1,2011.

(50) M, the maker, issued a promissory note

to P, the payee which states: “I, M, promise to pay
P or order the amount of Php1 Million. Signed, M."
P negotiated the note by indorsement to N, then N
to O also by indorsement, and O to Q, again by in-
dorsement. But before O indorsed the note to Q,
0's wife wrote the figure “2” on the note after
“Php1" without 0's knowledge, making it appear
that the note is for Php12 Million. For how much
is O liable to Q?
 2011 BAR EXAMINATION 89

(A) Phpl Million since it is the original tenor of

the note.
(B) Phpl Million since he warrants that the
note is genuine and in all respects what it
purports to be.
(C) Php12 Million since he warrants his sol-
vency and that he has a good title to the
note.
(D) Php12 Million since he warrants that the
note is genuine and in all respects what it
purports to be.

Answer:
(D) Php12 Million since he warrants that the
note is genuine and in all respects what it
purports to be.

(51) X Corp., whose business purpose is to

manufacture and sell vehicles, invested its funds
in Y Corp., an investment firm, through a resolu-
tion of its Board of Directors. The investment grew
tremendously on account of Y Corp.’s excellent
business judgment. But a minority stockholder in
X Corp. assails the investment as ultra vires. Is he
right and, if so, what is the status of the invest-
ment?
(A) Yes, it is an ultra vires act of the corpora-
tion itself but voidable only, subject to
stockholders’ ratification.
(B) Yes, it is an ultra vires act of its Board of Di-
rectors and thus void.
90 BAR Q & A IN COMMERCIAL LAW

(C) Yes, it is an ultra vires act of its Board of Di-

rectors but voidable only, subject to stock-
holders’ ratication.
(D) Yes, it is an ultra vires act of the corpora-
tion itself and, consequently, void.
Answer

(C) Yes, it is an ultra vires act of its Board of Di-

rectors but voidable only, subject to stock-
holders’ ratification.

(52) Notice of dishonor is not required to be

made in all cases. One instance where such notice
is not necessary is when the indorser is the one to
whom the instrument is suppose to be presented
for payment. The rationale here is that the in-
dorser
(A) already knows of the dishonor and it makes
no sense to notify him of it.
(B) is bound to make the acceptance in all
cases.
(C) has no reason to expect the dishonor of the
instrument.
(D) must be made to account for all his actions.

Answer:

(A) already knows of the dishonor and it makes

no sense to notify him of it.
 2011 BAR EXAMINATION 91

(53) “Eagleson Refillers, Co.," a firm that

sells water to the public, opposes the trade name
application of “Eagleson Laundry, Co.," on the
ground that such trade name tends to deceive
trade circles or confuse the public with respect to
the water firm's registered trade name. Will the
opposition prosper?
(A) Yes, since such use is likely to deceive or
confuse the public.
(B) Yes, since both companies use water in
conducting their business.
(C) No, since the companies are not engaged in
the same line of business.
(D) No, since the root word “Eagle” is a generic
name not subject to registration.

Answer:

(C) No, since the companies are not engaged in

the same line of business.

(54) For a constructive total loss to exist in

marine insurance, it is required that the person
insured relinquish his interest in the thing in-
sured. This relinquishment must be
(A) actual.
(B) constructive first and if it fails, then actual.
(C) either actual or constructive.
(D) constructive.
92 BAR Q & A IN COMMERCIAL LAW

Answer:

(A) actual.

(55) The Corporation Code sanctions a con-

tract between two or more corporations which
have interlocking directors, provided there is no
fraud that attends it and it is fair and reasonable
under the circumstances. The interest of an inter-
locking director in one corporation may be either
substantial or nominal. It is nominal if his interest:
(A) does not exceed 25% of the outstanding
capital stock.
(B) exceeds 25% of the outstanding capital
stock.
(C) exceeds 20% of the outstanding capital
stock.
(D) does not exceed 20% of the outstanding
capital stock.

Answer:

(D) does not exceed 20% of the outstanding

capital stock.

X, an amateur astronomer, stumbled

(56)
upon what appeared to be a massive volcanic
eruption in Jupiter while peering at the planet
through his telescope. The following week, X,
without notes, presented a lecture on his findings
before the Association of Astronomers of the Phil-
ippines. To his dismay, he later read an article in a
science journal written by Y, a professional as-
 2011 BAR EXAMINATION 93

tronomer, repeating exactly what X discovered

without any attribution to him. Has Y infringed on
X's copyright, if any?

(A) No, since X did not reduce his lecture in

writing or other material form.
(B) Yes, since the lecture is considered X's
original work.
(C) No, since no protection extends to any dis-
covery, even if expressed, explained, illus-
trated, or embodied in a work.
(D) Yes, since Y's article failed to make any at-
tribution to X.
Answer:

(C) No, since no protection extends to any dis-

covery, even if expressed, explained, illus-
trated, or embodied in a work.

(57) In case of disagreement between the

corporation and a withdrawing stockholder who
exercises his appraisal right regarding the fair
value of his shares, a three-member group shall by
majority vote resolve the issue with finality. May
the wife of the withdrawing stockholder be
named to the three-member group?
(A) No, the wife of the withdrawing share-
holder is not a disinterested person.
(B) Yes, since she could best protect her hus-
band's shareholdings.
94 BAR Q & A IN COMMERCIAL LAW

(C) Yes, since the rules do not discriminate

against wives.
(D) No, since the stockholder himself should sit
in the three-member group.
Answer:

(A) No, the wife of the withdrawing share-

holder is not a disinterested person.

(58) Apart from economic rights, the author

of a copyright also has moral rights which he may
transfer by way of assignment. The term of these
moral rights shall last
(A) during the author's lifetime and for 50 years
after his death.
(B) forever.
(C) 50 years from the time the author created
his work.
(D) during the author's lifetime.
Answer:

(A) during the author's lifetime and for 60 years

after his death.
(59) Which of the following indorsers ex-
pressly warrants in negotiating an instrument
that 1) it is genuine and true; 2) he has a good title
to it; 3) all prior parties have capacity to negotiate;
and 4) it is valid and subsisting at the time of his
indorsement?
 2011 BAR EXAMINATION 95

(A) The irregular indorser.

(B) The regular indorser.
(C) The general indorser.
(D) The qualified indorser.

Answer:
(C) The general indorser.

(60) Where the insurer was made to pay the

insured for a loss covered by the insurance con-
tract, such insurer can run after the third person
who caused the loss through subrogation. What is
the basis for conferring the right of subrogation to
the insurer?
(A) Their express stipulation in the contract of
insurance.
(B) The equitable assignment that results from
the insurer's payment of the insured.
(C) The insured’s formal assigmnent of his
right to indemnification to the insurer.
(D) The insured's endorsement of its claim to
the insurer.

Answer:
(B) The equitable assignment that results from
the insurer's payment of the insured.

(61) X invented a device which, through the

use of noise, can recharge a cellphone battery. He
applied for and was granted a patent on his de-
96 BAR Q & A IN COMMERCIAL LAW

vice, effective within the Philippines. As it turns

out, a year before the grant of X’s patent, Y, also
an inventor, invented a similar device which he
used in his cellphone business in Manila. But X
files an injunctive suit against Y to stop him from
using the device on the ground of patent in-
fringement. Will the suit prosper?
(A) No, since the correct remedy for X is a civil
action for damages.
(B) No, since Y is a prior user in good faith.
(C) Yes, since X is the first to register his de-
vice for patent registration.
(D) Yes, since Y unwittingly used X's patented
invention.

Answer:

(B) No, since Y is a prior user in good faith.

(62) P, a sales girl in a flower shop at the

Ayala Station of the Metro Rail Transit (MRT)
bought two tokens or tickets, one for her ride to
work and another for her ride home. She got to
her ower shop where she usually worked from 8
a.m. to 5 p.m. At about 3 p.m., while P was attend-
ing to her duties at the flower shop, two crews of
the MRT got into a fight near the ower shop,
causing injuries to P in the process. Can P sue the
MRT for contractual breach as she was within the
MRT premises where she would shortly take her
ride home?
 2011 BAR EXAMINATION 97

(A) No, since the incident took place, not in an

MRT train coach, but at the MRT station.
(B) No, since P had no intention to board an
MRT train coach when the incident oc-
curred.
(C) Yes, since she already had a ticket for her
ride home and was in the MRTs premises
at the time of the incident.
(D) Yes, since she bought a round trip ticket
and MRT had a duty while she was at its
station to keep her safe for her return trip.

Answer:

(B) No, since P had no intention to board an

MRT train coach when the incident oc-
curred.

(63) Forgery of bills of exchange may be sub-

divided into, a) forgery of an indorsement on the
bill and b) forgery of the drawer’s signature,
which may either be with acceptance by the
drawee, or

(A) with acceptance but the bill is paid by the

drawee.
(B) without acceptance but the bill is paid by
the drawer.
(C) without acceptance but the bill is paid by
the drawee.
(D) with acceptance but the bill is paid by the
drawer.
98 BAR Q & A IN COMMERCIAL LAW

Answer:

(C) without acceptance but the bill is paid by

the drawee.

(64) If an insurance policy prohibits addi-

tional insurance on the property insured without
the insurer’s consent, such provision being valid
and reasonable, a violation by the insured

(A) reduces the value of the policy.

(B) avoids the policy.
(C) offsets the value of the policy with the ad-
ditional insurances's value.
(D) forfeits premiums already paid.

Answer:

(B) avoids the policy.

(65) X found a check on the street, drawn by

Y against ABC Bank, with Z as payee. X forged Z's
signature as an indorser, then indorsed it person-
ally and delivered it to DEF Bank. The latter, in
turn, indorsed it to ABC Bank which charged it to
the Y's account. Y later sued ABC Bank but it set
up the forgery as its defense. Will it prosper?
(A) No, since the payee's signature has been
forged.
(B) No, since Y’s remedy is to run after the
forger, X.
 2011 BAR EXAMINATION 99

(C) Yes, since forgery is only a personal de-

fense.
(D) Yes, since ABC Bank is bound to know the
signature of Y, its client.

Answer:
(D) Yes, since ABC Bank is bound to know the
signature of Y, its client.

(66) The rule is that no stock dividend shall

be issued without the approval of stockholders
representing at least 2/3 of the outstanding capital
stock at a regular or special meeting called for the
purpose. As to other forms of dividends:

(A) a mere majority of the entire Board of Direc-

tors applies.
(B) a mere majority of the quorum of the Board
of Directors applies.
(C) a mere majority of the votes of stockholders
representing the outstanding capital stock
applies.
(D) the same rule of 2/3 votes applies.

Answer:
(B) a mere majority of the quorum of the Board
of Directors applies.

(67) X, at Y's request, executed a Real Estate

Mortgage (REM) on his (X's) land to secure Y's
loan from Z. Z successfully foreclosed the REM
when Y defaulted on the loan but half of Y's obli-
100 BAR Q & A IN COMMERCIAL LAW

gation remained unpaid. May Z sue X to enforce

his right to the deficiency?

(A) Yes, but solidarily with Y.

(B) Yes, since X's is deemed to warrant that his
land would cover the whole obligation.
(<3) No, since it is the buyer at the auction sale
who should answer for the deciency.
(D) No, because X is not Z's debtor.

Answer

(D) No, because X is not Z's debtor.

(63) May a publicly listed universal bank

own 100% of the voting stocks in another univer-
sal bank and in a commercial bank?

(A) Yes, if with the permission of the Bangko

Sentral ng Pilipinas.
(B) No, since it has no power to invest in equi-
ties.
Yes, as there is no prohibition on it.
No, since under the law, the 100% owner-
ship on voting stocks must be in either
bank only.
Answer:

(D) No, since under the law, the 100% owner-

ship on voting stocks must be in either
bank only.
 2011 BAR EXAMINATION 101

(69) Perils of the ship, under marine insur-

ance law, refer to loss which in the ordinary
course of events results from

(A) natural and inevitable actions of the sea.

(B) natural and ordinary actions of the sea.
(C) unnatural and inevitable actions of the sea.
(D) unnatural and ordinary actions of the sea.

Answer:
(A) natural and inevitable actions of the sea.

(70) Under the Intellectual Property Code,

lectures, sermons, addresses or dissertations pre-
pared for oral delivery, whether or not reduced in
writing or other material forms, are regarded as
(A) non-original works.
(B) original works.
derivative works.
not subject to protection

Answer:
(B) original works.
(71) Can a drawee who accepts a materially
altered check recover from the holder and the
drawer?

(A) No, he cannot recover from either of them.

(B) Yes from both of them.
102 BAR Q & A IN COMMERCIAL LAW

(C) Yes but only from the drawer.

(D) Yes but only from the holder.

Answer:

(A) No, he cannot recover from either of them.

(72) The rule is that the intentional cancella-

tion of a person secondarily liable results in the
discharge of the latter. With respect to an in-
dorser, the holder's right to cancel his signature is:
(A) without limitation.
(B) not limited to the case where the indorse-
ment is necessary to his title.
(C) limited to the case where the indorsement
is not necessary to his title.
(D) limited to the case where the indorsement
is necessary to his title.

Answer:

(C) limited to the case where the indorsement

is not necessary to his title.

(73)X, in the hospital for kidney dysfunc-

tion, was about to be discharged when he met his
friend Y. X told Y the reason for his hospitaliza-
tion. A month later, X applied for an insurance
covering serious illnesses from ABC Insurance,
Co., where Y was working as Corporate Secretary.
Since X had already told Y about his hospitaliza-
tion, he no longer answered a question regarding
 2011 BAR EXAMINATION 103

it in the application form. Would this constitute

concealment?

(A) Yes, since the previous hospitalization

would inuence the insurer in deciding
whether to grant X's application.
(B) No, since Y may be regarded as ABC's
agent and he already knew of X's previous
hospitalization.
(C) Yes, it would constitute concealment that
amounts to misrepresentation on X's part.
(D) N0, since the previous illness is not a mate-
rial fact to the insurance coverage.

Answer:

(A) Yes, since the previous hospitalization

would inuence the insurer in deciding
whether to grant X's application.

(74) Several American doctors wanted to set

up a group clinic in the Philippines so they could
render modern medical services. If the clinic is to
be incorporated under our laws, what is the re-
quired foreign equity participation in such a cor-
poration?

(A) 40%
(B) 0%

(C) 60%
(D) 70%
104 BAR Q & A IN COMMERCIAL LAW

Answer:

(B) 0%

(75)X executed a promissory note in favor of

Y by way of accommodation. It says: "Pay to Y or
order the amount of Php50,000.00. Signed, X." Y
then indorsed the note to Z, and Z to T. When T
sought collection from Y, the latter countered as
indorser that there should have been a present-
ment first to the maker who dishonors it. ls Y cor-
rect?

(A) No, since Y is the real debtor and thus,

there is no need for presentment for pay-
ment and dishonor by the maker.
(B) Yes, since as an indorser who is secondar-
ily liable, there must first be presentment
for payment and dishonor by the maker.
(C) No, since the absolute rule is that there is
no need for presentment for payment and
dishonor to hold an indorser liable.
(D) Yes, since the secondary liability of Y and Z
would only arise after presentment for pay-
ment and dishonor by the maker.

Answer:
(A) No, since Y is the real debtor and thus,
there is no need for presentment for pay-
ment and dishonor by the maker.

The Board of Directors of XYZ Corp.

(76)
unanimously passed a Resolution approving the
 2011 BAR EXAMINATION 105

taking of steps that in reality amounted to willful

tax evasion. On discovering this, the government
filed tax evasion charges against all the com-
pany’s members of the board of directors. The di-
rectors invoked the defense that they have no
personal liability, being mere directors of a fic-
tional being. Are they correct?
(A) No, since as a rule only natural persons like
the members of the board of directors can
commit corporate crimes.
(B) Yes, since it is the corporation that did not
pay the tax and it has a personality distinct
from its directors.
(C) Yes, since the directors officially and collec-
tively performed acts that are imputable
only to the corporation.
(D) No, since the law makes directors of the
corporation solidarily liable for gross negli-
gence and bad faith in the discharge of
their duties.

Answer:
(D) No, since the law makes directors of the
corporation solidarily liable for gross negli-
gence and bad faith in the discharge of
their duties.
T is the registered trademark owner of
(77)
“CROCOS" which he uses on his ready-to-wear
clothes. Banking on the popularity of T's trade
mark, B came up with his own “CROCOS” mark,
which he then used for his “CROCOS" burgers. T
106 BAR Q &A nu COMMERCIAL LAW

now sues B for trademark infringement but B ar-

gues that his product is a burger, hence, there is
no infringement. Is B correct?

(A) No, since the owner of a well-known mark

registered in the Philippines has rights that
extends even to dissimilar kinds of goods.
(B) Yes, since the right of the owner of a well-
known mark registered in the Philippines
does not extend to goods which are not of
the same kind.
(C) Yes, as B was in bad faith in coming up
with his own “CROCOS" mark.
(D) No, since unlike T, he did not register his
own “CROCOS" mark for his product.
Answer:

(A) No, since the owner of a well-known mark

registered in the Philippines has rights that
extends even to dissimilar kinds of goods.

(78) A, the proprietor of a eet of ten taxi-

cabs, decides to adopt, as his business name, “A
Transport Co., Inc." May this be allowed?

(A) No, it would be deceptive since he is a pro-

prietor, not a corporation.
(B) No, since “A” is a generic name, not suit-
able for registration.
(C) Yes, since his line of business is public
transportation.
 2011 BAR EXAMINATION 107

(D) Yes, since such name would give his busi-

ness a corporate identity.

Answer:

(A) No, it would be deceptive since he is a pro-

prietor, not a corporation.

(79) T delivers two refrigerators to the ware-

house of W who then issues a negotiable receipt
undertaking the delivery of the refrigerators to “T
or bearer." T entrusted the receipt to B for safe-
keeping only. B negotiated it, however, to F who
bought it in good faith and for value. Who is enti-
tled to the delivery of the refrigerators?
(A) T, since he is the real owner of the refrig-
erators.
(B) F, since he is a purchaser in good faith and
for value.
(C) B, since T entrusted the receipt to him.
(D) W, since he has as a warehouseman a lien
on the goods.

Answer:
(B) F, since he is a purchaser in good faith and
for value.

(80) The Articles of Incorporation must be

accompanied by a Treasurer's Affidavit certifying
under oath, among others, that the total subscrip-
tion paid is:
108 BAR Q & A IN COMMERCIAL LAW

I1 ot less than P25,000.00.

ot more than P5,000.00.
ot less than P5,000.00.
not more than P25,000.00.

Answer:

(C) not less than P5,000.00.

Note that the Revised Corporation eliminated
the minimum subscription requirement
upon incorporation

(81)In a special meeting called for the pur-

pose, 2/3 of the stockholders representing the out-
standing capital stock in X. Co. authorized the
company's Board of Directors to amend its By-
laws. By majority vote, the Board then approved
the amendment. Is this amendment valid?
(A) No since the stockholders cannot delegate
their right to amend the By-laws to the
Board.
(B) Yes since the majority votes in the Board
was sufficient to amend the By-laws.
(C) No, because the voting in the Board should
have been by majority of a quorum.
(D) Yes since the votes of 2/3 of the stockhold-
ers and majority of the Board were secured.

Answer:

(B) Yes since the majority votes in the Board

was sufficient to amend the By-laws.
 2011 BAR EXAMINATION 109

NB. The majority votes in the board was suffi-

cient because of the valid delegation of au-
thority by the stockholders.

(82) A group of Malaysians wanted to invest

in the Philippines‘ insurance business. After nego-
tiations, they agreed to organize “FIMA Insurance
Corp." with a group of Filipino businessmen.
FIMA would have a PhP50 Million paid up capital,
PhP40 Million of which would come from the Fili-
pino group. All corporate officers would be Filipi-
nos and 8 out of its 10-member Board of Directors
would be Filipinos. Can FIMA operate an insur-
ance business in the Philippines?

(A) No, since an insurance company must have

at least PhP75 Million paid-up capital.
(B) Yes, since there is substantial compliance
with our nationalization laws respecting
paid-up capital and Filipino dominated
Board of Directors.
(C) Yes, since FIMA’s paid up capital more
than meets the country's nationalization
laws.
(D) No, since an insurance company should be
100% owned by Filipinos.

Answer:

(D) No, since an insurance company should be

100% owned by Filipinos.

NB: As of this writing, insurance business is

not reserved for Filipinos. Foreigners may
110 BAR Q & A IN COMMERCIAL LAW

own shares of stock and the capital re-

quirement is Php90O million by end 2019
and PHP1.3 Billion by 2022

(83) Under the Public Service Act, an admin-

istrative agency has the power to approve provi-
sionally the rates of public utilities without a hear-
ing in case of urgent public needs. The exercise of
this power is
(A) supervisory.
(B) absolute.
(C) discretionary.
(D) mandatory.

Answer:

(C) discretionary.

(84) X, creditor of Y, obtained a judgment in

his favor in connection with Y's unpaid loan to
him. The court's sheriff then levied on the goods
that Y stored in T's warehouse, for which the lat-
ter issued a warehouse receipt. A month before
the levy, however, Z bought the warehouse re-
ceipt for value. Who has a better right over the
goods?

(A) T, being the warehouseman with a lien on

the goods
(B) Z, being a purchaser for value of the ware-
house receipt
(C) X, being Y's judgment creditor
 2011 BAR EXAMINATION 111

(D) Y, being the owner of the goods

Answer:

(B) Z, being a purchaser for value of the ware-

house receipt

(85) A promissory note states, on its face: “I,

X, promise to pay Y the amount of Php5,000.00
five days after completion of the on-going con-
struction of my house. Signed, X.” Is the note ne-
gotiable?

(A) Yes, since it is payable at a fixed period af-

ter the occurrence of a specified event.
(B) No, since it is payable at a xed period af-
ter the occurrence of an event which may
not happen.
(C) Yes, since it is payable at a fixed period or
determinable future time.
(D) No, since it should be payable at a xed pe-
riod before the occurrence of a specified
event.

Answer:
(B) No, since it is payable at a fixed period af-
ter the occurrence of an event which may
not happen.

(86) P sold to M a pair of gecko (tuko) for

Php50,000.00. M then issued a promissory note to
P promising to pay the money within 90 days. Un-
known to P and M, a law was passed a month be-
112 BAR Q & A IN COMMERCIAL LAW

fore the sale that prohibits and declares void any

agreement to sell gecko in the country. If X ac-
quired the note in good faith and for value, may
he enforce payment on it?

(A) No, since the law declared void the con-

tract on which the promissory note was
founded.
(B) No, since it was not X who bought the
gecko.
in due course of a
(C) Yes, since he is a holder
note which is distinct from the sale of
gecko.
(D) Yes, since he is a holder in due course and
P and M were not aware of the law that
prohibited the sale of gecko.
Answer:

(A) No, since the law declared void the con-

tract on which the promissory note was
founded.

(87) P authorized A to sign a bill of exchange

in his (P's) name. The bill reads: “Pay to B or order
the sum of Php1 million. Signed, A (for and in be-
half of P)." The bill was drawn on P. B indorsed
the bill to C, C to D, and D to E. May E treat the
bill as a promissory note?
(A) No, because the instrument is payable to
order and has been indorsed several times.
(B) Yes, because the drawer and drawee are
one and the same person.
 2011 BAR EXAMINATION 113

(C) No, because the instrument is a bill of ex-

change.
(D) Yes, because A was only an agent of P.

Answer:

(B) Yes, because the drawer and drawee are

one and the same person.

(88) Zwrote out an instrument that states:

“Pay to X the amount of Phpl Million for collec-
tion only. Signed, Z." X indorsed it to his creditor,
Y, to whom he owed Phpl million. Y now wants to
collect and satisfy X's debt through the Phpl mil-
lion on the check. May he validly do so?
(A) Yes, since the indorsement to Y is for Phpl
Million.
(B) No, since Z is not a party to the loan be-
tween X and Y.
(C) No, since X is merely an agent of Z, his only
right being to collect.
(D) Yes, since X owed Y Phpl Million.
Answer:
(C) No, since X is merely an agent of Z, his only
right being to collect.
(89) X Shipping, Co., insured its vessel MV
Don Teodoro for Php100 Million with ABC Insur-
ance, Co. through T, an agent of X Shipping. Dur-
ing a voyage, the vessel accidentally caught fire
and suffered damages estimated at Php80 Million.
114 BAR Q & A IN COMMERCIAL LAW

T personally informed ABC Insurance that X Ship-

ping was abandoning the ship. Later, ABC insur-
ance denied X Shipping's claim for loss on the
ground that a notice of abandonment through its
agent was improper. Is ABC Insurance right?

(A) Yes, since X Shipping should have ratified

its agent’s action.
(B) No, since T, as agent of X Shipping who
procured the insurance, can also give no-
tice of abandonment for his principal.
(C) Yes, since only the agent of X Shipping re-
layed the fact of abandonment.
(D) No, sincein the first place, the damage was
more than 3/4 of the ship’s value.

Answer:

(B) No, since T, as agent of X Shipping who

procured the insurance, can also give no-
tice of abandonment for his principal.

(90) A law was passed disqualifying former

members of Congress from sitting in the Board of
Directors of government-owned or controlled cor-
porations. Because of this, the Board of Directors
of ABC Corp.. a government-owned and controlled
corporation, disqualified C, a former Congress-
man, from continuing to sit as one of its members.
C objected, however, insisting that under the Cor-
poration Code members of the board of directors
of corporations may only be removed by vote of
stockholders holding 2/3 of its outstanding capital
 2011 BAR EXAMINATION 115

stock in a regular or special meeting called for

that purpose. Is C correct?
(A) Yes, since the new law cannot be applied
to members of the board of directors al-
ready elected prior to its passage.
(B) No, since the disqualification takes effect
by operation of law, it is sufficient that he
was declared no longer a member of the
board.
(C) Yes, since the provisions of the Corporation
Code applies as well to govemment-owned
and controlled corporations.
(D) No, since the board has the power to oust
him even without the new law.

Answer:

(B) No, since the disqualification takes effect

by operation of law, it is sufficient that he
was declared no longer a member of the
board.

(91) 002-38-0001 G, a grocery goods supplier,

sold 100 sacks of rice to H who promised to pay
once he has sold all the rice. H meantime deliv-
ered the goods to W, a warehouseman, who issued
a warehouse receipt. Without the knowledge of G
and W, H negotiated the receipt to P who acquired
it in good faith and for value. P then claimed the
goods from W, who released them. After the rice
was loaded on a ship bound for Manila, G invokes
his right to stop the goods in transit due to his un-
paid lien. Who has a better right to the rice?
116 BAR Q & A IN COMMERCIAL LAW

(A) P, since he has superior rights as a pur-

chaser for value and in good faith.
(B) P, regardless of whether or not he is a pur-
chaser for value and in good faith.
(C) G, since as an unpaid seller, he has the
right of stoppage in transitu.
(D) W, since it appears that the warehouse
charges have not been paid.

Answer:

(A) P, since he has superior rights as a pur-

chaser for value and in good faith.

(92) In a signature by procuration, the prin-

cipal is bound only in case the agent acted within
the actual limits of his authority. The signature of
the agent in such a case operates as notice that he
has
(A) a qualified authority to sign.
(B) a limited authority to sign.
(C) a special authority to sign.
(D) full authority to sign.
Answer:
(B) a limited authority to sign.
(93)In return for the 20 years of faithful ser-
vice of X as a househelper to Y, the latter prom-
ised to pay Php100,000.00 to X's heirs if he (X) dies
 2011 BAR EXAMINATION 117

in an accident by fire. X agreed. Is this an insur-

ance contract?

(A) Yes, since all the elements of an insurance

contract are present.
(B) Yes, since X’ services may be regarded as
the consideration.
(C) No, since Y actually made a conditional do-
nation in X’s favor.
(D) No, since it is in fact an innominate con-
tract between X and Y.

Answer:

(C) No, since Y actually made a conditional do-

nation in X's favor.

(94) A bill of exchange states on its face:

“One (1) month after sight, pay to the order of Mr.
R the amount of Php50,000.00, chargeable to the
account of Mr. S. Signed, Mr. T." Mr. S, the
drawee, accepted the bill upon presentment by
writing on it the words “I shall pay Php30,000.00
three (3) months after sight." May he accept under
such terms, which varies the command in the bill
of exchange?
(A) Yes, since a drawee accepts according to
the tenor of his acceptance.
(B) No, since, once he accepts, a drawee is li-
able according to the tenor of the bill.
(C) Yes, provided the drawer and payee agree
to the acceptance.
118 BAR Q & A IN COMMERCIAL LAW

(D) No, since he is bound as drawee to accept

the bill according to its tenor.

Answer:

(A) Yes, since a drawee accepts according to

the tenor of his acceptance.

May the indorsee of a promissory note

(95)
indorsed to him “for deposit” file a suit against
the indorser?
(A) Yes, as long as the indorser received value
for the restrictive indorsement.
(B) Yes, as long as the indorser received value
for the conditional indorsement.
(C) Yes, whether or not the indorser received
value for the conditional indorsement.
(D) Yes, whether or not the indorser received
value for the restrictive indorsement.

Answer:

(A) Yes, as long as the indorser received value

for the restrictive indorsement.

X issued a check in favor of his creditor,

(96)
Y. It
reads: “Pay to Y the amount of Seven Thou-
sand Hundred Pesos (Php700,000.00). Signed, X".
What amount should be construed as true in such
a case?

(A) Php700,000.00.
(B) Php700.00.
 2011 BAR EXAMINATION 119

(C) Php7,000.00.
(D) Php700,100.00.

Answer:

(A) Php700,000.00.

(97) Shipowner X, in applying for a marine

insurance policy from ABC, Co., stated that his
vessel usually sails middle of August and with
normally 100 tons of cargo. It turned out later that
the vessel departed on the first week of Septem-
ber and with only 10 tons of cargo. Will this avoid
the policy that was issued?
(A) Yes, because there was breach of implied
warranty.
(B) N0, because there was no intent to breach
an implied warranty.
(C) Yes, because it relates to a material repre-
sentation.
(D) No, because there was only representation
of intention.

Answer:
(D) No, because there was only representation
of intention.

(98) The Articles of Incorporation of ABC

Transport Co., a public utility, provides for ten (10)
members in its Board of Directors. What is the pre-
scribed minimum number of Filipino citizens in
its Board?
120 BAR Q & A IN COMMERCIAL LAW

Answer:

(B) 6

(99) authorized A to sign a negotiable in-

P
strument in his (P's) name. It reads: “Pay to B or
order the sum of Phpl million. Signed, A (for and
in behalf of P).” The instrument shows that it was
drawn on P. B then indorsed to C, C to D, and D to
E. E then treated it as a bill of exchange. Is pre-
sentment for acceptance necessary in this case?
(A) No, since the drawer and drawee are the
same person.
(B) No, since the bill is non-negotiable, the
drawer and drawee being the same person.
(C) Yes, since the bill is payable to order, pre-
sentment is required for acceptance.
(D) Yes, in order to hold all persons liable on
the bill.
Answer:
(A) No, since the drawer and drawee are the
same person.

(100) The corporate term of a stock corpora-

tion is that which is stated in its Articles of Incor-
 2011 BAR EXAMINATION 121

poration. It may be extended or shortened by an

amendment of the Articles when approved by ma-
jority of its Board of Directors and:
(A) approved and ratified by at least 2/3 of all
stockholders.
(B) approved by at least 2/3 of the stockholders
representing the outstanding capital stock.
(C) ratified by at least 2/3 of all stockholders.
(D) ratified by at least 2/3 of the stockholders
representing the outstanding capital stock.

Answer:

(D) ratified by at least 2/3 of the stockholders

representing the outstanding capital stock.

NB: Under the RCC, the term of the corporation

is perpetual unless otherwise set forth in
the articles of incorporation.
 2012 BAR EXAMINATION

MULTIPLE CHOICE QUESTIONS (MCQs)

1. Letters of Credit are financial devices in
commercial transactions which will ensure that
the seller of the goods is sure to be paid when he
parts with the goods and the buyer of the goods
gets control of the goods upon payment. Which
statement is most accurate?
a) The use of the Letter of Credit serves to re-
duce the risk of non-payment of the pur-
chase price in a sale transaction.
b) The Letters of Credit can only be used ex-
clusively in a sales transaction.
c) The Letters of Credit are issued for the
benefit of the seller only.
d) (a), (b) and (c) are all correct.

Answer:
a) The use of the Letter of Credit serves to re-
duce the risk of non-payment of the pur-
chase price in a sale transaction.

2. Letter of Credit which is used in non-sale

transaction, where it serves to reduce the risk of
non-performance is called —
a) irrevocable letter of credit;
b) standby letter of credit;

122
 2012 BAR EXAMINATION 123

c) confirmed letter of credit;

d) none of the above.

Answer:

b) standby letter of credit;

3. At the instance of CCC Corporation, AAA

Bank issued an irrevocable Letter of Credit in fa-
vor of BBB Corporation. The terms of the irrevoca-
ble Letter of Credit state that the beneficiary must
present certain documents including a copy of the
Bill of Lading of the importation for the bank to
release the funds. BBB Corporation could not find
the original copy of the Bill of Lading so it instead
presented to the bank a xerox copy of the Bill of
Lading. Would you advise the bank to allow the
drawdown on the Letter of Credit?
a) No, because the rule of strict compliance in
commercial transactions involving letters of
credit, requiring documents set as condi-
tions for the release of the fund, has to be
strictly complied with or else funds will not
be released.
b) Yes, because an irrevocable letter of credit
means that the issuing bank undertakes to
release the fund anytime when claimed by
the beneciary, regardless of the kind of
document presented.
c) Yes, because the issuing bank can always
justify to CCC Corporation that xerox cop-
ies are considered as faithful reproduction
of the original copies.
124 BAR Q & A IN COMMERCIAL LAW

d) Yes, because the issuing bank really

has no discretion to determine whether
the documents presented by the bene-
ficiary are sufficient or not.

Answer:
a) No, because the rule of strict compliance in
commercial transactions involving letters of
credit, requiring documents set as condi-
tions for the release of the fund, has to be
strictly complied with or else funds will not
be released.

4. AAA Carmakers opened an irrevocable

Letter of Credit with BBB Banking Corporation
with CCC Cars Corporation as beneficiary. The,
irrevocable Letter of Credit was opened to pay for
the importation of ten (10) units of Mercedes Benz
S class. Upon arrival of the cars, AAA Carmakers
found out that the cars were all not in running
condition and some parts were missing. As a con-
sequence, AAA Carmakers instructed BBB Bank-
ing Corporation not to allow drawdown on the
Letter of Credit. Is this legally possible?
a) No, because under the "Independence
Principle", conditions for the drawdown on
the Letters of Credit are based only on
documents, like shipping documents, and
not with the condition of the goods subject
of the importation.
b) Yes, because the acceptance by the im-
porter of the goods subject of importation is
material for the drawdown of the Letter of
Credit.
 2012 BAR EXAMINATION 125

C) Yes, because under the “Independence

Principle", the seller or the beneficiary is
always assured of prompt payment if there
is no breach in the contract between the
seller and the buyer.
d) No, because what was opened was an ir-
revocable letter of credit and not a con-
firmed letter of credit.

Answer:

a) No, because under the “Independence

Principle", conditions for the drawdown on
the Letters of Credit are based only on
documents, like shipping documents, and
not with the condition of the goods subject
of the importation.

5. For a fee, X deposited 1,000 sacks of corn

in the warehouse owned by Y. Y is in the business
of warehousing. Y issued a warehouse receipt as
proof of the possession of the 1,000 sacks of corn.
The warehouse receipt states as follows: “De1iver
to X or bearer 1,000 sacks of corn." X wanted to
use the warehouse receipt as payment of his debt
in favor of Z. How can the ownership of the goods
covered by the warehouse receipt be transferred?

a) Negotiate the warehouse receipt by just

delivering the warehouse receipt to Z.
b) Assign the warehouse receipt to Z to trans-
fer ownership of the goods.
C) Negotiate the warehouse receipt by spe-
cifically indorsing it to Z.
126 BAR Q & A IN COMMERCIAL LAW

d) The warehouse receipt in this case is non-

negotiable.

Answer:

a) Negotiate the warehouse receipt by just

delivering the warehouse receipt to Z.

6. The warehouseman, by issuing the ware-

house receipt, acknowledges that the goods are in
his possession, but he can refuse to deliver the
goods to the holder of the warehouse receipt cov-
ering the goods if —
a) the warehouse receipt covering the goods
is not presented.
b) the lien of the warehouseman is not satis-
ed.
c) the said holder presents a materially al-
tered warehouse receipt.
d) All of the above.
Answer:

d) All of the above.

7. The legal remedy of the warehouseman in
case of conicting claims is to -
a) file an action for interpleader.
b) give the goods to the first one who first pre-
sented the warehouse receipt.
c) use his discretion as to who he believes
has the prior right.
 2012 BAR EXAMINATION 127

d) keep the goods and appropriate them to

himself.

Answer:

a) file an action for interpleader.

8. BBB Banking Corporation issued a Letter

of Credit in the amount of P5Million, for the pur-
chase of five (5) tons of corn by X. Upon arrival of
the goods, the goods were delivered to the ware-
house of X. Thereafter he was asked to sign a
Trust Receipt covering the goods. When the goods
were sold, X did not deliver the proceeds to BBB
Banking Corporation, arguing that he will need
the fund for the subsequent importation. Is there
sufficient basis to sue for criminal action?
a) Yes, because X's failure to turn over the
proceeds to the bank is a violation of the
Trust Receipt Law.
b) No, because the trust receipt was signed
only after the delivery of the goods. When
the trust receipt was signed, the ownership
of the goods was already with X.
c) Yes, because violation of Trust Receipt Law
is mala prohibita, intention is irrelevant.
d) No, because X has a valid reason not to de-
liver the proceeds to BBB Banking Corpora-
tion.
128 BAR Q & A IN COMMERCIAL LAW

Answer:

a) Yes, because X’s failure to turn over the

proceeds to the bank is a violation of the
Trust Receipt Law.
c) Yes, because violation of Trust Receipt Law
is mala prohibita, intention is irrelevant.

9. X secured a loan from BBB Bank to pay for

the importation of some dried fruits. Upon arrival
of the goods consisting of dried fruits imported by
X but before delivery to him, a trust receipt was
executed by X to cover the transfer of the dried
fruits to his possession. The dried fruits were so
saleable but instead of turning over the proceeds
of the sale, X used the funds to pay for the medical
expenses of his mother who was sick of cancer of
the bone. Which statement is most accurate?

a) X cannot be held criminally liable because

although he did not pay the bank he used
the proceeds for a good reason.
b) Fraud or deceit is a necessary element to
hold X criminally liable for non-payment
under the Trust Receipts Law.
c) X can be held criminally liable under the
Trust Receipts Law regardless of the pur-
pose or intention for the use of the pro-
ceeds.
d) X cannot be held criminally liable because
the underlying obligation is one of simple
loan.
 2012 BAR EXAMINATION 129

Answer:

C) X can be held criminally liable under the

Trust Receipts Law regardless of the pur-
pose or intention for the use of the pro-
ceeds.

10. X is the President of AAA Products Cor-

poration. X signs all the Trust Receipts documents
for certain importations of the company. In the
event of failure to deliver the proceeds of the sale
of the goods to the bank, which statement is most
accurate?

8) The criminal liability will not attach to X as

President because of separate juridical per-
sonality.
b) For violation of Trust Receipts Law, the law
specifically provides for the imposition of
penalty upon directors and officers of the
corporation.
C) The officer will notbe held criminally ac-
countable because he is just signing the
trust receipt for arid in behalf of the corpo-
ration.
<1) The officer of the corporation will be held
liable provided it is clear that the officer
concerned participated in the decision not
to pay.

Answer:

b) For violation of Trust Receipts Law, the law

specifically provides for the imposition of
130 BAR Q & A IN COMMERCIAL LAW

penalty upon directors and officers of the

corporation.

Who is the Entrustee in a Trust Receipt

11.
arrangement?

a) the owner of the goods;

b) the one who holds the goods and receives
the proceeds from the sale of the goods;
c) the person to whom goods are delivered for
sale and who bears the risk of the loss;
d) the party who acquires security interest in
the goods.

Answer:
c) the person to whom goods are delivered for
sale and who bears the risk of the loss;

12.Which phrase best completes the state-

ment - In accordance with the Trust Receipt Law,
purchasers of the goods from the Entrustee will:

a) get the goods only as a collateral;

b) not get good title to the goods;
c) only get security interest over the goods;
d) get good title to the goods.

Answer:
d) get good title to the goods.

13. X acted as an accommodation party in

signing as a maker of a promissory note. Which
 2012 BAR EXAMINATION 131

phrase best completes the sentence - This means

that X is liable on the instrument to any holder for
value:

a) for as long as the holder does not know that

X is only an accommodation party.
b) even though the holder knew all along that
X is only an accommodation party.
C) for as long as X did not receive any consid-
eration for acting as accommodation party.
d) provided X received consideration for act-
ing as accormnodation party.

Answer:

b) even though the holder knew all along that

X is only an accommodation party.

14. X issued a promissory note which states,

“I promise to pay Y or order Php100,000.00 or one
(1) unit Volvo Sedan.” Which statement is most
accurate?

a) The promissory note is negotiable because

the forms of payment are clearly stated.
b) The promissory note is non-negotiable be-
cause the option as to which form of pay-
ment is with the maker.
<1) The promissory note is an invalid instru-
ment because there is more than one fonn
of payment.
d) The promissory note can be negotiated by
way of delivery.
132 BAR Q & A IN COMMERCIAL LAW

Answer:
b) The promissory note is non-negotiable
because the option as to which fonn of
payment is with the maker.

X issued a promissory note which states

15.
“I promise to pay Y or bearer the amount of
HK$50,000 on or before December 30, 2013." Is the
promissory note negotiable?

a) No, the promissory note becomes invalid

because the amount is in foreign currency.
b) Yes, the promissory note is negotiable even
though the amount is stated in foreign cur-
rency.
c) No, the promissory note is not negotiable
because the amount is in foreign currency.
d) Yes, the promissory note is negotiable be-
cause the Hong Kong dollar is a known for-
eign currency in the Philippines.

Answer:
b) Yes, the promissory note is negotiable even
though the amount is stated in foreign cur-
rency.

16.X delivered a check issued by him and

payable to the order of CASH to Y in payment for
certain obligations incurred by X in favor of Y. Y
then delivered the check to Z in payment for cer-
tain obligations. Which statement is most accu-
rate?
 2012 BAR EXAMINATION 133

a) Z can encash the check even though Y did

not indorse the check.
b) Z cannot encash the check for lacking in
proper endorsement.
c) Y is the only one liable because he was the
one who delivered the check to Z.
d) The negotiation is not valid because the
check is an instrument payable to order.

Answer:

a) Z can encash the check even though Y did

not indorse the check.

17. A stale check is a check -

a) that cannot anymore be paid although the
underlying obligation still exists.
b) that cannot anymore be paid and the un-
derlying obligation under the check is also
extinguished.
c) that can still be negotiated or indorsed so
that whoever is the holder can
d) which has not been presented for payment
within a period of thirty (30) days.
Answer:
a) that cannot anymore be paid although the
underlying obligation still exists.
18.In payment for his debt in favor of X, Y
gave X a Manager's Check in the amount of
134 BAR Q & A IN COMMERCIAL LAW

Php100,000 dated May 30, 2012. Which phrase

best completes the statement — A Manager's
Check:

a) is a check issued by a manager of a bank

for his own account.
b) is a check issued by a manager of a bank in
the name of the bank against the bank it-
self for the account of the bank.
c) is like any ordinary check that needs to be
presented for payment also.
d) is better than a cashier's check in terms of
use and effect.

Answer:

b) is a check issued by a manager of a bank in

the name of the bank against the bank it-
self for the account of the bank.

19.Which phrase best completes the state-

ment - A check which is payable to bearer is a
bearer instrument and:

a) negotiation can be made by delivery only;

b) negotiation must be by written indorse-
ment;
c) negotiation must be by specific indorse-
ment;
d) negotiation must be by indorsement and
delivery.
 2012 BAR EXAMINATION 135

Answer:

a) negotiation can be made by delivery only;

20. As payment for a debt, X issued a prom-

issory note in favor of Y but the promissory note
on its face was marked non-negotiable. Then Y in-
stead of indorsing the promissory note, assigned
the same in favor of Z to whom he owed some
debt also. Which statement is most accurate?

a) Z cannot claim payment from X on the basis

of the promissory note because it is marked
non-negotiable.
b) Z can claim payment from X even though it
is marked non-negotiable.
c) Z can claim payment from Y because under
the Negotiable Instrument Law, negotia-
tion and assignment is one and the same.
d) Z can claim payment from Y only because
he was the endorser of the promissory note.

Answer:

b) Z can claim payment from X even though it

is marked non-negotiable.

21. Negotiable instruments are used as sub-

stitutes for money, which means —
a) that they can be considered legal tender.
b) that when negotiated, they can be used to
pay indebtedness.
136 BAR Q &A IN COMMERCIAL LAW

C) that at all times the delivery of the instru-

ment is equivalent to delivery of the cash.
<1) that at all times negotiation of the instru-
ments requires proper indorsement.
Answer:

b) that when negotiated, they can be used to

pay indebtedness.
22 The signature of X was forged as drawer
of a check. The check was deposited in the ac-
count of Y and when deposited was accepted by
AAA Bank, the drawee bank. Subsequently, AAA
Bank found out that the signature of X was actu-
ally forged. Which statement is most accurate?
a) The drawee bank can recover from Y, be-
cause the check was deposited in his ac-
coimt.
b) The drawee bank can recover from X, be-
cause he is the drawer even though his
signature was forged.
<1) The drawee bank is estopped from denying
the genuineness of the signature of the X,
the drawer of the check.
d) The drawee bank can recover from Y be-
cause as endorser he warrants the genu
ineness of the signature.
Answer:
C) The drawee bank is estopped from denying
the genuineness of the signature of the X,
the drawer of the check.
 2012 BAR EXAMINATION 137

23. A issued a check in the amount of

Php20,000 payable to B. B endorsed the check but
only to the extent of Php10,000. Which statement
is most accurate?

a) The partial indorsement is not a valid in-

dorsement, although will result in the as-
signment of that part.
b) The partial indorsement will invalidate the
whole instrument.
c) The endorsee will be considered as a
holder in due course.
d) The partial indorsement is valid indorse-
ment up to the extent of the Php10,000.

Answer:
a) The partial indorsement is not a valid in-
dorsement, although will result in the as-
signment of that part.

24. A promissory note which does not have

the words “or order" or “or bearer" will render
the promissory note non-negotiable, and there-
fore
a) it will render the maker not liable;
b) the note can still be assigned and the
maker made liable;
c) the holder can become holder in due
course;
d) the promissory note can just be delivered
and the maker will still be liable.
138 BAR Q & A IN COMMERCIAL LAW

Answer:

b) the note can still be assigned and the

maker made liable;

25. A check is -
a bill of exchange;
the same as a promissory note;
is drawn by a maker;
a non-negotiable instrument.

Answer:
a) a bill of exchange;
26. A check was issued to Tiger Woods. But
what was written as payee is the word “Tiger
Woods”. To validly endorse the check —

a) Tiger Woods must sign his real name.

b) Tiger Woods must sign both his real name
and assumed name.
<1) Tiger Woods can sign his assumed name.
<11) the check has become non-negotiable.
Answer:

<1) Tiger Woods can sign his assumed name.

27. Y, as President of and in behalf of AAA

Corporation, as a way to accommodate X, one of
its stockholders, endorsed the check issued by X.
Which statement is most accurate?
 2012 BAR EXAMINATION 139

a) it is an ultra vires act.

b) it is a valid indorsement.
c) the corporation will be held liable to any
holder in due course.
d) it is an invalid indorsement.

Answer:
a) it is an ultra vires act.
b) it is a valid indorsement.
28. In instrument, when the
a negotiable
sum is expressed both in numbers and in words
and there is discrepancy between the words and
the numbers —
a) the sum expressed in words will prevail
over the one expressed in numbers.
b) the sum expressed in numbers will prevail
over the one expressed in words.
c) the instrument becomes void because of
the discrepancy.
d) this will render the instrument invalid.

Answer:
a) the sum expressed in words will prevail
over the one expressed in nmnbers.

29. A promissory note which is undated is

presumed to be -

a) dated as of the date of issue;

140 BAR Q &A IN COMMERCIAL LAW

b) dated as of the date of the first indorse-

ment;
<1) promissory note is invalid because there is
no date;
d) dated on due date.

Answer
a) dated as of the date of issue;

30. An insurance contract is an aleatory con-

tract, which means that —

a) the insurer will pay the insured equivalent

to the amount of the premium paid.
b) the obligation of the insurer is to pay de-
pending upon the happening of an uncer-
tain future event.
<1) the insured pays a fixed premium for the
duration of the policy period and the
amount of the premiums paid to the insurer
is not necessarily the same amount as what
the insured will get upon the happening of
an uncertain future event.
d) the obligation of the insurer is to pay de-
pending upon the happening of an event
that is certain to happen.
Answer:

b) the obligation of the insurer is to pay de-

pending upon the happening of an uncer-
tain future event.
 2012 BAR EXAMINATION 141

31. An Insurance Contract is a contract of

adhesion, which means that in resolving ambigui-
ties in the provision of the insurance contract, —

a) the general rule is that, the insurance con-

tract is to be interpreted strictly in accor-
dance with what is written in the contract.
b) are to be construed liberally in favor of the
insured and strictly against the insurer who
drafted the insurance policy.
c) are to be construed strictly against the in-
sured and liberally in favor of the insurer.
d) if there is an ambiguity in the insurance
contract, this will invalidate the contract.

Answer:
b) are to be construed liberally in favor of the
insured and strictly against the insurer who
drafted the insurance policy.

32. X is the common law wife of Y. Y loves X

so much that he took out a life insurance on his
own life and made her the sole beneficiary. Y did
this to ensure that X will be financially comfort-
able when he is gone. Upon the death of Y, -
a) X as sole beneficiary under the life insur-
ance policy on the life of Y will be entitled
to the proceeds of the life insurance.
b) despite the designation of X as the sole
beneficiary, the proceeds of the life insur-
ance will go to the estate of Y.
142 BAR Q & A IN COMMERCIAL LAW

c) the proceeds of the life insurance will go to

the compulsory heirs of Y.
d) the proceeds of the life insurance will be
divided equally amongst X and the com-
pulsory heirs of Y.

Answer:

b) despite the designation of X as the sole

beneficiary, the proceeds of the life insur-
ance will go to the estate of Y.

33.X, in January 30, 2009, or two (2) years

before reaching the age of 65, insured his life for
Php20 Million. For reason unknown to his family,
he took his own life two (2) days after his 65th
birthday. The policy contains no excepted risk.
Which statement is most accurate?

a) the insurer will be liable.

b) the insurer will not be liable.
c) the state of sanity of the insured is relevant
in cases of suicide in order to hold the in-
surer liable.
d) the state of sanity of the insured is irrele-
vant in cases of suicide in order to hold the
insurer liable.

Answer:
a) the insurer will be liable.

34. X, a minor, contracted an insurance on

his own life. Which statement is most accurate?
 2012 BAR EXAMINATION 143

a) the life insurance policy is void ab 1'n1't1'o.

b) the life insurance is valid provided it is with
the consent of the beneficiary.
C) the life insurance policy is valid provided
the beneficiary is his estate or his parents,
or spouse or child.
d) the life insurance is valid provided the dis-
position of the proceeds will be subject to
the approval of the legal guardian of the
minor.

Answer:

<1) the life insurance policy is valid provided

the beneficiary is his estate or his parents,
or spouse or child.

35. The “incontestability clause" in a Life In-

surance Policy means —

a) that life insurance proceeds cannot be

claimed two (2) years after the death of the
insured.
b) that two (2) years after date of issuance or
reinstatement of the life insurance policy,
the insurer cannot anymore prove that the
policy is void ab 1'n1't1'o or rescindable by
reason of fraudulent concealment or mis-
representation of the insured.
C) that the insured can still claim from the in-
surance policy after two (2) years even
though premium is not paid.
144 BAR Q & A IN COMMERCIAL LAW

d) that the insured can only claim proceeds in

a life insurance policy two (2) years after
death.

Answer

b) that two (2) years after date of issuance or

reinstatement of the life insurance policy,
the insurer cannot anymore prove that the
policy is void ab 1'n1't1'o or rescindable by
reason of fraudulent concealment or mis-
representation of the insured.

36.For both the Life Insurance and Property

Insurance, the insurable interest is required to be-

a) existing at the time of perfection of the con-

tract and at the time of loss.
b) existing at the time of perfection and at the
time of loss for property insurance but only
at the time of perfection for life insurance.
C) existing at the time of perfection for prop-
erty insurance but for life insurance both at
the time of perfection and at the time of
loss.
d) existing at the time of perfection only.
Answer:

b) existing at the time of perfection and at the

time of loss for property insurance but only
at the time of perfection for life insurance.
 2012 BAR EXAMINATION 145

37. A house and lot is covered by a real es-

tate mortgage (REM) in favor of ZZZ Bank. The
bank required that the house be insured. The
owner of the policy failed to endorse nor assign
the policy to the bank. However, the Deed of Real
Estate Mortgage has- an express provision which
says that the insurance policy is also endorsed
with the signing of the REM. Will this be suffi-
cient?

a) No, insurance policy must be expressly en-

dorsed to the bank so that the bank will
have a right in the proceeds of such insur-
ance in the event of loss.
b) The express provision contained in the
Deed of Real Estate Mortgage to the effect
that the policy is also endorsed is sufficient.
c) Endorsement of Insurance Policy in any
fonn is not legally allowed.
d) Endorsement of the Insurance Policy must
be in a formal document to be valid.

Answer:
a) No, insurance policy must be expressly en-
dorsed to the bank so that the bank will
have a right in the proceeds of such insur-
ance in the event of loss.

38. X is a passenger of a jeepney for hire be-

ing driven by Y. The jeepney collided with another
passenger jeepney being driven by Z who was
driving recklessly. As a result of the collision, X
suffered injuries. Both passenger jeepneys are
146 BAR Q & A IN COMMERCIAL LAW

covered by Comprehensive Motor Vehicular In-

surance Coverage. If X wants to claim under the
“no fault indemnity clause", his claim will lie -
a) against the insurer of the jeepney being
driven by Z who was the one at fault.
b) the claim shall lie against the insurer of the
passenger jeepney driven by Y because X
was his passenger.
c) X has a choice against whom he wants to
make his claim.
d) None of the above.

Answer:

b) the claim shall lie against the insurer of the

passenger jeepney driven by Y because X
was his passenger.

39. X insured the building she owns with

two (2) insurance companies for the same amount.
In case of damage,
a) X can not claim from any of the two (2) in-
surers because with the double insurance,
the insurance coverage becomes automati-
cally void.
b) the two (2) insurers will be solidarily liable
to the extent of the loss.
c) the two (2) insurers will be proportionately
liable.
d) X can choose who he wants to claim
against.
 2012 BAR EXAMINATION 147

Answer:

d) X can choose who he wants to claim

against.

40. When X insured his building, X indicated

in the application that it is a residential building,
but actually the building was being used as a
warehouse for some hazardous materials. What is
the effect on the insurance policy, if any?

a) The insurance policy can be cancelled be-

cause of the change in the use.
b) The insurance policy will automatically be
changed.
C) The insurance policy need not be changed.
d) The insurance policy is fixed regardless of
the change in the use.

Answer:
Any of the above.

41. X owned a house and lot. X insured the

house. The house got burned. Then he sold the
partially burnt house and the lot to Y. Which
statement is most accurate?

a) X is not anymore entitled to the proceeds of

the insurance policy because he already
sold the partially bumt house and lot.
b) X is still entitled to the proceeds of the in-
surance policy because what is material is
150 BAR Q & A IN COMMERCIAL LAW

c) The bus company is liable because com-

mon carriers are liable for the negligence or
willful act of its employees even though
they acted beyond the scope of their re-
sponsibility.
d) The bus company is not liable because
there is no way that the bus company can
anticipate the act of X.

Answer:
c) The bus company is liable because com-
mon carriers are liable for the negligence or
willful act of its employees even though
they acted beyond the scope of their re-
sponsibility.

44. X is a trader of school supplies in Cala-

pan, Oriental Mindoro. To bring the school sup-
plies to Calapan, it has to be transported by a ves-
sel. Because there were so many passengers, the
two (2) boxes of school supplies were loaded but
the shipping company was not able to issue the
Bill of Lading. So, on board, the Ship Captain is-
sued instead a “shipping receipt" to X indicating
the two (2) boxes of school supplies being part of
the cargo of the vessel. Which phrase therefore, is
the most accurate?
a) The owner of the vessel is not liable be-
cause no bill of lading was issued to X
hence, no contract of carriage was per-
fected.
 2012 BAR EXAMINATION 151

b) It is possible to have a contract of carriage

of cargo even without a bill of lading, and
the “shipping receipt" would be sufficient.
c) The only acceptable docmnent of title is a
Bill of Lading.
d) None of the above.

Answer:

b) It is possible to have a contract of carriage

of cargo even without a bill of lading, and
the "shipping receipt" would be sufficient.

45. X took Philippine Airlines Flight PR

102 to Los Angeles, USA. She had two (2) luggage
checked-in and was issued two (2) baggage
checks. When X reached Los Angeles one (1) of the
two (2) checked in luggage could not be found.
Which statement is most accurate?
a) PAL is liable for the loss of the checked-in
luggage under the provisions of the War-
saw Convention on Air Transport.
b) PAL is liable for the loss only if the bag-
gage check expressly states that the airline
shall be liable in case of loss.
c) PAL cannot be held liable because that is
the risk that a passenger takes when she
checks- in her baggage.
d) PAL can only be held liable if it can be
proven that PAL was negligent.
152 BAR Q & A IN COMMERCIAL LAW

Answer:

a) PAL is liable for the loss of the checked- in

luggage under the provisions of the War-
saw Convention on Air Transport.
NB Warsaw Convention has been sup-
planted by the Montréal Convention but
the answer is still the same.

46. X owns a passenger ieepney covered

by Certificate of Public Convenience. He allowed
Y to use its Certificate of Convenience for a con-
sideration. Y therefore was operating the passen-
ger jeepney under the same Certificate of Public
Convenience (Kabit System) under the name of X.
The passenger jeepney met an accident. Who will
be liable?

a) Y, the one actually operating the jeepney,

will be liable to the injured party.
b) X will be the one liable to the injured party
despite the fact that it is Y who is actually
operating the jeepney, because while the
Kabit System is tolerated, the public should
not be inconvenienced by the arrangement.
c) X will not be held liable if he can prove that
he is not the owner anyinore.
d) Public Policy dictates that the real owner,
even not the registered one, will be held li-
able.
 2012 BAR EXAMINATION 153

Answer:

b) X will be the one liable to the injured party

despite the fact that it is Y who is actually
operating the jeepney, because while the
Kabit System is tolerated, the public should
not be inconvenienced by the arrangement.

4'7. X owns a fleet of taxicabs. He operates it

through what is known as boundary system. Y
drives one of such taxicabs and pays X a fixed
amount of Php1,000 daily under the boundary sys-
tem. This means that anything above Php1,000
would be the earnings of Y. Y, driving recklessly,
hit an old lady crossing the street. Which state-
ment is most accurate?

a) X as the owner is exempt from liability be-

cause he was not the one driving.
b) X as the owner is exempt from liability be-
cause precisely the arrangement is one un-
der the “boundary system".
C) X will not be exempt from liability because
he remains to be the registered owner and
the boundary system will not allow the cir-
cumvention of the law to avoid liability.
d) Y is the only one liable because he drove
recklessly.

Answer:

<1) X will not be exempt from liability because

he remains to be the registered owner and
154 BAR Q & A IN COMMERCIAL LAW

the boundary system will not allow the cir-

cumvention of the law to avoid liability.

48. The Articles of Incorporation of AAA Cor-

poration was approved by the Securities and Ex-
change Commission (SEC). After the receipt of the
Certificate of Approval from the SEC, AAA Corpo-
ration decided to immediately start the operation
of its business despite the fact that it has no ap-
proved By-Laws. What is the legal status of the
AAA Corporation?
a) A de jure corporation;
b) A de facto corporation;
c) A corporation by estoppel;
d) An unregistered corporation.
Answer:

a) A de jure corporation;
b) De facto corporation (as held in Sawadjaan
vs. Court ofAppea1s, G.R. No. 141735, June
8, 2005)

49. X, the President of ZZZ Corporation, was

authorized by the Board of Directors of ZZZ Cor-
poration to obtain a loan from YYY Bank and to
sign documents in behalf of the corporation. X
personally negotiated for the loan and got the loan
at very low interest rates. Upon maturity of the
loan, ZZZ Corporation was unable to pay. Which
statement is most accurate?
 2012 BAR EXAMINATION 155

a) Because X was personally acting in behalf

of the Corporation, he can be held person-
ally liable.
b) X, as President, cannot be personally held
liable for the obligation of the corporation
even though he signed all the loan docu-
ments, because the loan was authorized by
the Board.
c) YYY Bank can choose as to who it wants to
hold liable for the loan.
d) If ZZZ Corporation cannot pay, X can be
held subsidiarily liable.

Answer:

b) X, as President, cannot be personally held

liable for the obligation of the corporation
even though he signed all the loan docu-
ments, because the loan was authorized by
the Board.

50. X owns 99% of the capital stock of SSS

Corporation. X also owns 99% of TTT Corporation.
SSS Corporation obtained a loan from VW Bank.
On due date, SSS Corporation defaulted. TTT Cor-
poration is financially healthy. Which statement is
most accurate?
a) X being a controlling owner of SSS Corpora-
tion can automatically be held personally
liable for the loan of SSS Corporation.
b) TTT Corporation, owned 99% by X, can
automatically be held liable.
156 BAR Q & A IN COMMERCIAL LAW

c) SSS Corporation and TTT Corporation, al-

though both are owned by X, are two (2)
distinct corporations with separate juridical
personalities hence, the TTT Corporation
cannot automatically be held liable for the
loan of SSS Corporation.
d) The principle of piercing the veil of corpo-
rate fiction can be applied in this case.

Answer:

c) SSS Corporation and 'ITT Corporation, al-

though both are owned by X, are two (2)
distinct corporations with separate juridical
personalities hence, the TIT Corporation
cannot automatically be held liable for the
loan of SSS Corporation.

51. A corporation generally can issue both

par value stock and no par value stock. These are
all fixed in the Articles of Incorporation of the
corporation. Which of the following corporations
may not be allowed to issue no par value shares?
a) Insurance companies;
b) Banks;
c) Trust companies;
d) All of the above.
Answer:

d) all of the above

 2012 BAR EXAMINATION 157

52. Father X, an American priest who came

from New York, registered the Diocese of Bacolod
of the Roman Catholic Church which was incorpo-
rated as a corporation sole. There were years
when the head of the Diocese was a Filipino, but
there were more years when the heads were for-
eigners. Today, the head is an American again. Y
donated a piece of land located in Bacolod City for
use as a school. Which statement is most accu-
rate?

a) The Register of Deeds of Bacolod City can

refuse to register and transfer the title be-
cause the present head of the corporation
sole is not a Filipino.
b) The nationality of a corporation sole de-
pends upon the nationality of the head at
any given time.
<1) A corporation sole, regardless of the na-
tionality of the head, can acquire real prop-
erty either by sale or donation.
d) A corporation sole is not legally allowed to
own real property.

Answer:

a) A corporation sole, regardless of the na-

tionality of the head, can acquire real prop-
erty either by sale or donation.
NB This should be on the condition that at
least 60% of the members of the church are
Filipino citizens
158 BAR Q &A IN COMMERCIAL LAW

53. The number of the Board of Trustees of a

non-stock, non-profit educational institution
should be

a) five (5) only

b) any number for as long as it is not less than
five (5) and no more than eleven (11)
c) any number in multiples of ve (5), for as
long as it is not less than five (5) and no
more than fifteen (15).
d) not less than five (5) nor more than ten (1 O)
in multiples of five (5).

Answer:

c) any number in multiples of five (5), for as

long as it is not less than five (5) and no
more than fifteen ( 15).

54.X subscribed 10,000 shares in the capital

stocks of AAA Corporation. He paid 50% of the
10,000 shares. X asked the Corporate Secretary to
issue him the corresponding stock certificate rep-
resenting the 50% of what he already paid. The
Corporate Secretary of the corporation refused.
Was the Corporate Secretary correct?

a) The Corporate Secretary is correct because

the Corporation Code provides that no cer-
tificate of stock shall be issued to a sub-
scriber until the shares as subscribed have
been fully paid.
b) The Corporate Secretary cannot refuse be-
cause a Stock Certificate can be issued cor-
 2012 BAR EXAMINATION 159

responding to the percentage of shares

which were paid.
c) The Corporate Secretary cannot refuse be-
cause a Certificate of Stock can be issued
provided it is indicated in the Certificate
the actual percentage of what has been
paid.
d) The Corporate Secretary cannot refuse be-
cause it is his legal duty to issue a stock
certificate corresponding to the number of
shares actually subscribed regardless of
the actual payment.

Answer:

a) The Corporate Secretary is correct because

the Corporation Code provides that no cer-
tificate of stock shall be issued to a sub-
scriber until the shares as subscribed have
been fully paid.

55. XXX Corporation and YYY Corporation

have agreed to be merged into one corporation. To
facilitate the merger, both corporations agreed
that the merger be made effective on May 31,
2012. The Securities and Exchange Commission
(SEC) approved the Articles of Merger on June 30,
2012. Which statement is most accurate?

a) The effective date of the merger is May 31,

2012, the date stipulated by the parties as
the effective date.
160 BAR Q & A IN COMMERCIAL LAW

b) The effective date of the merger is always

the date of the approval of the Articles of
Merger by the SEC.
c) The effective date of the merger would be
the date approved by the Board of Directors
and the stockholders.
d) The stockholders and the Board of Directors
can set the effective date of the merger
anytime after the approval of the SEC.

Answer:

b) The effective date of the merger is always

the date of the approval of the Articles of
Merger by the SEC.
NB. While B is the correct answer, there is
a an SEC Opinion (O8-19, March 13, 2019)
the parties may fix the effectivity date of
the merger as long as it would not ad-
versely affect third parties nor would it
cause decrease in tax dues of the corpora-
tions involved.

56. AAA Corporation is a wholly owned sub-

sidiary of BBB Corporation. To support the busi-
ness of AAA Corporation, BBB Corporation agreed
to give its corporate guarantee to the loan of AAA
Corporation. What is required so that the corpo-
rate guarantee will be valid?
a) It only requires the approval of the Board of
Directors of BBB Corporation.
 2012 BAR EXAMINATION 161

b) The Articles of Incorporation must provide

such power and be approved by the Board
of Directors.
<1) Providing corporate guarantee to another
corporation is a necessary exercise of
power of a corporation.
d) It would require both the approval of the
Board of Directors and the stockholders on
record.

Answer:

a) It only requires the approval of the Board of

Directors of BBB Corporation.

5'7. The capital stock of ABC Corporation is

divided into common shares and preferred shares.
Preferred shares are preferred as to dividends and
common shares are those shares which have the
regular and ordinary attributes of a share of a cor-
poration. Which statement is most accurate?

a) This kind of classification may not be al-

lowed or else it will violate the Doctrine of
Equality of shares.
b) Classications of shares may be allowed for
as long as it is clearly stated as such in the
Articles of Incorporation of the Corporation.
C) Classications of shares is mainly for busi-
ness purpose to attract investors.
d) Classifications of shares may be allowed
with the approval of the stockholders and
the Board of Directors.
162 BAR Q & A IN COMMERCIAL LAW

Answer:
b) Classifications of shares may be al-
lowed for as long as it is clearly stated
as such in the Articles of Incorporation
of the Corporation.

58. X sold all his shares in AAA Hotel Corpo-

ration to Y. X owns 99% of AAA Hotel Corporation.
As the new owner, Y wanted a reorganization of
the hotel which is to include primarily the separa-
tion of all existing employees and the hiring of
new employees. Which statement is most accu-
rate?

a) With the change in ownership, in effect

there is a new juridical entity and therefore
all employees are considered separated.
b) Despite the change in shareholder, there is
actually no change in the juridical entity
and therefore existing employees can not
automatically be considered separated.
C) Y, as the new shareholder, has the right to
retain only those employees who in his
judgment are qualified.
d) For as long as the existing employees are
given their separation pay, they can be
terminated.

Answer:

b) Despite the change in shareholder, there is

actually no change in the juridical entity
 2012 BAR EXAMINATION 163

and therefore existing employees can not

automatically be considered separated.

59. South China Airlines is a foreign airline

company. South China Airlines tickets are sold in
the Philippines though Philippine Airlines as their
general agent. South China Airlines is not regis-
tered to do business as such with the Philippine
Securities and Exchange Commission. Which
statement is most accurate?
a) Although unlicensed to do business in the
Philippines, South China Airlines can sue
before the Philippine Courts and can also
be sued.
b) South China Airlines can sue but cannot be
sued.
c) South China Airlines cannot sue and cannot
be sued also.
d) South China Airlines can be sued in Philip-
pine Courts but cannot sue.

Answer:

d) South China Airlines can be sued in Philip-

pine Courts but cannot sue.
60. So that ABC Corporation could venture
into more projects, it needed to raise funds by is-
suing new shares to increase its capitalization. X,
Y, Z, J and G are the five existing shareholders of
the company. They hold 20% each. How will the
additional shares be divided among the existing
shareholders?
164 BAR Q & A IN COMMERCIAL LAW

a) The existing shareholders can subscribe to

the new shares equivalent to their existing
shareholdings because the Corporation
Code provides that each of the existing
stockholders will have preemptive rights to
the extent of their existing shareholdings.
b) The existing shareholders’ preemptive
rights is equivalent to the percentage that
they want.
c) Each of the existing shareholder can exer-
cise their right of first refusal against each
other.
d) Preemptive rights and right of first refusal
are one and the same.

Answer:

a) The existing shareholders can subscribe to

the new shares equivalent to their existing
shareholdings because the Corporation
Code provides that each of the existing
stockholders will have preemptive rights to
the extent of their existing shareholdings.

61. X is a minority stockholder of CCC Cor-

poration. Y is a member of the Board of Directors
of CCC Corporation and at the same time he is the
President. X believes that Y is mismanaging CCC
Corporation hence, as a stockholder and in behalf
of the other stockholders, he wanted to sue Y.
Which statement is most accurate?
a) X can institute a derivative suit in behalf of
himself as a stockholder.
 2012 BAR EXAMINATION 165

b) A derivative suit must be instituted in be-

half of the corporation.
C) Derivative suit is an exclusive remedy that
X can institute.
d) Derivative suit is not the remedy in this
situation.

Answer

b) A derivative suit must be instituted in be-

half of the corporation.

62. The term GGG Corporation in accordance

with its Articles of Incorporation ended last Janu-
ary 30, 2012. The term was not extended. What
will happen to the corporation?
a) The corporation is dissolved ipso facto.
b) There is a need to pass a board resolution
to formally dissolve the corporation.
C) The Board of Directors must pass a resolu-
tion for the corporation to formally go into
liquidation.
d) The stockholders must pass a resolution to
dissolve the corporation.
Answer:

a) The corporation is dissolved ipso facto.

NB. Under the RCC, this should now be
construed to mean without prejudice to
remedy of petition for revival of corporate
existence.
166 BAR Q & A IN COMMERCIAL LAW

63. The term of one (1) year of the Board of

Directors of AAA Corporation expired last Febru-
ary 15, 2012. No new election of the Board of Di-
rectors was called, hence, the existing members of
Board continue as Directors in hold over capacity.
Which statement is most accurate?
a) This is allowed provided there is a valid
and justifiable reason for not calling for an
election of the new members of the Board.
b) This is not allowed because the term of the
directors must only be for one (1) year.
c) The positions of the members of the Board
of Directors will be automatically declared
vacant.
d) Acting as members of the Board of Direc-
tors in a hold over capacity must be ratified
by the stockholders.

Answer:

a) This is allowed provided there is a valid

and justifiable reason for not calling for an
election of the new members of the Board.

64. AAA Corporation is a foreign corporation

that wants to operate a representative office here
in the Philippines. As required by the Corporation
Code, there is a need to appoint a Resident Agent
as a condition precedent to the issuance of a li-
cense to transact business in the Philippines. After
two (2) years, AAA Corporation removed its Resi-
dent Agent and did not appoint anyone anymore.
Which statement is the most accurate?
 2012 BAR EXAMINATION 167

a) This can be a ground for revocation or sus-

pension of its license to do business.
b) There is no more effect in the license be-
cause anyway at the time of registration, a
resident agent was appointed.
C) This can be a ground for suspension only.
<1) This will result in automatic revocation of
its license to do business in the Philippines.
Answer:

a) This can be a ground for revocation or sus-

pension of its license to do business.

65. The By-laws of ABC Corporation is silent

as to when a stockholder can be qualified to at-
tend the meeting of the stockholders. The Corpo-
rate Secretary sent out the notice of the stock-
holders meeting two (2) days before the meeting
and at that time X was not yet a stockholder. On
the day of the meeting, however, X became a
shareholder which was duly recorded in the stock
and transfer book. Which statement is most accu-
rate?

a) X is a stockholder of ABC Corporation as of

the time of meeting of the stockholders for
the purpose of electing the members of the
board.
b) X is not qualified to elect members of the
board because at the time the notice of the
meeting was sent, she was not yet a stock-
holder.
168 BAR Q & A IN COMMERCIAL LAW

<1) Qualifications as to who are considered as

stockholders on record for purposes of be-
ing able to elect members of the board are
to be determined by the By-laws alone.
d) None of the above.

Answer:

a) X is a stockholder of ABC Corporation as of

the time of meeting of the stockholders for
the purpose of electing the members of the
board.

66. X, who is the Executive Vice President of

ABC Corporation, a listed company, can be held
liable or guilty of insider trading if, he —

a) Bought shares of ABC Corporation when it

was planning to acquire another company
to improve its asset base, the news of
which increased the price of the shares in
the Stock Exchange.
b) Bought shares of XY C Corporation, a sister
company of ABC Corporation when he
learned that XY C Corporation was about to
also list its share in the Philippine Stock
Exchange.
C) Bought shares of ZZZ Corporation when he
learned that ABC Corporation would ac-
quire ZZZ Corporation.
d) All of the above.
 2012 BAR EXAMINATION 169

Answer:

All of the above.

67. The purpose of the “Tender Offer" Rule
is to -

a) Ensure an even playing field for all share-

holders of a company in terms of opportu-
nity to sell their shareholdings.
b) Ensure that minority shareholders in a pub-
licly listed company are protected in the
sense that they will equally have the same
opportunity as the majority shareholders in
terms of selling their shares.
c) Ensure that the shareholders who would
also want to sell their shareholdings will
have the opportunity for a better price.
d) All of the above.
Answer:
All of the above.
68. Section 38 of The Securities Regulation
Code defines an independent director as a person
who must not have a relation with the corporation
which would interfere with his exercise of inde-
pendent judgment in carrying out the responsi-
bilities of a director. To ensure independence
therefore, he must be -
a) Nominated and elected by the entire
shareholders;
170 BAR Q & A m COMMERCIAL LAW

b) Nominated and elected by the minority

shareholders;
c) Nominated and elected by the majority
shareholders;
d) Appointed by the Board.

Answer:

c) Nominated and elected by the majority

shareholders;

69."Securities" issued to the public are re-

quired by law to be registered with -
a) The Bangko Sentral ng Pilipinas;
b) The Philippine Stock Exchange;
c) The Securities and Exchange Commission;
d) The Securities and Exchange Commission
and the Philippine Stock Exchange.

Answer:

c) The Securities and Exchange Commission;

70. The government agency granted with

the power of supervision and examination over
banks and non-bank financial institutions per-
forming quasi-banking functions, to ensure that
the conduct of its business is on a sound financial
basis that will provide continued solvency and li-
quidityis—
a) The Philippine Deposit Insurance Corpora-
tion;
 2012 BAR EXAMINATION 171

b) The Bangko Sentral ng Pilipinas;

C) The Anti-Money Laundering Council;
d) The Securities and Exchange Commission.

Answer

b) The Bangko Sentral ng Pilipinas;

71. X maintains a savings deposit in the

amount of Php-1 Million with ABC Bank Corpora-
tion. X also has obtained a loan from ABC Bank
Corporation in the amount of Phpl Million. In case
of default,

a) ABC Bank can set-off the loan from the sav-

ings account being maintained by X with
ABC Bank.
b) Set-off is not possible because legal com-
pensation is not allowed in banking trans-
action.
C) Deposit accounts are usually earmarked for
specific purpose hence offsetting is not le-
gally possible.
d) Off -setting is not possible because the ob-
ligation of X is a “simple loan".
Answer:

a) ABC Bank can set-off the loan from the sav-

ings account being maintained by X with
ABC Bank.
172 BAR Q & A IN COMMERCIAL LAW

72.XYZ Corporation is engaged in lending

funds to small vendors in various public markets.
To fund the lending, XYZ Corporation raised funds
through borrowings from friends and investors.
Which statement is most accurate?

a) XYZ Corporation is a bank.

b) XYZ Corporation is a quasi-bank.
0) XY Z Corporation is an Investment Com-
pany.
d) XY Z is none of the above.

Answer:

a) XY Z Corporation is a quasi-bank.
NB The premise here is that the number of
Friends and investors is at least 20.

73. XXX Bank Corporation and ZZZ Corpora-

tion were merged into XX ZZ Bank Corporation. So
as not to create any unnecessary conflict, all the
former directors of both banks wanted to be ap-
pointed /elected as members of the Board of Di-
rectors of the merged bank. Each bank used to
have eleven (11) members of the board. The
maximum number of directors of the merged
bank iS—
a) 15;

b) 22;
C) 21;
d) 11.
 2012 BAR EXAMINATION 173

Answer:

c) 2 1;

74. All senior officers of ABC Bank are enti-

tled to obtain a housing loan. X is an Executive
Vice President for Operations of ABC Bank. She
obtained a housing loan with the ABC Bank.
Which statement is most accurate?
a) The housing loan of X requires a guarantor
from somebody who is not connected with
the bank.
b) The housing loan of X requires the approval
of the Board of Directors of the bank.
c) The housing loan of X, being a benefit for
employees, does not require (a) but will re-
quire (b).
d) The housing loan of X, being a benefit for
employees, will not require (a) and (b).

Answer:

d) The housing loan of X, being a benefit for

employees, will not require (a) and (b).

75. ABC Holdings Company, a Hong Kong

company, owns 10% of XYZ Bank. Because of the
peace and order situation in the Philippines, ABC
Holding Company wanted to sell its shareholdings
in XYZ Bank. Unfortunately, nobody is interested
to buy a 10% shareholdings in a bank. The board
of directors of XYZ Bank thought that it would be
a good idea to buy back the shares owned by ABC
174 BAR Q & A IN COMMERCIAL LAW

Holding Company. Which statement is most accu-

rate?

a) Buying back the shares by XYZ Bank is ab-

solutely not allowed.
b) Buying back the shares may be allowed
provided it is with the approval of the
Monetary Board and disposed of within six
(6) months.
c) Buying back the shares may be allowed
provided such shares ‘will be disposed of
within ten (1 0) years.
d) Buying back the shares may be done any-
time provided the Board of Directors will
approve the same.

Answer:

b) Buying back the shares may be allowed

provided it is with the approval of the
Monetary Board and disposed of within six
(6) months.

X is being charged for violation of Anti-

76.
Graft and Corrupt Practices because he is sus-
pected having accumulated unexplained
of
wealth. X maintains deposit accounts with ABC
Bank. The Ombudsman filed criminal cases
against X before the Sandiganbayan. Can the
Court issue subpoenas against ABC Bank to pro-
duce all documents pertaining to all the deposit
accounts of X?
 2012 BAR EXAM|NATlON 175

a) Yes, because there is already a pending

case and provided the subpoena must be
specific as to which account.
b) Yes, it is enough that the specific bank is
identied.
c) No, because the issuance of the subpoena
has no real legal basis.
d) Even without a subpoena, information
about the deposit accounts of X can be
submitted to the Sandiganbayan because it
will be used in a pending case.
Answer:

a) Yes, because there is already a pending

case and provided the subpoena must be
specific as to which account.

77. X, a private individual, maintains a dollar

deposit with ABC Bank. X is suspected to be the
leader of a Kidnap for Ransom Gang and he is sus-
pected of depositing all ransom money in said de-
posit account which are all in US Dollars. The po-
lice want to open said account to know if there are
really deposits in big amounts. Which statement is
most accurate?
a) The same rules under Secrecy of Bank De-
posit Act will apply.
b) An approval from the Monetary Board is
necessary to open the account.
c) Because the deposit is in US Dollars, it is
covered by the Foreign Currency Deposit
176 BAR Q & A IN COMMERCIAL LAW

Act which allows disclosure only upon the

written permission of the depositor.
d) Approval from the Court is necessary to or-
der disclosure of the account.

Answer:

a) The same rules under Secrecy of Bank De-

posit Act will apply.
NB: (A) is the correct answer only because
it is the best answer. B, C, and D are all
wrong answers. But “A” is not completely
accurate because there are different rules
for foreign currency and Philippine currency
deposit. “A” is correct in the context of the
question that the general rule on confiden-
tiality of bank deposits under RA 1405 also
applies to foreign currency deposits.

78. X is a depositor of AAA Bank. She has

three (3) deposit accounts all under her name.
One, in checking account, one in saving account
and another one in time deposit account. Each ac-
count has a balance of Php250,000. AAA Bank be-
came insolvent. Philippine Deposit Insurance Cor-
poration closed the Bank. X therefore is unable to
withdraw from all of the accounts. She then filed
her claims with the Philippine Deposit Insurance
Corporation. Which statement is most accurate?
a) X can claim a total of Php500,000 for all the
three (3) accounts.
b) X can only claim from one (1) account of
Php250,000.
 2012 BAR EXAMINATION 177

<1) X can claim a total of Php750,000 from all

the three (3) accounts.

d) X cannot claim anything from any of the

deposit accounts.

Answer:

a) X can claim a total of Php500,000 for all the

three (3) accounts.

'79. The Bank Secrecy Law (RA 1405) prohib-

its disclosing any information about deposit re-
cords of an individual without court order except -

a) In an examination to determine gross es-

tate of a decedent.

b) In an investigation for violation of Anti-

Graft and Corrupt Practices.

<1) In an investigation by the Ombudsman.

d) In an impeachment proceeding.

Answer:

a) In an examination to determine gross es-

tate of a decedent.
178 BAR Q & A IN COMMERCIAL LAW

80.X works as a research computer engineer

with the Institute of Computer Technology, a gov-
ernment agency. When not busy with his work,
but during office hours, he developed a software
program for law firms that will allow efficient
monitoring of the cases, which software program
is not at all related to his work. Assuming the pro-
gram is patentable, who has the right over the
patent?

a) X;
b) Institute of Computer Teclmology;
C) Neither X nor the Institute of Computer
Technology can claim patent right over the
invention;
d) X and the employer of X will jointly have
the rights over the patent.

Answer:

a) X;

81. The “test of dominancy” in the Law on

Trademarks, is a way to determine whether there
exists an infringement of a trademark by -

a) determining if the use of the mark has been

dominant in the market.
b) focusing on the similarity of the prevalent
features of the competing marks which
might create confusion.
C) looking at the mark whether they are simi-
lar in size, fonn or color.
 2012 BAR EXAMINATION 179

d) looking at the mark whether there is one

specific feature that is dominant.

Answer:

b) focusing on the similarity of the prevalent

features of the competing marks which
might create confusion.

82. X's painting of Madonna and Child was

used by her mother to print some personalized
gift wrapper. As part of her mother's efforts to
raise funds for Bantay Bata, the mother of X sold
the wrapper to friends. Y, an entrepreneur, liked
the painting in the wrapper and made many cop-
ies and sold the same through National Bookstore.
Which statement is most accurate?

a) Y can use the painting for his use because

this is not a copyrightable material.
b) X can sue Y for infringement because artis-
tic works are protected from moment of
creation.
C) Works of art need to be copyrighted also to
get protection under the law.
d) Y can use the drawing even though not
copyrighted because it is already a public
property having been published already.

Answer

b) X can sue Y for infringement because artis-

tic works are protected from moment of
creation.
180 BAR Q &A IN COMMERCIAL LAW

83. Compulsory Licensing of Inventions

which are duly patented may be dispensed with or
will be allowed exploitation even without agree-
ment of the patent owner under certain circum-
stances, like national emergency, for reason of
public interest, like national security, etc. The per-
son who can grant such authority is —

a) the Director General of the Intellectual

Property Office;
b) the Director of Legal Affairs of the Intellec-
tual Property Office;
c) the owner of the Patent right;
d) any agent of the owner of the Patent right.

Answer:
b) the Director of Legal Affairs of the In-
tellectual Property Office;

84. The Fair Use Doctrine allows others to

utilize copyrighted works under certain condi-
tions. The factors to consider whether use is fair
or not would be the purpose and character of the
use, nature of the copyrighted work, amount and
substantiality of the portions used, and what else?
a) effect of the use upon the creator of the
work.
b) effect of the use upon the potential market
of the work.
c) effect of the use upon the public in general.
 2012 BAR EXAMINATION 181

<1) effect of the use upon the class in which

the creator belongs.

Answer:

b) effect of the use upon the potential market

of the work.

as. XYZ Corporation bought ten (10) units of

Honda Civic from CCC Corporation. ABC Bank
granted a loan to XYC Corporation which exe-
cuted a financing agreement which provided for
the principal amount, the installment payments,
the interest rates and the due dates. On due dates
of the installment payments, XYZ Corporation was
asked to pay for some handling charges and other
fees which were not mentioned in the Financing
Agreement. Can XYC Corporation refuse to pay
the same?

a) No, because handling charges and other

fees are usual in certain banking transac-
tions.
b) Yes, because ABC Bank is required to pro-
vide XY Z Corporation not only the amount
of the monthly installments but also the de-
tails of the finance charges as required by
the Truth in Lending Act.
C) No, because the Finance Agreement is a
valid document to establish the existence
of the obligation.
d) Yes, because legally, finance charges are
never allowed in any banking transaction.
182 BAR Q & A m COMMERCIAL LAW

Answer:

b) Yes, because ABC Bank is required to pro-

vide XYZ Corporation not only the amount
of the monthly installments but also the de-
tails of the finance charges as required by
the Truth in Lending Act.

86. Which of the following is an exception to

the secrecy of bank deposits which are in Philip-
pine Pesos, but NOT an exception to the secrecy of
foreign currency deposits?
a) Upon Bangko Sentral ng Pilipinas (BSP) in-
quiry into or examination of deposits or in-
vestments with any bank, when the inquiry
or examination is made in the course of the
BSP’s periodic special examination of said
bank to ensure compliance with the Anti-
Money Laundering Act (AMLA);
b) Upon Philippine Deposit Insurance Corpo-
ration (PDIC) and SSP inquiry into and ex-
amination of deposit accounts in case there
is a finding of unsafe or unsound banking
practice;
c) Upon inquiry in cases of impeachment;
d) Upon inquiry by the Comrnissioner of Inter-
nal Revenue in the event a taxpayer files an
application to compromise his tax liabilities
on the ground of financial incapacity.

Answer:

c) Upon inquiry in cases of impeachment;

 2012 BAR EXAMINATION 183

87. The Anti-Money Laundering Law is a law

that seeks to prevent money laundering activities
by providing for more transparency in the Philip-
pine Financial System, hence the following insti-
tutions are covered by the law, except:
a) bank and any financial institutions;
b) pawnshops;
c) casino operators;
d) All of the above.
Answer:

a) casino operators;
NB Casino operators were made covered
institution in July Z017 under RA 10927
88. For purposes of determining violation of
the provisions of Anti-Money Laundering Law, a
transaction is considered as a “Suspicious Trans-
action" with “Covered Institutions” regardless of
the amount involved, where which the following
circumstances exists?

a) the amount involved is not cormnensurate

with the client’s business or financial ca-
pacity;
b) there is no underlying legal or trade obliga-
tion, purpose or economic justification;
c) client is not properly identified;
d) All of the above.
184 BAR Q & A IN COMMERCIAL LAW

Answer:

d) All of the above.

89. The main feature of the Foreign Invest-
ment Act of 1991 is to introduce the concept of
“Negative Lists". Under the said law, what is a
“Negative List”?
a) It is a list of business activities or enter-
prises in the Philippines that foreigners are
disqualified to engage in.
b) It is a list of business activities or enter-
prises in the Philippines that foreigners are
qualified to engage in.
c) It is list of business activities or enter-
a
prises that are open to foreign investments
provided it is with the approval of the
Board of Investment.
d) It is a list of business activities or enter-
prises that are open to foreign investments
provided it is with the approval of the Secu-
rities and Exchange Commission.

Answer:

a) It is a list of business activities or enter-

prises in the Philippines that foreigners are
disqualied to engage in.
 2012 BAR EXAMINATION 185

ESSAY-TYPE QUESTIONS

I
ABC Company filed a Petition for Rehabilita-
tion with the Court. An Order was issued by the
Court, (1) staying enforcement of all claims,
whether money or otherwise against ABC Com-
pany, its guarantors and sureties not solidarily li-
able with the company; and (2) prohibiting ABC
Company from making payments of its liabilities,
outstanding as of the date of the filing of the Peti-
tion. XYC Company is a holder of an irrevocable
Standby Letter of Credit which was previously
procured by ABC Company in favor of XYC Com-
pany to secure performance of certain obligations.
In the light of the Order issued by the Court.
a) Can XYC Company still be able to draw
on their irrevocable Standby Letter of
Credit when due? Explain your answer.
(5%):

Answer:
Yes, this is on all fours with the case of Metro-
politan Waten/vorks and Sewerage System v. Hon.
Reynaldo B. Daway, et al., GR No. 160732, June 21,
2004 where the Supreme Court held that the stay
order in corporate rehabilitation only covers the
principal debtor, its guarantors and sureties not
liable solidarily with the principal debtor.
186 BAR Q &A IN COMMERCIAL LAW

Here, the liability of the bank is direct, primary

and solidary. Hence XYC Company can draw on
their irrevocable Standby Letter of Credit.
NB The MWSS ruling became part of the Fi-
nancial Rehabilitation and Insolvency Act
(“FRIA”). Under Section 18(c) of FRIA, a Stay or
Suspension Order (which is included in a Com-
mencement Order) shall not apply “to the en-
forcement of claims against sureties and other
persons solidarily liable with the debtor, and third
party or accommodation mortgagors as well as is-
suers of letters of credit.
FRIA, however, was excluded from the cover-
age of the 2012 Bar Examinations

b) Explain the nature of Letters of Credit as

a financial devise. (5%).

Answer:

A letter of credit is a financial device developed

by merchants as a convenient and relatively safe
mode of dealing with sale of goods to satisfy the
seemingly irreconcilable interest of the seller, who
refuses to part with his goods before he is paid, and
a buyer, who wants to have control of the goods be-
fore paying. To break the impasse, the buyer may be
required to contract a bank to issue a letter of credit
in favor of the seller so that, by virtue of the letter of
credit, the issuing bank can authorize the seller to
draw drafts and engage to pay them upon their pre-
sentment simultaneously with the tender of docu-
ments required by the letter of credit. The buyer and
the seller agree on what docmnents are to be pre-
 2012 BAR EXAMINATION 187

sented for the payment, but ordinarily they are

documents of title evidencing or attesting to the
shipment of the goods to the buyer. Once the credit
is established, the seller ships the goods to the
buyer and in the process secures the required ship-
ping documents or documents of title. To get paid,
the seller executes a draft and presents it together
with the required documents to the issuing bank.
The issuing bank redeems the draft and pays cash
to the seller if it finds that the documents submitted
by the seller conform with what the letter of credit
requires. The bank then obtains possession of the
documents upon paying the seller. The transaction
is completed when the buyer reimburses the issuing
bank and acquires the documents entitling him to
the goods, while the buyer acquired the said docu-
ments and control over the goods only after reim-
bursing the bank.
However, letters of credit are also used in non-
sale settings where they serve to reduce the risk of
nonperformance. Generally, letters of credit in non-
sale settings have come to be known as standby let-
ters of credit. (Bank of America vs. Court of Appeals,
228 SCRA 357; Transeld Philippines vs. Luzon Hy-
dro Corporation, 443 SCRA 307)

II
CCC Car, Inc. obtained a loan from BBB Bank,
which fund was used to import ten (10) units of
Mercedes Benz S class vehicles. Upon arrival of
the vehicles and before release of said vehicles to
CCC Car, Inc., X and Y, the President and Treas-
urer, respectively, of CCC Car, Inc. signed the
188 BAR Q & A IN COMMERCIAL LAW

Trust Receipt to cover the value of the ten (10)

units of Mercedes Benz S class vehicles after
which, the vehicles were all delivered to the Car
display room of CCC Car, Inc. Sale of the vehicles
were slow, and it took a month to dispose of the
ten (10) units. CCC Car, Inc. wanted to be in busi-
ness and to save on various documentations re-
quired by the bank, decided that instead of turn-
ing over the proceeds of the sales, CCC Car, Inc.
used the proceeds to buy another ten (10) units of
BMW 3 series.
a) Is the action of CCC Car, Inc. legally justi-
fied? Explain your answer. (5%);

Answer:

No. As entrustee, it is the obligation of CCC to

hold, receive in trust and tum over to BBB Bank the
proceeds of the sale of the Mercedes Benz S class
vehicles to the extent of the amount owing to the
latter or as appears in the trust receipt.
b) Will the corporate officers of CCC Car,
Inc. be held liable under the circum-
stances? Explain your answer. (5%)

Answer:
Yes, both only the president and the treasurer
of CCC who both signed the trust receipts agree-
ment. Section 13 of the Trust Receipts Law provides
that if the violation or offense is committed by a cor-
poration, partnership, association, or other juridical
entity, criminal liability shall be imposed upon the
directors, officers, employees or other officials or
 2012 BAR EXAMINATION 189

persons therein responsible for the offense, without

prejudice to the civil liabilities arising from the
criminal offense. In this case, only the president and
the treasurer were responsible for the offense.

III
X borrowed money from Y in the amount of
Php1Mi11ion and as payment, issued a check. Y
then indorsed the check to his sister Z for no con-
sideration. When Z deposited the check to her ac-
count, the check was dishonored for insufficiency
of funds.
a) Is Z a holder in due course? Explain your
answer. (5%)

Answer:

Z is not a holder in due course. She did not give

any valuable consideration for the check. She lacks
one of the essential conditions to be considered a
holder in due course, that is, she must have ac-
quired the instrument in good faith and for value.

b) Who is liable on the check? The drawer

or the indorser? Explain your answer.
(5%)

Answer:
X, the drawer, will be liable. As drawer, X en-
gaged that on due presentment the check would be
paid according to its tenor and that if it is dishon-
ored and the necessary proceedings on dishonor be
190 BAR Q & A IN COMMERCIAL LAW

duly taken, he will pay the amount to the holder or

to any subsequent indorser who may be compelled
to pay (Section 61 of NIL). X need not be given a no-
tice of dishonor if he is aware that he has insuffi-
cient funds in his account, for in this case, he has no
right to expect that the drawee will pay the instru-
ment (Section 114(d) of NIL)
Z, not being a holder in due course, cannot hold
Y, the endorser, liable as the latter can raise the de-
fense that there was no valuable consideration for
the endorsement of the check.

IV
Indicate and explain whether the promissory
note is negotiable or non-negotiable.

a) I promise to pay A or bearer Php100,000.00

from my inheritance which I will get after
the death of my father. (2%);
b) I promise to pay A or bearer Php100,000
-
plus the interest rate of ninety (90) day
treasury bills. (2%);
c) I promise to pay A or bearer the sum of
Php100,000 if A passes the 2012 bar exams.
(2%);
d) I promise to pay A or bearer the sum of
Php100.000 on or before December 30, 2012.
(2%);
e) I promise to pay A or bearer the sum of
Php100,000. (2%)
 2012 BAR EXAMINATION 191

Answer:

a) Not negotiable. There is no unconditional

promise to pay a sum certain in money as
the promise is to pay is taken out of par-
ticular funds, i.e., the inheritance from the
father of the prornisor, which may or may
not exist.
b) Not negotiable. There is no unconditional
promise to pay a sum certain in money. The
promise to pay “the interest rate of 90-day
treasury bills" is vague because, first, there
are no 90-day treasury bills; second, the
interest is not determined or determinable.
c) Not negotiable. The promise to pay is sub-
ject to a condition, i.e., that A will pass the
2012 bar exams.
d) Negotiable. It conforms fully with the re-
quirements of negotiability under Section 1
of Negotiable Instniments Law.
e) Negotiable. The instrument is payable on
demand because the note does not express
a time for its payment.

NB. The answers that the instrument is nego-

tiable are obviously premised on the assumption
that the instrument is signed.

V
X borrowed from CCC Bank. She mortgaged
her house and lot in favor of the bank. X insured
her house. The bank also got the house insured.
1 92 BAR Q & A IN COMMERCIAL LAW

a) Is this double insurance? Explain your

answer. (3%);

b) Is this legally valid? Explain your an-

swer. (3%);

C) In case of damage, can X and CCC Bank

separately claim for the insurance pro-
ceeds? (4%).

Answer:

a) No, there is no double insurance. Double

insurance exists where the same person is
insured by two or more insurers sepa-
rately with respect to the same, risk, sub-
ject and interest. Not only are the insured
two, the insurable interest of the mortga-
gor is his property ownership, for the
mortgagee, it is the non-payment of the
mortgage debt.

b) Yes, X and CCC Bank can both insure the

house as they have different insurable in-
terests therein. X, the borrower-mort-
gagor, has an insurable interest in the
house being the owner thereof while CCC
Bank, the lender, also has an insurable in-
terest in the house as mortgagee thereof
to the extent of the mortgage debt.

C) Yes, since they have separate insurable

interest both covered by insurance policy
If X obtained an open policy then she
could claim an amount corresponding to
 2012 BAR EXAMINATION 193

the extent of the damage, but not to ex-

ceed the face value of the insurance pol-
icy; however, if she obtained a valued pol-
icy then she could claim an amount based
on the agreed upon valuation of the house.
As for CCC Bank, it could claim an
amount corresponding to the extent of the
damage but not to exceed the amount of
the loan it extended to X or so much
thereof as may remain unpaid.

VI
X is a Filipino immigrant residing in Sacra-
mento, California. Y is a Filipino residing in Que-
zon City, Philippines. Z is a resident alien residing
in Makati City. GGG Corporation is a domestic
corporation — 40% owned by foreigners and 60%
owned by Filipinos, with T as authorized repre-
sentative. CCC Corporation is a foreign corpora-
tion registered with the Philippine Securities and
Exchange Commission. KKK Corporation is a do-
mestic corporation (100%) Filipino owned. S is a
Filipino, 16 years of age, and the daughter of Y.
a) Who can be incorporators? Who can be
subscribers? (2%);
b) What are the differences between an in-
corporator and a subscriber, if there are
any? (2%);
c) Who are qualified to become members of
the board of directors of the corporation?
(2%):
194 BAR Q & A IN COMMERCIAL LAW

<1) Who are qualified to act as Treasurer of

the company? (2%);
9) Who can be appointed Corporate Secre-
tary? (2%).

Answer:

a) X, Y, Z and T could all be incorporators and

subscribers. Note, however, that Section 10
of the Corporation Code requires that there
must be at least 5 but not more than 15 in-
corporators (who must all be natural per-
sons) and that a majority of the incorpora-
tors must be residents of the Philippines. S,
being a minor, could neither be an incorpo-
rator nor a subscriber. GGG Corporation,
CCC Corporation, and KKK Corporation
could not be incorporators as they are not
natural persons. However, they could be
subscribers.
NB Under the Revised Corporation Code,
both natural and juridical persons may be
incorporators.
b) Some of the differences are as follows: first,
all the incorporators are required to sign
and acknowledge the Articles of Incorpora-
tion while the subscribers, as such, are not
subject to the same requirement; second,
the number of incorporators for stock corpo-
ration cannot exceed 15 while the number
of subscribers could be more than 15;
NB The residency requirement for incorpo-
rators no longer exists under the Revised
 2012 BAR EXAMINATION 195

Corporation Code, hence, excluded in the

distinction.
c) X, Y, Z and T could be directors (subject to
any nationality requirement under relevant
laws governing the business of the corpo-
ration) but not GGG Corporation, CCC Cor-
poration, and KKK Corporation as they are
not natural persons. However, the afore-
mentioned corporations could have their
respective representatives nominated and
possibly elected as directors by the stock-
holders provided they are shareholders.
d) The Corporation Code does not impose any
nationality in respect of the Treasurer ex-
cept if the corporation is engaged in na-
tionalized economic activities. Thus, any
one may be a treasurer provided he meets
the qualifications under the by laws of the
corporation. However, the Treasurer could
not be President at the same time.
NB: Under the Revised Corporation Code,
the treasurer is required to be a Philippine
resident.
e) The Secretary is required to be both a resi-
dent and a citizen of the Philippines.

VII
A, B, C, D, E are all duly elected members of
the Board of Directors of XYZ Corporation. F, the
general manager, entered into a supply contract
with an American firm. The contract was duly ap-
proved by the Board of Directors. However, with
196 BAR Q & A IN COMMERCIAL LAW

the knowledge and consent of F, no deliveries

were made to the American firm. As a result of
the non-delivery of the promised supplies, the
American firm incurred damages. The American
firm would like to file a suit for damages. Can the
American firm sue:
a) The members of the Board of Directors
individually, because they approved the
transaction? (2%);
b) The corporation? (2%);
<1) F, the general manager, personally, be-
cause the non-delivery was with his
knowledge and consent? (2%);
d) Explain the rules on liabilities of a corpo-
ration for the act of its corporate officers
and the liabilities of the corporate officers
and Board of Directors of a corporation
acting in behalf of the corporation. (4%).
Answer:

a) No, because they approved the transac-

tion not in their personal capacities but on
behalf of XYZ Corporation. The facts do
not contain any instance where, by law
and jurisprudence, they can be held liable
with the corporation.
b) Yes, because the transaction was duly
approved by the Board of Directors. It is
the Board that exercises corporate powers
and conducts business for the corporation.
 2012 BAR EXAMINATION 197

c) Yes, F could be sued in his personal ca-

pacity because he was guilty of bad faith
in knowingly consenting to the non-
delivery of the promised supplies contrary
to the contract that was duly approved by
the Board of Directors.

d) A corporation would be liable for the acts

of its officers if the said acts were per-
formed by them in accordance with the
powers granted to them under the Corpo-
ration Code, the articles of incorporation
and by-laws of the corporation, or if they
have been authorized by the Board of Di-
rectors or even though not authorized un-
der theby-laws and/or by the Board of Di-
rectors, if their acts are ratified by the cor-
poration.
Directors and officers have no personal li-
ability for actions taken on behalf of the corpo-
ration they represent. Personal liability, how-
ever, will attach in the following cases: a) vot-
ing for or assenting to a patently unlawful act
of the corporation; b) when they acted with
gross negligence or in bad faith in directing
the affairs of the corporation; c) when they ac-
quire any personal or pecuniary interest in
conict with their duty as directors, which
acts result in damages to the corporation, its
stockholders or other persons; d) when they
consented to the issuance of watered stocks or
who, having knowledge thereof, did not forth-
with file their written objection with the corpo-
rate secretary; e) when they contractually
agreed to hold themselves personally and soli-
198 BAR Q & A IN COMMERCIAL LAW

darily liable with the corporation; and, f) or

when they are made, by a specific provision of
law, to personally liable for the corporate ac-
tion. (Heirs of Fe Tan Uy vs. International Ex-
change Bank, G.R. Nos. 166282, February 13,
2013)

VIII
AAA Corporation is a bank. The operations of
AAA Corporation as a bank were not doing well.
So, to avert any bank run, AAA Corporation, with
the approval of the Monetary Board, sold all its as-
sets and liabilities to BBB Banking Corporation
which includes all deposit accounts. In effect then,
BBB Corporation will service all deposits of all de-
positors of AAA Corporation.

8) Will the sale of all assets and liabilities of

AAA Corporation to BBB Banking Corpo-
ration automatically dissolve or termi-
nate the corporate existence of AAA
Corporation? Explain your answer. (5%);

b) What are the legal requirements in order

thata corporation may be dissolved?
(5%).

Answer:

a) No, the sale of all the assets and liabilities

of AAA Corporation to BBB Banking Cor-
poration will not result in the automatic
dissolution or termination of the existence
of the fonner. Such sale is not one of the
 2012 BAR EXAMINATION 199

modes of dissolution under the Corpora-

tion Code. Moreover, having assets is not
a condition for the continuation of juridical
existence.

A corporation may be dissolved voluntar-

ily under Section 118 (where no creditors
are affected) or under Section 119 (where
creditors are affected) or by shortening of
the corporate term under Section 120, or
involuntarily by the SEC under Section
122, all of the Corporation Code. Voluntary
dissolution under Sections 118, 119, and
120 require the approval by at least major-
ity of the Board of Directors of AAA Corpo-
ration and its stockholders representing at
least 2/3 of the total outstanding capital
stock.
In voluntary dissolution by banks, like
in this case, the favorable endorsement of
the Bangko Sentral ng Pilipinas must be
obtained, and the dissolution becomes ef-
fective upon approval by the Securities
and Exchange Commission.
 2013 BAR EXAMINATION

ESSAY QUESTIONS

I.

Antonio issued the following instrument:

August 10, 2013
Makati City
P100,000.00

Sixty days after date, I promise to pay Bobby

or his designated representative the sum of ONE
HUNDRED THOUSAND PESOS(P 100,000.00) from
my BPI Acct. No. 1234 if, by this due date, the sun
still sets in the west to usher in the evening and
rises in the east the following morning to welcome
the day.

(Sgd.) Antonio Reyes

Explain each requirement of negotiability pre-

sent or absent in the instrument. (8%)
Answer:
The requirement that the instrument is in writ-
ing, signed by the maker is present.
It does not, however, contain an unconditional
promise or order to pay sum certain in money be-
cause even though the amount payable is sum cer-

200
 2013 BAR EXAMINATION 201

tain it is payable out of a particular fund (from BPI

account).
It is payable at a fixed or determinable future
time 60 days after August 10, 2013 and because the
sun is sure to set in the west and rise in the east.
It is not, however, payable to order or bearer.

II.

Benny applied for life insurance for Php1.5

Million. The insurance company approved his ap-
plication and issued an insurance policy effective
Nov. 6, 2008. Benny named his children as his
beneficiaries. On April 6, 2010, Benny died of
hepatoma, a liver ailment.
The insurance company denied the children's
claim for the proceeds of the insurance policy on
the ground that Benny failed to disclose in his ap-
plication two previous consultations with his doc-
tors for diabetes and hypertension, and that he
had been diagnosed to be suffering from hepa-
toma. The insurance company also rescinded the
policy and refunded the premiums paid.
Was the insurance company correct? (8%)

Answer:
The insurance company correctly rescinded the
policy because of concealment. Benny did not dis-
close that he was suffering from diabetes, hyperten-
sion, and hepatoma. The concealment is material
because these are serious ailments. These have rea-
sonable and probable influence on the decision of
202 BAR Q & A IN COMMERCIAL LAW

the insurance company to provide coverage and for

what amount of premitun.
Also, Benny died less than 2 years from the date
of the issuance of the policy. Therefore, the incon-
testability clause has not set in.

III.
From his first term in 2007, Congressman Ab-
ner has been endorsing his pork barrel allocations
to Twin Rivers in exchange for a commission of
40% of the face value of the allocation. Twin Riv-
ers is a non-governmental organization whose
supporting papers, after audit, were found by the
Commission on Audit to be fictitious. Other than
to prepare and submit falsified papers to support
the encashment of the pork barrel checks, Twin
Rivers does not appear to have done anything on
the endorsed projects and Congressman Abner
likewise does not appear to have bothered to
monitor the progress of the projects he endorsed.
The congressman converted most of the commis-
sions he generated into US dollars, and deposited
these in a foreign currency account with Banco de
Plata (BDP).
Based on amply-supported tips given by a
congressman from another political party, the
Anti-Money Laundering Council (AMLC) sent BDP
an order: (1) to confirm Cong. Abner’s deposits
with the bank and to provide details of these de-
posits; and (2) to hold all withdrawals and other
transactions involving the congressman's bank
accounts.
 2013 BAR EXAMINATION 203

As counsel for BDP, would you advise the

bank to comply with the order? (8%)

Answer:

I shall advise BDP not to comply with the order

of the AMLC. Without a bank inquiry order from a
competent court, AMLC cannot inquire bank depos-
its, regardless of currency, unless there is probable
cause that the predicate crime involved is any of hi-
jacking, kidnapping for ransom, violations of the
Dangerous Drugs act, hijacking or other violations of
R.A. No. 6235, destructive arson, murder or terror-
1SII1.

Further, the AMLC cannot order BDP to hold all

withdrawals and other transactions involving the
accounts of Congressman Abner. The power to is-
sue freeze order is lodged with the Court of Appeals
which may issue it upon after AMLC establishes
and the Court of Appeals independently determines
that the account relates to unlawful activities under
the AMLA.

IV.

Rudy is a fine arts student in a university. He

stays in a boarding house with Bernie as his
roommate. During his free time, Rudy would paint
and leave his finished works lying around the
boarding house. One day, Rudy saw one of his
works -an abstract painting entitled Manila Traffic
Jam - on display at the university cafeteria. The
cafeteria operator said he purchased the painting
204 BAR Q &A IN COMMERCIAL LAW

from Bernie who represented himself as its

painter and owner.
Rudy and the cafeteria operator immediately
confronted Bernie. While admitting that he did not
do the painting, Bernie claimed ownership of its
copyright since he had already registered it in his
name with the National Library as provided in the
Intellectual Property Code.
Who owns the copyright to the painting? Ex-
plain. (8%)

Answer:

Rudy owns the copyright to the painting be-

cause he was the one who created it. His rights ex-
isted and are protected from the moment of its crea-
tion. Bemie did not have a copyright to the painting.
His registration of the painting with the National Li-
brary did not confer copyright upon him. The regis-
tration is merely for the administrative purpose of
the National Library.

V.

You are a member of the legal staff of a law

firm doing corporate and securities work for Coco
Products Inc., a company with unique products
derived from coconuts and whose shares are
traded in the Philippine Stock Exchange. A part-
ner in the law firm, Atty. Buenexito, to whom you
report, is the Corporate Secretary of Coco Prod-
ucts. You have long been investing in Coco Prod-
ucts stocks even before you became a lawyer.
 2013 BAR EXAMINATION 205

While working with Atty. Buenexito on an-

other file, he accidentally gave you the Coco
Products file containing the company's planned
corporate financial rehabilitation. While you knew
you had the wrong file, your curiosity prevailed
and you browsed through the file before returning
it. Thus, you learned that a petition for financial
rehabilitation is imminent, as the company could
no longer meet its obligations as they fell due.
Soon after, your mother is rushed to the hos-
pital for an emergency operation, and you have to
raise money for her hospital bills. An immediate
option for you is to sell your Coco Products shares.
The sale would be very timely because the prices
of the company's stocks are still high.
Would you sell the shares to raise the needed
funds for your mother’s hospitalization? Take into
account legal (5%) and ethical (3%) considerations.
(8% total points)

Answer:

The sale of the shares does not constitute in-

sider trading. Although Atty. Buenixto, as corporate
secretary of Coco products, Inc. was an insider be-
cause his position gave him access to material non-
public information of the company, I did not leam
the information regarding the planned corporate re-
habilitation by a communication from him. He just
accidentally gave the wrong le.
It would be unethical to sell the shares. Rule
1.01 of the Code of Professional Responsibility pro-
206 BAR Q & A IN COMMERCIAL LAW

vides, “A lawyer shall not engage in unlawful, dis-

honest, immoral or deceitful conduct. "
A lawyer should not only refrain from perform-
ing unlawful acts. He should also desist from engag-
ing in unfair deceitful conduct. I could not disclose
the material information to the buyer because it
would mean a breach of my lawyer's duty of confi-
dentiality. I will then be at an advantage because I
could technically conceal from the buyer of the
shares the planned corporate rehabilitation.

VI.

Delano Cruz is in default in the payment of

his existing loan from BDP Bank. To extend and
restructure this loan, Delano agreed to execute a
trust receipt in the bank's favor covering the iron
pellets Delano imported from China one year ear-
lier. Delano subsequently succeeded in selling the
iron pellets to a smelting plant, but the proceeds
went to the payment of the separation benefits of
his employees who were laid off as he reduced his
operations.
When the extended loan period expired with-
out any significant payment from Delano (not
even to the extent of the proceeds of the sale of
the iron pellets), BDP Bank consulted you on how
to proceed against Delano. The bank is contem-
plating the filing of estafa pursuant to the provi-
sions of Pres. Decree No. 115 (Trust Receipts Law)
to force Delano to turn in at least the proceeds of
the sale of the iron pellets.
 2013 BAR EXAMINATION 207

Would you, as bank counsel and as an officer

of the court, advise the bank to proceed with its
contemplated action? (8%)

Answer:

I will not advise BDP Bank to file a criminal case

for estafa against Delano. Delano received the iron
pellets he imported one year before the trust receipt
was executed. As held by the Supreme Court in
Colinares vs. Court of Appeals, 339 SCRA 609, where
the execution of a trust receipt agreement was
made after the entmstee has already acquired own-
ership of the goods covered by it, the transaction
does not involve a trust receipt but a simple loan
even though the parties denominated the transac-
tion as one of tnist receipt.

VII.

Stable Insurance Co. (SIC) and St. Peter Manu-

facturing Co. (SPMC) have had a long-standing in-
surance relationship with each other; SPMC se-
cures the comprehensive fire insurance on its
plant and facilities from SIC. The standing busi-
ness practice between them has been to allow
SPMC a credit period of 90 days from the renewal
of the policy within which to pay the premium.
Soon after the new policy was issued and be-
fore premium payments could be made, a fire gut-
ted the covered plant and facilities to the ground.
The day after the fire, SPMC issued a manager's
check to SIC for the fire insurance premium, for
208 BAR Q & A IN COMMERCIAL LAW

which it was issued a receipt; a week later SPMC

issued its notice of loss.
SIC responded by issuing its own manager's
check for the amount of the premiums SPMC had
paid, and denied SPMC’s claim on the ground that
under the “cash and carry" principle governing
fire insurance, no coverage existed at the time the
fire occurred because the insurance premium had
not been paid.
Is SPMC entitled to recover for the loss from
SIC? (8%)

Answer:

SPMC is entitled to recover for the loss from

SIC. SIC granted a credit term for the payment of the
premiums and loss occurred during the credit pe-
riod. Recovery on the policy should be allowed even
though the premium was paid after the loss. Also,
the long- standing business practice of allowing
SPMC to pay the premiums after 60 or 90 days, was
relied upon in good faith by SPMC. SIC is already in
estoppel (UCPB General Insurance Co. Inc. vs. Ma-
sagana Telamart, Inc., G.R. No. 137172, April 4,
2001.)

VIII.
In the November 2010 stockholders meeting
of Greenville Corporation, eight (8) directors were
elected to the board. The directors assumed their
posts in January 2011. Since no stockholders’
meeting was held in November 2011, the eight di-
 2013 BAR EXAMINATION 209

rectors served in a holdover capacity and thus

continued discharging their powers.
In June 2012, two (2) of Greenville Corpora-
tion‘s directors — Director A and Director B - re-
signed from the board. Relying on Section 29 of
the Corporation Code, the remaining six (6) direc-
tors elected two (2) new directors to fill in the va-
cancy caused by the resignation of Directors A
and B.
Stockholder X questioned the election of the
new directors, initially, through a letter-complaint
addressed to the board, and later (when his letter-
complaint went unheeded), through a derivative
suit filed with the court. He claimed that the va-
cancy in the board should be filled up by the vote
of the stockholders of Greenville Corporation.
Greenville Corporation's directors defended the
legality of their action, claiming as well that
Stockholder X's derivative suit was improper.
Rule on the issues raised. (8%)

Answer:
The remaining directors cannot elect new direc-
tors to ll in the two vacancies. The board of direc-
tors may ll up vacancy only if the ground is not due
to expiration of term, removal or increase in the
number of board seats. In this case, the tenn of the
two directors expired after 1 year. While they re-
mained in office in a hold-over capacity, the hold-
over period is not part of their term. The resignation
of a hold-over director is one of expiration of term.
Therefore, the vacancies should be lled up by elec-
210 BAR Q & A IN COMMERCIAL LAW

tion of the stockholders in a meeting called for the

purpose (Valle Verde Country Club vs. Africa, G.R.
No. 151969, September 4, 2009).
The derivative suit was improper. In a deriva-
tive suit, the corporation, not the individual stock-
holder, must be the aggrieved party and that the
stockholder is suing on behalf of the corporation to
enforce a corporate right or cause of action. What
stockholder X is asserting is his individual right as a
stockholder to elect the two directors. The case par-
takes more of an election contest under the rules on
intra-corporate controversy.

IX.

Fil-Asia Air Flight 916 was on a scheduled

passenger flight from Manila when it crashed as it
landed at the Cagayan de Oro airport; the pilot
miscalculated the plane’s approach and undershot
the runway. Of the 150 people on board, ten (10)
passengers died at the crash scene.
Of the ten who died, one was a passenger who
managed to leave the plane but was run over by
an ambulance coming to the rescue. Another was
an airline employee who hitched a free ride to Ca-
gayan de Oro and who was not in the passenger
manifest.
It appears from the Civil Aeronautics Author-
ity investigation that the co-pilot who had control
of the plane's landing had less than the required
ying and landing time experience, and should
not have been in control of the plane at the time.
He was allowed to fly as a co-pilot because of the
 2013 BAR EXAMINATION 211

scarcity of pilots — Philippine pilots have been re-

cruited by foreign airlines under vastly improved
ying terms and wages so that newer and less
trained pilots are being locally deployed. The main
pilot, on the other hand, had a very high level of
blood alcohol at the time of the crash.
You are part of the team that the victims
hired to handle the case for them as a group. In
your ca se conference, the following questions
came up

(A) Explain the causes of action legally possi-

ble under the given facts against the air-
line and the pilots; whom will you specifi-
cally implead in these causes of action?
(5%)
(B) How will you handle the cases of the pas-
senger run over by the ambulance and
the airline employee allowed to hitch a
free ride to Cagayan de Oro? (3%)

Answer:

(A) A complaint for breach of contract of car-

riage can be led against Fil-Asia air for
failure to exercise extraordinaiy diligence
in transporting the passengers safely from
their point of embarkation to their destina-
tion.
A complaint based on a quasi-delict
can be filed against Fil-Asia Air and the
pilots because of their fault and negli-
gence. The carrier and the pilots are
 BAR Q & A IN COMMERCIAL LAW

jointly and severally liable unless Fil-Asia

Air can prove that it exercised due dili-
gence in the selection and supervision of
the pilots.
A third cause of action may be a
criminal prosecution for reckless impru-
dence resulting in homicide against two
pilots. The airline will be subsidiarily li-
able for the civil liability only after the pi-
lots are convicted and found to be insol-
vent.

It is the driver of the ambulance and his

employer who should be held liable for
damages, because a passenger was run
over. This is in accordance with Articles
2176 and 2180 of the Civil Code. There
could also be a criminal prosecution for
reckless imprudence resulting in homicide
against the ambulance driver and the con-
sequent civil liability.
The airline employee may also sue Fil-
Asia Air for breach of contract of carriage
even though he was carried gratuitously,
there is no stipulation limiting the liability
of Fil-Asias. As such, the air carrier is still
required to exercise extraordinary dili-
gence for his safety and only ordinary
care. Such obligation does not end after he
has disembarked but from the lapse of
reasonable time to leave the premises.
 2013 BAR EXAMINATION 213

X.

Bell Philippines, Inc. (BelPhil) is a public util-

ity company, duly incorporated and registered
with the Securities and Exchange Commission. Its
authorized capital stock consists of voting com-
mon shares and non-voting preferred shares, with
equal par values of P100.00/share. Currently, the
issued and outstanding capital stock of BelPhil
consists only of common shares shared between
Bayani Cruz, a Filipino with 60% of the issued
common shares, and Bernard Fleet, a Canadian,
with 40%.
To secure additional working fund, BelPhil is-
sued preferred shares to Bernard Fleet equivalent
to the currently outstanding common shares. A
suit was filed questioning the corporate action on
the ground that the foreign equity holdings in the
company would now exceed the 40% foreign eq-
uity limit allowed under the Constitution for pub-
lic utilities.
Rule on the legality of Bernard Fleet's current
holdings. (8%)

Answer:
The Foreign equity holdings of Bernard Fleet
exceeded the allowable 40% foreign equity limit for
public utility. Even though the preferred shares is-
sued to Bernard Fleet are non-voting, the Supreme
Court ruled in Heirs of Wilson Gamboa vs. Teves (682
SCRA 397) that if a corporation engaged in partially
nationalized industry, like a public utility corpora-
tion, issues a mixture of common and preferred
214 BAR Q & A IN COMMERCIAL LAW

shares, the 60-40 ownership requirement in favor of

Filipinos must apply separately to each class of
shares, whether common, preferred, non-voting,
preferred voting or any other class of shares. Thus,
in the present case, 60% of the preferred shares
should have been issued to the Filipinos. This is be-
cause under the Constitution, the State is required
to adopt a self-reliant economy effectively controlled
by Filipinos. Such control is not possible unless Fili-
pinos have at least 60% of the corporation's voting
shares and outstanding capital stock.
NB. In the case of Roy III vs. Herbosa (G.R. No.
207246, November 22, 2016), the Supreme Court up-
held the validity of SEC-MC No. 8 entitled “Guide-
lines on Compliance with the Filipino-Foreign Own-
ership Requirements Prescribed in the Constitution
and/or Existing Laws by Corporations Engaged in
Nationalized and Partly Nationalized Activities."
Section 2 of SEC-MC No. 8 provides that the re-
quired percentage of Filipino ownership shall be
applied to BOTH (a) the total number of outstanding
shares of stock entitled to vote in the election of di-
rectors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote in
the election of directors.
In other words, the 60-40% ownership require-
ment in favor of Filipinos need not be applied for
each class of shares. It is enough that at least 60% of
the voting shares and 60% of the total number of
outstanding shares of are owned by Filipinos.
Tested against the Roy case, the foreign equity
limit of Bernard Holdings still exceeded the foreign
ownership limit.
 2013 BAR EXAMINATION 215

MULTIPLE CHOICE QUESTIONS

Claude, the registered stockholder of 1 000

shares in ABC Corp., pledged the shares to
Conrad by endorsement in blank of the cov-
ering stock certificates and, execution of a
Deed of Assignment of Shares of Stock, in-
tended as collateral for a loan of P1.0 Million
that was also supported by a separate prom-
issory note.
Under these facts, is there a valid pledge
of the shares of stock to Conrad? (1 %)
A) No, because shares of stock are intangible
personal properties whose possession
cannot be delivered and, hence, cannot be
the subject of a pledge;
(B) No, because the pledge of shares of stock
requires double registration with the Reg-
ister of Deeds of the principal place of
business of the corporation and of the
residence of the pledgor;
(C) Yes, because endorsement and delivery of
the certificates of stock is equivalent to
the transfer of possession of the covered
shares to the pledge;
(D) Yes, because the execution of the Deed of
Assignment of Shares of Stock is equiva-
lent to a lawful pledge of the shares of
stock.
218 BAR Q & A IN COMMERCIAL LAW

11. (3) The delegation heard that foreigners can

invest up to 100% of the equity in “export
oriented enterprises” and you were asked
exactly what the term covers.
You replied that an “export oriented enter-
prise” under FIA ‘91 is an enterprise that
. (1%)
(A) only engages in the export of goods
and services, and does not sell goods
or services to the domestic market;
(B) exports consistently at least 40% of
its goods or services, and sells at
least 60% of the rest to the domestic
market;
(C) exports consistently at least 60% of
the goods or services produced, and
sells at least 40% of the rest to the
domestic market;
(D) exports consistently at least 60% of
its goods or services produced, and
can sell goods or services to the do-
mestic market;
(E) None of the above.

Answer:

(E) None of the above.

11. (4) As a last question and by way of a con-

crete example, a delegation member fi-
nally inquired which of the following
—

corporations or businesses in the Philip-

 2013 BAR EXAMINATION 219

pines may it invest in and up to what ex-

tent? (1%)
(A) A lifestyle magazine publication cor-
poration, up to 40% equity;
(B) An advertising corporation, up to
100% equity;
(C) A commercial bank, up to 60% equity;
(D) A jeepney manufacturing corpora-
tion, up to 100% equity;
(E) A real estate development corpora-
tion, up to 60% equity.

Answer:

(D) A jeepney manufacturing corporation, up to

100% equity;

III. Dennis subscribed to 10,000 shares of XYZ

Corporation with a par value of P100 per
share. However, he paid only 25% of the sub-
scription or P250,000.00. No call has been
made on the unpaid subscription.
How many shares is Dennis entitled to
vote at the annual meeting of the stockhold-
ers of XYZ? (1%)
(A) 10,000 shares;
(B) 2,500 shares;
(C) 100 shares;
(D) 0 shares;
(E) None of the above.
220 BAR Q & A IN COMMERCIAL LAW

Answer:

(A) 10,000 shares;

IV. ABC Corp. issued redeemable shares. Under

the terms of the issuance, the shares shall be
redeemed at the end of 10 years from date of
issuance, at par value plus a premium of
10%.
Choose the correct statement relating to
these redeemable shares. (1 %)
(A) ABC Corp. would need unrestricted re-
tained eamings to be able tore deem the
shares;
(B) Corporations are not allowed to issue re-
deemable shares; thus, the issuance by
ABC Corp. is ultra vires;
(C) Holders of redeemable shares enjoy a
preference over creditors;
(D) ABC Corp. may redeem the shares at the
end of 10 years without need for unre-
stricted retained earnings provided that,
after the redemption, there are sufficient
assets to cover its debts;
(E) All of the above are incorrect.
Answer:

(D) ABC Corp. may redeem the shares at the

end of 10 years without need for unre-
stricted retained earnings provided that, af-
ter the redemption, there are sufficient as-
sets to cover its debts;
 2013 BAR EXAMINATION 221

Arnold, representing himself as an agent of

Brian for the sale of Brian's car, approached
Dennis who appeared interested in buying
the car. At Arnold's prodding, Dennis issued
a crossed check payable to Brian for
P25,000.00 on the understanding that the
check would only be shown to Brian as evi-
dence of Dennis‘ good faith and interest in
buying the car. Instead, Arnold used the
check to pay for the medical expenses of his
wife in Brian's clinic after Brian, a doctor,
treated her.
Is Brian a holder in due course (HI DC)?
(1%)

(A) Yes, Brian is a HIDC because he was the

payee of the check and he received it for
services rendered;
(B) Yes, Brian is a HIDC because he did not
need to go behind the check that was
payable to him;
(C) No, Brian is not a HIDC because Dennis
issued the check only as evidence of
good faith and interest in buying the car;
(D) N0, Brian is not a HIDC because Brian
should have been placed on notice: the
check was crossed in his favor and Ar-
nold was not the drawer;
(E) No, Brian is not a HIDC because the req-
uisite consideration to Dennis was not
present.
222 BAR Q & A IN COMMERCIAL LAW

Answer:

(D) No, Brian is not a HIDC because Brian

should have been placed on notice: the
check was crossed in his favor and Arnold
was not the drawer;

VI. Gawsengsit Corp. is a corporation incorpo-

rated in Singapore. It invested in Bumblebee
Corp., a Philippine corporation, by acquiring
30% of its shares. As a result, Gawsengsit
Corp. nominated 300/0 of the directors of
Bumblebee Corp., all of whom are Singapor-
eans and officers of Gawsengsit Corp.
Choose the correct statement relating to
Gawsengsit Corp. (1 %)

(A) Gawsengsit Corp. is doing business in

the Philippines and requires a license
from the Securities and Exchange Com-
mission (SEC);
(B) Gawsengsit Corp. is not doing business
in the Philippines by its mere invest-
ment in a Philippine corporation and
does not need a license from the SEC;
(C) Gawsengsit Corp. has to appoint a resi-
dent agent in the Philippines;
(D) Gawsengsit Corp. cannot elect directors
in Bumblebee Corp.;
(E) All the above choices are incorrect.
 2013 BAR EXAMINATION 223

Answer:

(B) Gawsengsit Corp. is not doing business in

the Philippines by its mere investment in a
Philippine corporation and does not need a
license from the SEC;

VII. The BIR assessed ABC Corp. for deficiency

income tax for taxable year2010 in the
amount of P26,731,208.00, inclusive of sur-
charge and penalties.
The BIR can . (1 %)

(A) run after the directors and ofcers of ABC

Corp. to collect the deficiency tax and
their liability will be solidary;
(B) run after the stockholders of ABC Corp.
and their liability will be joint;
(C) run after the stockholders of ABC Corp.
and their liability will be solidary;
(D) run after the unpaid subscriptions still due
to ABC Corp., if any;
(E) None of the above choices is correct.

Answer:
(D) run after the unpaid subscriptions still due
to ABC Corp., if any;

VIII. Anton imported perfumes from Taiwan and

these were released to him by the bank un-
der a trust receipt. While the perfumes were
224 BAR Q & A IN COMMERCIAL LAW

in Anton’s warehouse, thieves broke in and

stole all of them.
Who will shoulder the loss of the stolen
perfumes? (1%)

(A) The loss of the perfumes will be borne by

the bank in whose behalf the perfumes
were held in trust;
(B) Anton will bear the loss;
(C) The exporter can hold both the bank and
Anton liable for the loss;
(D) The exporter from whom Anton bought
the perfmnes will bear the loss;
(E) No one bears the loss for an unforeseen
event.

Answer:

(B) Anton will bear the loss;

IX. A bank may acquire real property .

(1%)
(A) by purchase at a public sale of proper-
ties levied to satisfy tax delinquencies;
(B) by purchase from a real estate corpora-
tion in the ordinary course of the bank's
business;
(C) through dacion en pago in satisfaction of
a debt in favor of the bank;

(D) in exchange for the purchase of shares of

stocks of the bank;
 2013 BAR EXAMINATION 225

(E) All of the above;

(F) None of the above.

Answer:

(B) by purchase from a real estate corpora-

tion in the ordinary course of the bank's
business;
(C) through dacion en page in satisfaction of
a debt in favor of the bank;
Letter C is a correct answer if the debt is
made in the ordinary course of business.

X.

-
Under the Anti-Money Laundering Act, a de-
positor's bank account may be frozen
(1%)
(A) by the bank when the account is the
subject of a suspicious or covered trans-
action report;
(B) by the Anti-Money Laundering Council
(AMLC) when the account belongs to a
person already convicted of money laun-
dering;
(C) by the Regional Trial Court, upon ex
parte motion by the AMLC, in a criminal
prosecution for money laundering pend-
ing before it;
(D) by the Court of Appeals motu proprio in
an appeal from a judgment of conviction
of a criminal charge for money launder-
ing;
(E) In none of the above.
226 BAR Q & A IN COMMERCIAL LAW

Answer:

(E) In none of the above.

XI. Unknown to the other four proponents, En-

rico (who had been given the task of attend-
ing to the Articles of Incorporation of the
proposed corporation, (Auto Mo, Ayos Ko)
misappropriated the filing fees and never
filed the Articles of Incorporation with the
Securities and Exchange Commission (SEC).
Instead, he prepared and presented to the
proposed incorporators a falsified SEC cer-
tificate approving the Articles. Relying on
the falsified SEC certificate, the latter began
assuming and discharging corporate powers.
Auto Mo, Ayos K0 isa . (1%)
(A) de jure corporation;
(B) de facto corporation;
(C) corporation by estoppel;
(D) general partnership;
(E) None of the above.

Answer:
(C) corporation by estoppel if the term “latter”
refers to the incorporators.
(E) None of the above if the term “latter" re-
fers to Enrico because corporation by es-
toppel assumes that there should be at
least two persons claiming themselves to
third persons that they are a corporation
 2013 BAR EXAMINATION 227

when they are not legally authorized for

such purpose

XII. Preferred shares cannot vote on the proposal

.___- (1 %)
(A) to include other corporate officers in the
corporation's by-laws;
(B) to issue corporate bonds;
(C) to shorten the corporate term;
(D) All of the above;
(E) None of the above.

Answer:
B. Corporate bonds (because corporate bonds
are not the same as bonded indebtedness).
If the examiner meant bonded indebted-
ness, then the answer will be none of the
above

XIII. In 2010, the Philippine National Police de-

clared Kaddafy Benjelani “Public Enemy No.
1" because of his terrorist activities in the
country that have resulted in the death of
thousands of Filipinos. A ransom of P15 mil-
lion was placed on Kaddafy Benjelani's head.
Worried about the future of their family,
Kaddafy Benjelani's estranged wife, Aurelia,
secured in December 2010 a life insurance
policy on his life and designated herself as
the beneficiary.
Is the policy valid and binding? (1 %)
228 BAR Q & A IN COMMERCIAL LAW

(A) Yes, the policy is valid and binding be-

cause Aurelia has an insurable interest
on the life of Kaddafy Benjelani;
(B) No, the policy is not valid and binding
because Kaddafy Benjelani has been of-
ficially declared a public enemy;
(C) Yes, the policy is valid and binding be-
cause it has been in force for more than
two years;
(D) No, the policy is not valid and binding
since the spouses’ estrangement re-
moved Aurelia's insurable interest in
Benjelani‘s life;
(E) None of the above.

Answer:

(A) Yes, the policy is valid and binding be-

cause Aurelia has an insurable interest on
the life of Kaddafy Benjelani;

XIV. Muebles Classico, Inc. (MC), a Manila-based

furniture shop, purchased hardwood lumber
from Surigao Timber, Inc. (STI), a Mindanao-
based logging company. MC was to pay STI
the amount of P5.0 million for 50 tons of lum-
ber. To pay STI, MC opened a letter of credit
with Banco de Plata (BDP). BOP duly in-
formed STI of the opening of a letter of credit
in its favor.
In the meantime, MC- which had been
undergoing financial reverses- filed a peti-
tion for corporate rehabilitation. The reha-
 2013 BAR EXAMINATION 229

bilitation court issued a Stay Order to stay

the enforcement of all claims against MC.
After shipping the lumber, STI went to
BDP, presented the shipping documents, and
demanded payment of the letter of credit
opened in its favor. MC, on the other hand,
informed the bank of the Stay Order and in-
structed it to deny payment to STI because of
the Stay Order. BDP comes to you for advice.
Your best advice is to . (1%)

(A) grant STI’s claim. Under the “Independ-

ence Principle," the bank deals only
with the documents and not the under-
lying circumstances; hence, the presen-
tation of the letter of credit is sufficient;
(B) deny STI’s claim. The Stay Order covers
all claims against the debtor and binds
all its creditors. The letter of credit is a
claim against the debtor that is covered
by the Stay Order;
(C) grant STI’s claim. The letter of credit is
not a claim against the debtor under re-
habilitation, but against the bank which
has assumed a solidary obligation;
(D) deny STI’s claim. If the bank disregards
the Stay Order, it may be subject to con-
tempt by the rehabilitation court. STI
should file its claim with the rehabilita-
tion court;
(E) le an action for inter pleader to resolve
the parties’ competing claims.
230 BAR Q & A IN COMMERCIAL LAW

Answer:

(C) grant STI's claim. The letter of credit is not

a claim against the debtor under rehabili-
tation, but against the bank which has as-
sumed a solidary obligation;

XV. Akiro of Tokyo, Japan sent various goods to

his friend Juan in Cebu City, Philippines,
through one of the vessels of Worth well
Shippers, Inc., an American corporation. En
route to Cebu City, the vessel had two stops,
first in Hong Kong, and second, in Manila.
(1)While travelling from Tokyo to Hong Kong,
the goods were damaged. What law will gov-
ern? (1 %)
Japanese law;
Hong Kong law;
Chinese law;
Philippine law;
American law.

Answer:

(D) Philippine law;

(2) Assuming Philippine law to be applica-

ble and Juan fails to file a claim with the
carrier, may he still commence an action
to recover damages with the court? (1 %)
 2013 BAR EXAMINATION 231

(A) No, the failure to le a claim with

the carrier is a condition precedent
for recovery;
(B) Yes, provided he files the complaint
within 10 years from delivery;
(C) Yes, provided he les the complaint
within 10 years from discovery of
the damage;
(D) Yes, provided he files the complaint
within 1 year from delivery;
(E) Yes, provided he files the complaint
within 1 year from discovery of the
damage.

Answer:

(D) Yes, provided he les the complaint within

1 year from delivery;
 2014 BAR EXAMINATION
I.

Carlo and Bianca met in the La Boracay fes-

tivities. Immediately, they fell in love with each
other and got married soon after. They have been
cohabiting blissfully as husband and wife, but
they did not have any offspring. As the years
passed by, Carlo decided to take out an insurance
on Bianca's life for P1,000,000.00 with him (Carlo)
as sole beneficiary, given that he did not have a
steady source of income and he always depended
on Bianca both emotionally and financially. Dur-
ing the term of the insurance, Bianca died of what
appeared to be a mysterious cause so that Carlo
immediately requested for an autopsy to be con-
ducted. It was established that Bianca died of a
natural cause. More than that, it was also estab-
lished that Bianca was a transgender all along — a
fact unknown to Carlo.
Can Carlo claim the insurance benefit? (5%)

Answer:
Yes. Carlo can claim the insurance benefit. If a
person insures the life or health of another person
with himself as beneficiary, all his rights, title and
interests in the policy shall automatically vest in the
person insured. Carlo, as the husband of Bianca, has
an insurable interest in the life of the latter because
he depended upon Bianca wholly or in part for sup-

232
 2014 BAR EXAMINATION 233

port. Also, the insurable interest in the life of the

person insured must exist when the insurance takes
effect but need not exist when the loss occurs. Thus,
the subsequent knowledge of Carlo, upon the death
of Bianca, that the latter is a transgender does not
destroy his insurable interest on the life of the in-
sured.

II.

Bong bought 300 bags of rice from Ben

for P300,000.00. As payment, Bong indorsed to
Bena Bank of the Philippine Islands (BPI) check
issued by Baby in the amount of P300,000.00.
Upon presentment for payment, the BPI check
was dishonored because Baby's account from
which it was drawn has been closed. To replace
the dishonored check, Bong indorsed a crossed
Development Bank of the Philippines (DBP) check
issued also by Baby for P300,000.00. Again, the
check was dishonored because of insufficient
funds. Ben sued Bong and Baby on the dishonored
BPI check. Bong interposed the defense that the
BPI check was discharged by novation when Ben
accepted the crossed DBP check as replacement
for the BPI check. Bong cited Section 119 of the
Negotiable Instruments Law which provides that
a negotiable instrument is discharged “by any
other act which will discharge a simple contract
for the payment of money."
Is Bong correct? (4%)
234 BAR Q & A IN COMMERCIAL LAW

Answer:

No. Bong is not correct. While Section 119 of the

Negotiable Instruments Law in relation to Article
1231 of the Civil Code provides that one of the
modes of discharging a negotiable instrmnent is by
any other act which will discharge a simple contract
for the payment of money, such as novation, the ac-
ceptance by the holder of another check which re-
placed the dishonored bank check did not result to
novation.
There are only 2 ways which indicate the pres-
ence of novation and thereby produce the effect of
extinguishing an obligation by another which sub-
stitutes the same. First, novation must be explicitly
stated and declared in unequivocal terms as nova-
tion is never presumed. Secondly, the old and the
new obligation must be incompatible on every
point.
In the instant case, there was no express
agreement that the holder's acceptance of the re-
placement check will discharge the drawer and en-
dorser from liability. Neither is there incompatibility
because both checks were given precisely to termi-
nate a single obligation arising from the same
transaction. (Salazar vs. J Y Brothers Marketing Cor-
poration, G.R. No. 171998, October 20, 2010

III.

Under the Financial Rehabilitation and Insol-

vency Act (FRIA), the filing of a petition for volun-
tary rehabilitation must be approved by: (1 %)
 2014 BAR EXAMINATION 235

(A) a majority vote of the Board of Directors

and authorized by the vote of the stock-
holders representing at least a majority of
the outstanding capital stock
(B) a majority vote of the Board of Directors
and authorized by the vote of the stock-
holders representing at least two-thirds of
the outstanding capital stock
(C) two-thirds vote of the Board of Directors
and authorized by the vote of the stock-
holders representing at least a majority of
the outstanding capital stock
(D) two-thirds vote of the Board of Directors
and authorized by the vote of the stock-
holders representing at least two-thirds of
the outstanding capital stock

Answer:
(B) A majority vote of the Board of Directors
and authorized by the vote of the stock-
holders representing at least 2/3 of the out-
standing capital stock.

IV.
DC is a unit owner of Medici Condominium
located in Pasig City. On September 7, 2011,
Medici Condominium Corp. (Medici) demanded
from DC payment for alleged unpaid association
dues and assessments amounting to P195,000.00.
DC disputed the claim, saying that he paid all
dues as shown by the fact that he was previously
236 BAR Q & A IN COMMERCIAL LAW

elected as Director and President of Medici.

Medici, on the other hand, claimed that DC's obli-
gation was a carry-over of his obligations to the
condominium developer, Medici Construction
Corporation. Consequently, DC was prevented
from exercising his right to vote and be voted for
during the 2011 election of Medici's Board of Di-
rectors. This prompted DC to file a complaint for
damages before the Special Commercial Court of
Pasig City. Medici filed a motion to dismiss on the
ground that the court has no jurisdiction over the
intra-corporate dispute which the Housing and
Land Use Regulatory Board (HLURB) has exclusive
jurisdiction over.
Is Medici correct? (4%)

Answer:

No. Medici is not correct. Where a member of

the condominium corporation was denied the right
to vote for alleged non-payment of condominium
dues and assessments, the action although denomi-
nated as one for damages is an intra-corporate con-
troversy and therefore falling within the jurisdiction
of the Regional Trial Court designated as a special
commercial court. Also, while RA No. 9904, or the
Magna Carta for Homeowners Associations em-
powers the HLRUB to hear and decide inter-
association and/or intra-association controversies
concerning homeowners associations, the same can
not be applied in the present case as in involves a
controversy between a condominium unit owner
and the condominium corporation (Medical Plaza
 2014 BAR EXAMINATION 237

Makati Condominium Corporation vs. Cullen, G.R.

No. 181416, November 11,2013)

V.

A corporation organized under the Corpora-

tion Code commences to have corporate existence
and juridical personality and is deemed incorpo-
rated: (1 %)

(A) from the date the application for incorpo-

ration is filed with the Securities and Ex-
change Commission (SEC)
(B) from the date the SEC issues a certificate
of incorporation under its official seal
(C) thirty (30) days after the date the applica-
tion for incorporation is filed with the SEC
(D) thirty (30) days after the datethe SEC is-
sues a certificate of incorporation under its
official seal

Answer:
(B) From the date the SEC issues a certicate
of incorporation under its official seal.

VI.

On May 26, 2014, Jess insured with Jack In-

surance (Jack) his 2014 Toyota Corolla sedan un-
der a comprehensive motor vehicle insurance pol-
icy for one year. On July 1, 2014, Jess’ car was
unlawfully taken. Hence, he immediately reported
238 BAR Q & A IN COMMERCIAL LAW

the theft to the Traffic Management Command

(TMC) of the Philippine National Police (PNP),
which made Jess accomplish a complaint sheet as
part of its procedure. In the complaint sheet, Jess
alleged that a certain Ric Silat (Silat) took posses-
sion of the subject vehicle to add accessories and
improvements thereon. However, Silat failed to
return the subject vehicle within the agreed 3-day
period. As a result, Jess notified Jack of his claim
for reimbursement of the value of the lost vehicle
under the insurance policy. Jack refused to pay
claiming that there is no theft as Jess gave Silat
lawful possession of the car.
Is Jack correct? (4%)

Answer:

No. Jack is not correct. The “theft clause" of a

comprehensive motor vehicle insurance policy has
been interpreted by the Court in several cases to
cover situations like (1) when one takes the motor

-
vehicle of another without the latter's consent even
if the motor vehicle is later returned, there is theft
there being intent to gain as the use of the thing
unlawfully taken constitutes gain, or (2) when there
is taking of a vehicle by another person without the
permission or authority from the owner thereof
(Paramount Insurance vs. Spouses Remondeulaz,
G.R. No. 173773, November 28, 2012)

VII.
Jinggy went to Kluwer University (KU) in
Germany for his doctorate degree (Ph.D.). He
 2014 BAR EXAMINATION 239

completed his degree with the highest honors in

the shortest time. When he came back, he decided
to set-up his own graduate school in his home-
town in Zamboanga. After seeking free legal ad-
vice from his high-ying lawyer-friends, he
learned that the Philippines follows the territorial-
ity principle in trademark law, i.e., trademark
rights are acquired through valid registration in
accordance with the law. Forthwith, Jinggy
named his school the Kluwer Graduate School of
Business of Mindanao and immediately secured
registration with the Bureau of Trademarks. KU
did not like the unauthorized use of its name by
its top alumnus no less. KU sought your help.
What advice can you give KU? (4%)

Answer:
I will advice KU to seek for the cancellation of
the Kluwer Graduate School of Business of Min-
danao with the Bureau of Trademarks.
Jinggy is not the owner of the mark “Kluwer"
and as such, has no right to register the same in her
name. The owner is KU because it was the first one
to use it trade and commerce. It is ownership that
confers the right to register the mark and registra-
tion does not confer ownership of the mark. Even if
the mark "Kluwer" is not registered in the Philip-
pines, the same is entitled to protection against
trademark infringement and unfair competition in
view of the country’s obligation under the Paris
Convention. Under such convention, the Philippines
is obligated to assure nationals of countries of the
Paris Convention that they are afforded an effective
240 BAR Q & A IN COMMERCIAL LAW

protection against violation of their intellectual

property rights in the Philippines. Thus, under the
Philippine law, a trade name of a national of a State
that is a party to the Paris Convention, whether or
not the trade name forms part of a trademark, is pro-
tected “without the obligation of filing or registra-
tion" (Ecole de Cuisine Manille vs Renaus Cointreau
and Cie and Le Cordon Bleu Int1., G.R. No. 185830,
June 5, 2013)
NB The answer is still correct in the sense that
even if the mark “Kluwer“ is not registered in the
Philippines, the same is entitled to protection
against trademark infringement and unfair competi-
tion in view of the country's obligation under the
Paris Convention. Under such convention, the Phil-
ippines is obligated to assure nationals of countries
of the Paris Convention that they are afforded an ef-
fective protection against violation of their intellec-
tual property rights in the Philippines.
Slight modification is, however, needed. In Zun-
608 Pharmaceutical vs. Natrapharm, G.R. No.
211850, September 8, 2020, the Supreme Court held
abandoned previous rulings when it held that
trademark is acquired through registration made in
good faith and not prior use.

VIII.
As a rule, an insurance contract is consensual
and voluntary. The exception is in the case of:
(1%)

(A) Inland Marine Insurance

 2014 BAR EXAMINATION 241

(B) Industrial Life Insurance

(C) Motor Vehicle Liability Insurance
(D) Life Insurance

Answer:

(C) Motor Vehicle Liability Life Insurance

IX.

On February 21, 2013, Barrack entered into a

contract of insurance with Matino Insurance Com-
pany (Matino) involving a motor vehicle. The pol-
icy obligates Matino to pay Barrack the amount of
Six Hundred Thousand Pesos (P600,000.00) in case
of loss or damage to said vehicle during the period
covered, which is from February 26, 2013 to Feb-
ruary 26, 2014.
On April 16, 2013, at about 9:00 a.m., Barrack
instructed his driver, JJ, to bring the motor vehi-
cle to a near by auto shop for tune-up. However,
JJ no longer returned and despite diligent efforts
to locate the said vehicle, the efforts proved futile.
Resultantly, Barrack promptly notified Matino of
the said loss and demanded payment of the insur-
ance proceeds of P600,000.00. In a letter dated
July 5, 2013. Matino denied the claim, reasoning
as stated in the contract that “the company shall
not be liable for any malicious damage caused by
the insured, any member of his family or by a per-
son in the insured's service.
Is Matino correct in denying the claim? (4%)
242 BAR Q & A IN COMMERCIAL LAW

Answer:

No. Matino is not correct in denying the claim.

An insurance company cannot deny a claim by the
owner of a motor vehicle who insured it against loss
or damage because the driver he employed stole it.
Matino cannot invoke the provision excluding mali-
cious damages caused by a person in the service of
the insured. Contracts of insurance are to be con-
strued according to the sense and meaning of the
terms which the parties themselves have used. If
such tenns are clear and unambiguous, they must
be taken and understood in their plain, ordinary and
popular sense. The word “loss“ refers to the act or
fact of losing or failure to keep possession, while the
word “damage“ means deterioration or injury to
property. Also, a contract of insurance is a contract
of adhesion. So, when the terms of the insurance
contain limitations on liability, courts should con-
strue them in such a way as to preclude the insurer
from non-compliance with his obligation. (Alpha In-
surance and Surety Co. vs. Castor, G.R. No. 198174,
September O2, 2013)

X.

A person is said to have an insurable interest

in the subject matter insured where he has a rela-
tion or connection with, or concern in it that he
will derive pecuniary benefit or advantage from
its preservation. Which among the following sub-
ject matters is not considered insurable? (1%)
(A) A partner in a firm on its future prots
 2014 BAR EXAMINATION 243

(B) A general creditor on debtor’s property

A judgment creditor on debtor's property
A mortgage creditor on debtor's mort-
gaged property

Answer:

(A) B

XI.

PA Assurance (PA) was incorporated in 1980

to engage in the sale of pre-need educational
plans. It sold open-ended educational plans which
guaranteed the payment of tuition and other fees
to planholders irrespective of the cost at the time
of availment. It also engaged in the sale of fixed
value plans which guaranteed the payment of a
pre-determined amount to planholders. In 1982,
PA was among the country's top corporations.
However, it subsequently suffered financial diffi-
culties.
On September 8, 2005, PA filed a Petition for
Corporate Rehabilitation before the Regional Trial
Court (RTC) of Makati City. On October 17, 2005,
ten (10) plan holders filed an Opposition and Mo-
tion to Exclude Planholders from Stay Order on
the ground that planholders are not creditors as
they (planholders) have a trust relationship with
PA.
Are the planholders correct? (4%)
244 BAR Q & A IN COMMERCIAL LAW

Answer:

No. The plan-holders are not correct. Under the

Interim Rules of Procedure on Corporate Rehabilita-
tion of 2000 (Interim Rules), which took effect on De-
cember 15, 2000, stay order issued by the rehabilita-
tion court enjoins the enforcement of claims against
the debtor, its guarantors and sureties not liable
solidarily with the principal debtor. Under the In-
terim Rules, "claim" shall include “all claims or de-
mands of whatever nature or character against the
debtor or its property, whether for money or other-
wise." “Creditor” shall mean “any holder of a
claim." Hence, the claim of the plan-holders from PA
is included in the definition of “claims" under the
Interim Rules.
NB The answer is still valid even if it were to be
based on FRIA which supplanted the Interim Rules.

XII.

To constitute a quorum for the transaction of

corporate business, only a majority of the number
of Board of Directors is required: (1 %)
as fixed by the corporate by-laws
as fixed in the articles of incorporation
actually serving in the board
actually serving in the board but constitut-
ing a quorum
Answer:
(B) As fixed in the articles of incorporation
 2014 BAR EXAMINATION 245

XIII.

Pursuant to its By-Laws, Soei Corporation’s

Board of Directors created an Executive Commit-
tee to manage the affairs of the corporation in be-
tween board meetings. The Board of Directors ap-
pointed the following members of the Executive
Committee: the President, Sarah L; the Vice Presi-
dent, Jane L; and, a third member from the board,
Juan Riles. On December 1, 2013, the Executive
Committee, with Sarah L and Jane L present, met
and decided on the following matters:
1. purchase of a delivery van for use in the
corporation's retail business;
2. declaration and approval of the 13th
month bonus;
3. purchase of an office condominium unit
at the Fort; and
4. declaration of £110.00 per share cash divi-
dend.
Are the actions of the Executive Committee
valid? (4%)

Answer:
The actions of the Executive Cornrnittee are
valid except for the declaration of cash dividends
which is an act that cannot be delegated by the
Board of Directors to the Executive Committee pur-
suant to Section 35 of the Corporation Code.
NB The answer is on the assumption that: a) the
Vice President is also a director because only board
246 BAR Q & A IN COMMERCIAL LAW

directors can be appointed as regular and voting

members of the Executive Committee; and, b) that it
is the by-laws that created the Executive Committee
and the Board is simply authorized under the by-
laws to appoint the members.

XIV.

On September 25, 2013, Danny Marcial

(Danny) procured an insurance on his life with a
face value of P5,000,000.00 from RN Insurance
Company (RN), with his wife Tina Marcial (Tina)
as sole beneficiary. On the same day, Danny is-
sued an undated check to RN for the full amount
of the premium. On October 1, 2013, RN issued the
policy covering Danny's life insurance. On Octo-
ber 5, 2013, Danny met a tragic accident and died.
Tina claimed the insurance benefit, but RN was
quick to deny the claim because at the time of
Danny's death, the check was not yet encashed
and therefore the premium remained unpaid.
Is RN correct? Will your answer be the same if
the check is dated October 15, 2013? (4%)
Answer:

No. RN is not correct. The contract of insurance

was consummated after the issuance of the check
by Danny for the full amount of the premium and the
unconditional delivery of an insurance policy of RN
to Danny. By accepting the PDC, RN has effectively
granted credit to Danny to pay the premium.
My answer will still be the same even if the
check is dated October 15, 2013. While the loss oc-
 2014 BAR EXAMINATION 247

curred prior to the date of the postdated check, its

acceptance as a mode of premium payment is effec-
tively a grant of credit to Danny.

XV.

A, B, C, D, and E were members of the 2003-

2004 Board of Directors of FLP Corporation. At the
election for the 2004-2005 Board of Directors, not
one of them was elected. They filed in court a de-
rivative suit on behalf of FLP Corporation against
the newly-elected members of the Board of Direc-
tors. They questioned the validity of the election
as it was allegedly marred by lack of quorum, and
prayed for the nullification of the said election.
The 2004-2005 Board of Directors moved to dis-
miss the complaint because the derivative suit is
not proper. Decide. (4%)
Answer:

The derivative suit is not proper. The petition-

ers are the injured parties whose right to vote and
be voted upon were directly affected by the election
of the new board of directors. The cause of action
devolves on the petitioners, not on FLP Corporation,
which did not have the right to vote. Hence, the
complaint filed by A, B, C, D and E for the nullifica-
tion of the election is a direct action by the petition-
ers, who were the members of the Board of Directors
of the corporation before the election, against re-
spondents, who are the newly-elected Board of Di-
rectors. Under the circumstances, the derivative suit
filed by petitioners in behalf of FLP is improper. De-
rivative suit is a suit filed by a minority stockholder
248 BAR Q & A IN COMMERCIAL LAW

in the name of the corporation to enforce a corporate

right or cause of action (Legaspi Towers 300 vs.
Muer, G.R. No. 170783, June 18, 2012)

XVI.

In intellectual property cases, fraudulent in-

tent is not an element of the cause of action ex-
cept in cases involving: (1 %)

trademark infringement
copyright infringement
patent infringement
(D) unfair competition

Answer:

(A) Unfair competition

XVII.

On December 1, 2010, Kore A Corporation

shipped from South Korea to LT Corporation in
Manila some 300,000 sheets of high-grade special
steel. The shipment was insured against all risks
by NA Insurance (NA). The carrying vessel arrived
at the Port of Manila on January 10, 2011. When
the shipment was discharged, it was noted that
25,000 sheets were damaged and in bad order. The
entire shipment was turned over to the custody of
ATI, the arrastre operator, on January 21, 2011 for
storage and safekeeping, pending its withdrawal
 2014 BAR EXAMINATION 249

by the consignee's authorized customs broker,

RVM.
On January 26 and 29, 2011, the subject ship-
ment was withdrawn by RVM from the custody of
ATI. On January 29, 2011, prior to the withdrawal
of the last batch of the shipment, a joint inspec-
tion of the cargo was conducted per the Request
for Bad Order Survey (RBO) dated January 28,
2011. The examination report showed that 30,000
sheets of steel were damaged and in bad order.
NA Insurance paid LT Corporation the amount
of P30,000,000.00 for the 30,000 sheets that were
damaged, as shown in the Subrogation Receipt
dated January 13, 2013. Thereafter, NA Insurance
demanded reparation against ATI for the goods
damaged in its custody, in the amount
of P5,000,00.00. ATI refused to pay claiming that
the claim was already barred by the statute of
limitations. ATI alleged that the Carriage of Goods
by Sea Act (COGSA) applies in this case since the
goods were shipped from a foreign port to the
Philippines. NA Insurance claims that the COGSA
does not apply, since ATI is not a shipper or car-
rier.
Who is correct? (5%)
Answer:
NA Insurance is correct. ATI should be ordered
to pay NA Insurance notwithstanding the lapse of
the one year prescriptive period for ling a suit un-
der the COGSA. The term “carriage of goods" under
Section 1 of COGSA covers the period from the time
250 BAR Q & A IN COMMERCIAL LAW

when the goods are loaded to the time when they

are discharged from the ship. When the goods have
been discharged from the ship and given to the cus-
tody of the arrastre operator, it is no longer covered
by the COGSA. Further, the COGSA does not men-
tion that an arrastre operator may invoke the pre-
scriptive period of one year; thus, it does not cover
the arrastre operator (Insurance Company of North
America vs Asian Terminals, GR No. 180784, Febru-
ary 15, 2012)

XVIII.
Skechers Corporation sued Inter-Pacific for
trademark infringement, claiming that Inter-
Pacific used Skechers‘ registered “S” logo mark on
Inter-Pacific's shoe products without its consent.
Skechers has registered the trademark
“SKECHERS” and the trademark "S" (with an oval
design) with the Intellectual Property Office (IPO).
In its complaint, Skechers points out the fol-
lowing similarities: the color scheme of the blue,
white and gray utilized by Skechers. Even the de-
sign and “wave-like" pattern of the mid-sole and
outer sole of Inter Pacific’s shoes are very similar
to Skechers‘ shoes, if not exact patterns thereof.
On the side of Inter-Pacific’s shoes, near the upper
part, appears the stylized “S” placed in the exact
location as that of the stylized "S" the Skechers
shoes. On top of the “tongue” of both shoes, ap-
pears the stylized “S" in practically the same loca-
tion and size.
 2014 BAR EXAMINATION 251

In its defense, Inter-Pacific claims that under

the Holistic Test, the following dissimilarities are
present: the mark "S" found in Strong shoes is not
enclosed in an “oval design”; the word "Strong" is
conspicuously placed at the backside and insoles;
the hang tags labels attached to the shoes bear the
word “Strong” for Inter-Pacific and “Skechers
U.S.A." for Skechers; and, Strong shoes are mod-
estly priced compared to the costs of Skechers
shoes.
Under the foregoing circumstances, which is
the proper test to be applied — Holistic or Domi-
nancy Test? Decide. (4%)

Answer:

The proper test to be applied is the dominancy

test. Applying the dominancy test, there is a confus-
ing similarity between “Skechers" rubber shoes and
“Strong" rubber shoes. The use of the stylized “S”
by Inter-Pacific in its Strong Shoes infringes on the
trademark “Skechers" already registered by
Skechers U.S.A. with the IPO. While it is undisputed
that Skechers U.S.A. stylized “S” is within an oval
design, the dominant feature of the trademark is
stylized “S” as it is precisely the stylized “S" which
catches the eye of the purchaser. (Skechers vs. Inter
Pacic Industrial Trading Corporation, G.R. No.
164321, March 28,2011)

XIX.

Guetze and his wife have three (3) children:

Neymar, 25, who is now based in Rio de Janeiro,
252 BAR Q & A IN COMMERCIAL LAW

Brazil; Muelter, 23, who has migrated to Munich,

Germany; and James, 21, who resides in Bogota,
Colombia. Neymar and Muelter have since re-
nounced their Philippine citizenship in favor of
their country of residence. Nearing 70 years old,
Guetze decided to incorporate his business in Bi-
nondo, Manila. He asked his wife and three (3)
children to act as incorporators with one (1) share
of stock each, while he owned 999,996 shares of
the 1,000,000 shares of the capital stock. (6%)
(A) Assuming all other requirements are met,
should the Securities and Exchange Com-
mission (SEC) accept or reject the Articles
of Incorporation? Why?
(B) Being the control freak and micro-manager
that he is, Guetze asked you — his astute
legal adviser — if he can serve as Chainnan
of the Board of Directors, as President, and
as General Manager of the corporation, all
at the same time. Please advise Guetze.
(C) Assuming the corporation has been prop-
erly registered, may the Articles of Incor-
poration now be amended to reduce the
number of directors to two (2) - Guetze
and his wife — to reect the real owners of
the shares of stock?
Answer:
(A) The SEC should reject the articles of incor-
poration because majority of the incorpora-
tors are not Philippine residents.
 2014 BAR EXAMINATION 253

NB Under the Revised Corporation Code,

residency requirement for incorpora-
tors was removed.
(B) Yes, Guetze can serve as Chairman, as
President, and as General Manager of the
corporation all at the same time. Section 25
of the Corporation Code provides that “two
or more positions may be held concurrently
by the same person, except that no one
shall act as president and secretary or as
president and treasurer at the same time."
Such case does not fall within the excep-
tion under the aforesaid Section.
(C) No, the Articles of Incorporation may not be
amended to reduce the number of directors
to two. Section 14 of the Corporation Code
requires that the Articles of Incorporation
shall contain the number of directors,
which shall not be less than 5 nor more
than 15. Hence, the reduction of the num-
ber of directors to two, to reect the real
owners of the shares of stock, is not valid.

XX.

On May 13, 1996, PAM, Inc. obtained a

P15,000,000.00 fire insurance policy from Ilocano
Insurance covering its machineries and equip-
ment effective for one (1) year or until May 14,
1997. The policy expressly stated that the insured
properties were located at “Sanyo Precision Phils.
Building, Phase III, Lots 4 and 6, Block 15, PEZA,
Rosario, Cavite." Before its expiration, the policy
was renewed on “as is" basis for another year or
254 BAR Q & A IN COMMERCIAL LAW

until May 13, 1998. The subject properties were

later transferred to Pace Factory also in PEZA. On
October 12, 1997, during the effectivity of the re-
newed policy, a fire broke out at the Pace Factory
which totally burned the insured properties.
The policy forbade the removal of the insured
properties unless sanctioned by Ilocano. Condition
9 (c) of the policy provides that “the insurance
ceases to attach as regards the property affected
unless the insured, before the occurrence of any
loss or damage, obtains the sanction of the com-
pany signified by endorsement upon the policy x x
x (c) if the property insured is removed to any
building or place other than in that which is
herein stated to be insured.” PAM claims that it
has substantially complied with notifying Ilocano
through its sister company, the RBC, which, in
fact, referred PAM to Ilocano for the insurance
coverage.
Is Ilocano liable under the policy? (4%)

Answer:
Ilocano is not liable under the policy. With the
transfer of the location of the subject properties,
without notice and without insurer’s consent, after
the renewal of the policy, the insured clearly com-
mitted concealment, misrepresentation and a
breach of material warranty. The Insurance Code
provides that a neglect to communicate that which
a party knows and ought to communicate, is called
concealment. Concealment entitles the injured party
to rescind a contract of insurance. Moreover, under
Section 168 of the Insurance Code, the insurer is en-
 2014 BAR EXAMlNATlON 255

titled to rescind the insurance contract in case of an

alteration in the use or condition of the thing in-
sured. An alteration in the use or condition of a
thing insured from that to which it is limited by the
policy made without the consent of the insurer, by
means within the control of the insured, and in-
creasing the risks, entitles the insurer to rescind the
contract of fire insurance. (Malayan Insurance Com-
pany vs. PAP Co, G.R. No. 200784, August 7, 2013)

XXI.

On July 3, 1993, Delia Sotero (Sotero) took out

a life insurance policy from Ilocos Bankers Life In-
surance Corporation (Ilocos Life) designating
Creencia Aban (Aban), her niece, as her benefici-
ary. Ilocos Life issued Policy No. 747, with a face
value of P100,000.00, in Sotero's favor on August
30, 1993, after the requisite medical examination
and payment of the premium.
On April 10, 1996, Sotero died. Aban filed a
claim for the insurance proceeds on July 9, 1996.
Ilocos Life conducted an investigation into the
claim and came out with the following findings:
1. Sotero did not personally apply for insur-
ance coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capabil-
ity to pay the premium on the policy.
4. Sotero did not sign the application for in-
surance.
256 BAR Q & A IN COMMERCIAL LAW

5. Aban was the one who filed the insurance

application and designated herself as the
beneficiary.
For the above reasons and claiming fraud,
Ilocos Life denied Aban's claim on April 16, 1997,
but refunded the premium paid on the policy. (6%)
(A) May Sotero validly designate her niece as
beneficiary?
(B) May the incontestability period set in even
in cases of fraud as alleged in this case?
(C) Is Aban entitled to claim the proceeds un-
der the policy?
Answer:
(A) Yes. Sotero may validly designate her
niece, Aban, as beneficiary. When the in-
sured takes insurance on his own life, he
can designate anyone as beneciary ex-
cept those disqualified to receive donation
under Article 739 of the Civil Code. Aban
does not fall within the disqualification.
(B) Yes. The “incontestability clause” is a
provision in Insurance Code which pro-
vides that after a policy of life insurance
made payable on the death of the insured
shall have been in force during the lifetime
of the insured for a period of 2 years from
the date of its issue or of its last rein-
statement, the insurer carmot prove that
the policy is void ab initio or is rescindable
by reason of fraudulent concealment or
misrepresentation of the insured or his
agent.
 2014 BAR EXAMINATION 257

In this case, the policy was issued on

August 30, 1993, and the insured died on
April 10, 1996. The insurance policy was
thus in force for a period of 3 years, 7
months and 24 days. Considering that the
insured died after the 2-year period, Ilocos
is, therefore, barred from proving that the
policy is void ab 1'n1't1'o by reason of the in-
sured’s fraudulent concealment or misrep-
resentation or want of insurable interest
on the part of the beneficiary.

(C) Yes, Aban is entitled to claim the pro-

ceeds. After the 2-year period lapse, or
when the insured dies within the period,
the insurer must make good on the policy,
even though the policy was obtained by
fraud, concealment, or misrepresentation,
as in this case, when the insured did not
personally apply for the policy as she was
illiterate and that it was the beneficiary
who filled up the insurance application
designating herself as beneficiary (Manila
Bankers Life Insurance Corporation vs.
Aban, G.R. No. 175666)

XXII.

Paul George Pua (Pua) filed a complaint for a

sum of money against the spouses Benito and
Caroline James (Spouses James). In the complaint,
Pua prayed that the defendants pay Pua the
amount of 8,500,000.00, covered by a check. Pua
asserts that defendants owed him a sum of money
258 BAR Q & A IN COMMERCIAL LAW

way back in 1988 for which the Spouses James

gave him several checks. These checks, however,
had all been dishonoured and Pua has not been
paid the amount of the loan plus the agreed inter-
est. In 1996, the Spouses James approached Pua to
get the computation of their liability including the
2% compounded interest. After bargaining to
lower the amount of their liability, the Spouses
James gave Pua a post-dated check bearing the
discounted amount of P8,500,000.00. Like the 1988
checks, the drawee bank likewise dishonoured
this check. To prove his allegations, Pua submit-
ted the original copies of the seventeen (17)
checks issued by Caroline in 1988 and the check
issued in 1996, Manilatrust tCheck No. 750. The
Spouses James, on the other hand, completely de-
nied the existence of the debt asserting that they
had never approached Pua to borrow money in
1988 or 1996. They asserted, instead, that Pua is
simply acting at the instance of his sister, Lilian,
to file a false charge against them using a check
left to fund a gambling business previously oper-
ated by Lilian and Caroline.
Decide. (5%)

Answer:
The 17 original checks, completed and delivered
to Pua, are veritable proof of the loan obligation of
Spouses James to Pua. Under Section 24 of the Ne-
gotiable Instruments Law, “every negotiable in-
strument is deemed prima facie to have been issued
for a valuable consideration; and every person
whose signature appears thereon to have become a
 2014 BAR EXAMINATION 259

party for value." Spouses James would not have is-

sued the checks to Pua if they did not receive any
consideration therefor. And Spouses James can not
rebut the presumption by mere denial. Conse-
quently, the case should be decided in favor of Pua
and against Spouses James.

XXIII.

What vote is needed to consider every deci-

sion to be a valid corporate act? (1 %)

(A) a majority of the directors present at the

meeting
(B) two-thirds of the directors present at the
meeting
(C) a majority of the directors present at the
meeting at which there is a quorum
(D) two-thirds of the directors present at the
meeting at which there is a quorum

Answer:

(C) A majority of the directors present at the

meeting at which there is a quorum.

XXIV.

A criminal complaint for violation of B.P. 22 was

filed by Foton Motors (Foton), an entity engaged
in the business of car dealership, against Pura
Felipe (Pura) with the Office of the City Prosecu-
tor of Quezon City. The Office found probable
260 BAR Q & A IN COMMERCIAL LAW

cause to indict Pura and filed an information be-

fore the Metropolitan Trial Court (MeTC) of Que-
zon City, for her issuance of a post-dated check in
the amount of P1,020,000.00 which was subse-
quently dishonored upon presentment due to
“Stop Payment."
Pura issued the check because her son,
Freddie, attracted by a huge discount of
P220,000.00, purchased a Foton Blizzard 4x2 from
Foton. The term of the transaction was Cash-on-
Delivery and no down payment was required. The
car was delivered on May 14, 1997, but Freddie
failed to pay upon delivery. Despite non-payment,
Freddie took possession of the vehicle.
Pura was eventually acquitted of the charge
of violating B.P. 22 but was found civilly liable for
the amount of the check plus legal interest. Pura
appealed the decision as regards the civil liability,
claiming that there was no privity of contract be-
tween Foton and Pura. No civil liability could be
adjudged against her because of her acquittal
from the criminal charge. It was Freddie who was
civilly liable to Foton, Pura claimed. Pura added
that she could not be an accommodation party ei-
ther because she only came in after Freddie failed
to pay the purchase price, or six (6) months after
the execution of the contract between Foton and
Freddie. Her liability was limited to her act of issu-
ing a worthless check, but by her acquittal in the
criminal charge, there was no more basis for her
to be held civilly liable to Foton. Pura’s act of issu-
ing the subject check did not, by itself, assume the
 2014 BAR EXAMINATION 261

obligation of Freddie to Foton or automatically

make her a party to the contract.
Is Pura liable? (5%)

Answer:

Yes. Pura is liable. It is axiomatic that every

person criminally liable is also civilly liable. If the
accused however, is not found to be criminally li-
able, it does not necessarily mean that she is re-
lieved from civil liability because extinction of the
penal action does not automatically carry with it ex-
tinction of civil action. While Pura may have been
acquitted, and she was not an accommodation
party, she remains civilly as a result of issuing the
dishonored check.

XXV.

In an action for collection of a sum of money,

the Regional Trial Court (RTC) of Makati City is-
sued a decision finding D-Securities, Inc. liable to
Rehouse Corporation for P10,000,000.00. Subse-
quently, the writ of execution was issued but re-
turned unsatisfied because D-Securities had no
more assets to satisfy the judgment. Rehouse
moved for an Alias Writ of Execution against Fair-
field Bank (FB), the parent company of D-
Securities. FB opposed the motion on the grounds
that it is a separate entity and that it was never
made a party to the case. The RTC granted the
motion and issued the Alias Writ of Execution. In
its Resolution, the RTC relied on the following
facts: 499,995 out of the 500,000 outstanding
262 BAR Q &A nu COMMERCIAL LAW

shares of stocks of D-Securities are owned by FB;

FB had actual knowledge of the subject matter of
litigation as the lawyers who represented D-
Securities are also the lawyers of FB. As an alter
ego, there is no need for a finding of fraud or ille-
gality before the doctrine of piercing the veil of
corporate fiction can be applied. The RTC ratioci-
nated that being one and the same entity in the
eyes of the law, the service of summons upon D-
Securities has bestowed jurisdiction over both the
parent and wholly-owned subsidiary.
Is the RTC correct? (4%)

Answer:

No, the RTC is not correct. The fact that FB

owns almost all of the capital stock of D Securities is
not sufficient reason to disregard the separate legal
personality of the latter and treat it as one with its
parent company. To warrant piercing the veil of cor-
porate fiction, there must be total and absolute con-
trol not only in shares but also in business policies
and practices such that the corporation had not
mind of its own with respect to the transaction at-
tacked; the control must also be used to commit
fraud or wrong or perpetuate the violation of a legal
duty or dishonest or unjust act in contravention of
the plaintiffs legal rights and the aforesaid control
and breach of duty must have been the proximate
cause of the injury or unjust loss complained of.
These elements are not present in this case.
Also, the court must have first acquired jurisdic-
tion over the corporation(s) involved before its or
their separate personalities are disregarded; and the
 2014 BAR EXAMINATION 263

doctrine of piercing the veil of corporate entity can

only be raised during a full-blown trial over a cause
of action duly cormnenced involving parties duly
brought under the authority of the court by way of
service of summons or what passes as such service
(Pacic Rehouse Corporation vs. Court of Appeals,
G.R. No. 199687, March 24, 2014)

XXVI.

DMP Corporation (DMP) obtained a loan

of P20 million from National Bank (NB) secured by
a real estate mortgage over a 63,380sq. m. land
situated in Cabanatuan City. Due to the Asian
Economic Crisis, DMP experienced liquidity prob-
lems disenabling it from paying its loan on time.
For that reason, NB sought the extra judicial fore-
closure of the said mortgage by filing a petition
for sale on June 30, 2003. On September 4, 2003,
the mortgaged property was sold at public auc-
tion, which was eventually awarded to NB as the
highest bidder. That same day, the Sheriff exe-
cuted a Certificate of Sale in favor of NB.
On October 21, 2003, DMP filed a Petition for
Rehabilitation before the Regional Trial Court
(RTC). Pursuant to this, a Stay Order was issued
by the RTC on October 27, 2003.
On the other hand, NB caused the recording
of the Sheriff’s Certificate of Sale on December 3,
2003 with the Register of Deeds of Cabanatuan
City. NB executed an Affidavit of Consolidation of
Ownership and had the same annotated on the ti-
tle of DMP. Consequently, the Register of Deeds
264 BAR Q & A IN COMMERCIAL LAW

cancelled DMP’s title and issued a new title in the

name of NB on December 10, 2003.
NB also filed on March 17, 2004 an Ex-Parte
Petition for Issuance of Writ of Possession before
the RTC of Cabanatuan City. After hearing, the
RTC issued on September 6, 2004 an Order direct-
ing the Issuance of the Writ of Possession, which
was issued on October 4, 2004.
DMP claims that all subsequent actions per-
taining to the Cabanatuan property should have
been held in abeyance after the Stay Order was
issued by the rehabilitation court.
ls DMP correct? (4%)
Answer:

No. DMP is not correct. Since the foreclosure of

the mortgage and the issuance of the certificate of
sale in favor of the mortgagee were done prior to the
appointment of a Rehabilitation Receiver and the
issuance of the Stay Order, all the actions taken
with respect to the foreclosed mortgaged property
which were subsequent to the issuance of the Stay
Order were not affected by the Stay Order. Thus, af-
ter the redemption period expired without the mort-
gagor redeeming the foreclosed property, the mort-
gagee becomes the absolute owner of the property
and it was within its right to ask for consolidation of
title and the issuance of new title in its favor. The
writ of possession procured by the mortgagee de-
spite the subsequent issuance of Stay Order in the
rehabilitation proceeding instituted is also valid.
(Equitable PCI Bank vs. DNG Realty and Develop-
ment Corporation, 627 SCRA 125)
 2014 BAR EXAMINATION 265

Note, however, that under section 4 of Financial

Rehabilitation and Insolvency Act, the commence-
ment date shall refer to the date on which the court
issues the commencement order which shall be ret-
roactive to the date of the filing of the petition for
voluntary or involuntary proceedings. Thus, even if
the commencement order was issued after the fore-
closure, it serves as the legal basis for rendering
null and void the results of any extrajudicial activity
or process to seize the property. In that case, ac-
tions with respect to the foreclosed mortgaged
property subsequent to the issuance of the com-
mencement order should be stayed.

XXVII.

ELP Insurance, Inc. issued Marine Policy No.

888 in favor of FCL Corp. to insure the shipment of
132 bundles of electric copper cathodes against all
risks. Subsequently, the cargoes were shipped on
board the vessel “M/V Menchu" from Leyte to
Pier 10, North Harbor, Manila.
Upon arrival, FCL Corp. engaged the services
of CGM, Inc. for the release and withdrawal of the
cargoes from the pier and the subsequent delivery
to its warehouses/plants in Valenzuela City. The
goods were loaded on board twelve (12) trucks
owned by CGM, Inc., driven by its employed driv-
ers and accompanied by its employed truck help-
ers. Of the twelve (12) trucks en route to
Valenzuela City, only eleven (11) reached the des-
tination. One (1) truck, loaded with eleven (11)
bundles of copper cathodes, failed to deliver its
cargo.
266 BAR Q & A IN COMMERCIAL LAW

Because of this incident, FCL Corp. filed with

ELP Insurance, Inc. a claim for insurance indem-
nity in the amount of P1,500,000.00. After the req-
uisite investigation and adjustment, ELP Insur-
ance, Inc. paid FCL Corp. the amount of
P1,350,000.00 as insurance indemnity.
ELP Insurance, Inc., thereafter, filed a com-
plaint for damages against CGM, Inc. before the
Regional Trial Court (RTC), seeking reimburse-
ment of the amount it had paid to FCL Corp. for
the loss of the subject cargo. CGM, Inc. denied the
claim on the basis that it is not privy to the con-
tract entered into by and between FCL Corp. and
ELP Insurance, Inc., and hence, it is not liable
therefor.
If you are the judge, how will you decide the
case? (4%)

Answer:
CGM, Inc. should be held liable for damages
against ELP Insurance, Inc. The insurer, upon hap-
pening of the risk insured against and after payment
to the insured is subrogated to the rights and cause
of action of the latter. CGM, as a common carrier, is
liable for the loss of the cargo. By virtue of the sub-
rogation, ELP Insurance acquired the right to pro-
ceed against CGM. Subrogation does not require the
consent of the wrongdoer. It is an equitable assign-
ment of right that accrues to the insurer after valid
payment is made to the insured as a result of the
happening of the risks insured against.
 2014 BAR EXAMINATION 267

XXVIII.
Which of the following instruments is nego-
tiable if all the other requirements of negotiability
are met? (1 %)
(A) A promissory note with promise to pay out
of the U.S. Dollar account of the maker in
XY Z Bank
(B) A promissory note which designates the
U.S. Dollar currency in which payment is to
be made
(C) A promissory note which contains in addi-
tion a promise to paint the portrait of the
bearer
(D) A promissory note made payable to the or-
der of Jose Cruz or Josefa Cruz
Answer:
(B) A promissory note which designates the US
Dollar currency in which payment is to be
made

XXIX.
KK is from Bangkok, Thailand. She studies
medicine in the Pontifical University of Santo
Tomas (UST). She learned that the same foreign
books prescribed in UST are 40-50% cheaper in
Bangkok. So she ordered 50 copies of each book
for herself and her classmates and sold the books
at 20% less than the price in the Philippines. XX,
the exclusive licensed publisher of the books in
the Philippines, sued KK for copyright infringe-
ment.
268 BAR Q & A IN COMMERCIAL LAW

Decide. (4%)

Answer:

KK did not commit copyright infringement. Un-

der the “first sale" doctrine, the economic rights of
the author relevant to the question extend only to
the first public distribution of each original copy. Af-
ter the first sale of the original copies, the owner
may use and re-sell the same. Hence, there is no in-
fringement by KK since the said doctrine permitted
importation and resale without the publisher's fur-
ther permission.
KK, however, must also establish the number of
copies of the books he imported into the Philippines
is compatible with fair use. Otherwise, there is
copyright infringement.
 2015 BAR EXAMINATION

I.

(A) Nadine has a checking account with Fair

8: Square Bank. One day, she lost her
check book and the finder was able to
forge her signature and encash the forged
check. Will Nadine be able to recover the
amount debited from her checking ac-
count from Fair & Square Bank? Justify
your answer. (3%)
(B) Is a manager's check as good as cash?
Why or why not? (2%)
(C) When can you treat a bill of exchange as a
promissory note? (3%)
Answer:

(A) Yes, Nadine should be able to recover the

amount debited from her checking account
from Fair and Square Bank. The Bank is
supposed to know the signature of its cli-
ents. The Bank was thus negligent in not
detecting the forgery of Nadine's signature
and paying the check. Under the circum-
stances, there was no negligence 011 the
part of Nadine which would preclude her
from invoking forgery. (Philippine National
Bank v. Ouimpo, 158 SCRA 582.)

269
 BAR Q & A IN COMMERCIAL LAW

(B) Yes, a manager’s check is good as cash. A

manager’s check is a check drawn by the
bank against itself. It is deemed pre-
accepted by the bank from the moment of
issuance. The check becomes the primary
obligation of the bank which issues it and
constitutes its written promise to pay. By
issuing it, the bank in effect commits its to-
tal resources, integrity and honor behind
the check. (Tan v. Court of Appeals, 239
SCRA 310; International Corporate Bank v.
Gueco, 351 SCRA 516; Metrobank and Trust
Company v. Chiok, G.R. No. 172652, No-
vember 26, 2014.)
(C) A bill of exchange may be treated as a
promissory note in the following instances.
1. The drawee is a fictitious person or a
person not having the capacity to con-
tract;
2. The drawer and the drawee are one
and the same person.
3. Where the instrument is so ambiguous
that there is a doubt as to whether the
instrument is a bill or a note, the holder
may treat it either as a bill or note, at
the option of the holder. (Sections 130
and 17 of the Negotiable Instruments
Law.)

II.

(A) Novette entered into a contract for the

purchase of certain office supplies. The
 2015 BAR EXAMINATION 271

goods were shipped. While in transit, the

goods were insured by Novette. Does she
have an insurable interest over the goods
even before delivery of the same to her?
Explain. (2%)
(B) Will an insurance policy be binding even
if the premium is unpaid? What if it were
partially paid? (3%)
Answer:
(A) Yes, Novette has an insurable interest in
the goods. The contract of sale was already
perfected and Novette acquired interest
thereon although the goods have yet to be
delivered.
(B) As a general rule, the insurance policy is
not valid and binding unless the premium
thereof has been paid. This is the cash and
carry rule under the Insurance Code. Pre-
mium is the consideration for the undertak-
ing of the insurer to indemnify the insured
against a specified peril. There are excep-
tions, however, as when there is an agree-
ment allowing the insured to pay the pre-
mium in installments and partial payment
has been made at the time of the loss.
(Makati Tuscany Condominium Corporation
vs. Court ofAppeaJs, 215 SCRA 463)

III.
(A) Discuss the three-fold character of a bill
of lading. (3%)
272 BAR Q & A IN COMMERCIAL LAW

(B) What is a “Jason clause" in a charter

party? (2%)
(C) Are common carriers liable for injuries to
passengers even if they have observed
ordinary diligence and care? Explain. (2%)
Answer:

(A) A bill of lading is considered a receipt for

the goods shipped to the common carrier.
It also serves as the contract by
which three parties, namely, the shipper,
the carrier and the consignee undertake
specific responsibilities and assumed
stipulated obligations.
Third, it is the evidence of the exis-
tence of the contract of carriage providing
for the tenns and conditions thereof (Keng
Hua Paper Products v. Court of Appeals,
286 SCRA 257)

(B) The Jason clause derives its name from The

Jason 225 US 32 (1912) decided by the US
Supreme Court under the Harter Act. By the
Jason clause, a shipowner, provided he had
exercised due diligence to make the ship
seaworthy and properly manned, equipped
and supplied, could claim a general aver-
age contribution from cargo, even where
the damage was caused by faulty naviga-
tion of the vessel, provided that the bill of
lading excluded liability for such faults.
 2015 BAR EXAMINATION 273

(C) Yes, common carriers are liable to injuries

to passengers even if the carriers observed
ordinary diligence and care because the ob-
ligation imposed upon them by law is to
exercise extra-ordinary diligence. Common
carriers are bound to carry the passengers
safely as far as hmnan care and foresight
can provide, using the utmost diligence of
very cautious persons with a due regard for
all the circumstances (Article 1755 of the
Civil Code)

IV.

(A) Maine Den, Inc. opened an irrevocable let-

ter of credit with Fair Bank, in connection
with Maine Den, Inc.'s importation of
spare parts for its textile mills. The im-
ported parts were released to Maine Den,
Inc. after it executed a trust receipt in fa-
vor of Fair Bank. When Maine Den, Inc.
was unable to pay its obligation under the
trust receipt, Fair Bank sued Maine Den,
Inc. for estafa under the Trust Receipts
Law. The court, however, dismissed the
suit. Was the dismissal justified? Why or
why not? (3%)
(B) Does the rule “res perit domino" apply in
trust receipt transactions? Explain. (2%)
Answer:

(A) The dismissal of the complaint for estafa is

justified. In a number of cases, the Supreme
 BAR Q & A IN COMMERCIAL LAW

Court held that transactions referred to in

relation to trust receipts mainly involved
sales and if the entruster knew even before
the execution of the alleged trust receipt
agreement that the goods subject of the
trust receipt were never intended by the
entmstee for resale or for the manufacture
of items to be sold, the agreement is not a
trust receipt transaction but a simple loan,
notwithstanding the label. In this case, the
object of the trust receipt, spare parts for
textile mills, were for the use of the entrus-
tee and never intended for sale. As such,
the transaction is a simple loan. (Ng v. Peo-
ple of the Philippines, G.R. No. 173905, April
23, 2010; Land Bank v. Perez, G.R. No.
166884, June 13, 2012; and Hur Ting Yang
v. People of the Philippines, G.R. No. 195117,
August 14, 2013.)
No. The rule “res perit domino" apply in
trust receipt transactions because the loss
of the goods, documents or instruments
which are the subject of a trust receipt
pending their disposition, irrespective of
whether or not it was due to the fault or
negligence of the entrustee, shall not ex-
tinguish the entrustee's obligation to the
entruster for the value thereof. (Section 10
of PD 115; Rosario Textile Mills Corp v.
Home Bankers Savings and Trust Company,
462 SCRA 88)
 2015 BAR EXAMINATION 275

V.
(A) A standby letter of credit was issued by
ABC Bank to secure the obligation of X
Company to Y Company. Under the
standby letter of credit, if there is failure
on the part of X Company to perform its
obligation, then Y Company will submit
to ABC Bank a certificate of default (in
the form prescribed under the standby
letter of credit) and ABC Bank will have
to pay Y Company the defaulted amount.
Subsequently, Y Company submitted to
ABC Bank a certificate of default notwith-
standing the fact that X Company was not
in default. Can ABC Bank refuse to honor
the certificate of default? Explain. (3%)
(B) Is the Uniform Customs and Practice for
Documentary Credits of the International
Chamber of Commerce applicable to com-
mercial letters of credit issued by a do-
mestic bank even if not expressly men-
tioned in such letters of credit? What is
the basis for your answer? (3%)
Answer:

(A) No. Under the doctrine of independence in

a letter of credit, the obligation of the issu-
ing bank to pay the beneficialy does not
depend on the fulfillment or non-fulllment
of the main or originating contract underly-
ing the letter of credit. The obligation to
pay arises upon tender of the stipulated
docmnents under the letter of credit. In the
76 BAR Q & A IN COMMERCIAL LAW

present case, the tender of the certificate of

default entitles Y to payment under the
standby letter of credit notwithstanding
the fact that X Company was not in default.
This is without prejudice to the right of X
Company to proceed against Y Company
under the law on contracts and damages.
(Transeld Philippines v. Luzon Hydro Cor-
poration, 443 SCRA 307)
(B) Yes, the Supreme Court held that the ob-
servance of the Uniform Customs and Prac-
tice in the Philippines is justified by Article
2 of the Code of Commerce which enunci-
ates that in the absence of any particular
provision in the Code of Commerce, com-
mercial transaction shall be governed by
usage and customs generally observed.
(Bank of the Philippine Islands v. De Reny
Fabric Industries, Inc., 35 SCRA 253)

VI.

(A) DEF Corporation has retained surplus

profits in excess of 100% of its paid-in
capital stock. However, it is unable to de-
clare dividends, because it had entered
into a loan agreement with a certain
creditor wherein the declaration of divi-
dends is not allowed without the consent
of such creditor. If DEF Corporation can-
not obtain this consent, will it be justified
in not declaring dividends to its stock-
holders? Explain. (3%)
 2015 BAR EXAMINATION 277

(B) What is “watered stock" and what is the

legal consequence of the issuance of such
stock? (3%)

Answer:

(A) Yes. Stock corporations are prohibited from

retaining surplus profits in excess of 100%
of their paid-in capital stock except among
others, when the corporation is prohibited
under any loan agreement with any finan-
cial institution or creditor, whether local or
foreign, from declaring dividends without
the consent of the creditor and such con-
sent has not been secured. (Section 43 of
the Corporation Code)
(B) Watered stocks are stocks issued for a con-
sideration less than its par or issued value
or for a consideration in any form other than
cash, valued in excess of its fair value. Any
director or officer of a corporation consent-
ing to the issuance of watered stocks or
who, having knowledge thereof, does not
forthwith express his objection in writing
and file the same with the corporate secre-
tary shall be solidarily liable with the
stockholder concemed to the corporation
and its creditors for the difference between
the fair value received at the time of issu-
ance of the stock and the par or issued
value of the same. (Section 65 of the Corpo-
ration Code)
278 BAR Q & A IN COMMERCIAL LAW

VII.
(A) A foreign company has been exporting
goods to a Philippine company for several
years now. When the Philippine company
failed to pay the latest exportation, the
foreign company sued to collect in the
Philippines. The Philippine company in-
terposed the defense that the foreign
company was doing business in the Phil-
ippines without a license; hence, could
not sue before a Philippine court. Is this
defense tenable? Explain your answer.
(3%)
(B) Define:
1. Doctrine of apparent authority (2%)
2. Trust fund doctrine (2%)

Answer:

(A) The defense is not tenable. The mere act of

exporting from one’s own country, without
doing any specific commercial act within
the territory of the importing country can-
not be deemed as doing business in the
importing country. Thus, the foreign com-
pany may sue in the Philippines despite
lack of license to do business in the Philip-
pines. (B. Van Zuiden Bros Ltd. v. GTVL
Manufacturing Industries 523 SCRA 233)
(B) (1) By the doctrine of apparent authority,
the corporation will be estopped from deny-
ing the agent’s authority if it knowingly
permits one of its officers or any other
 2015 BAR EXAMINATION 279

agent to act within the scope of an appar-

ent authority and it holds him out to the
public as possessing the power to do those
acts. (Advance Paper Corporation v. Arma
Traders Corporation, G.R. No. 176897, De-
cernber 11,2013)
(2) By the trust fund doctrine, subscriptions to
the capital stock of a corporation constitute
a ftmd to which the creditors have the right
to look for satisfaction of their claims. The
scope of the doctrine encompasses not only
the capital stock but also other property
and assets generally regarded in equity as
a trust fund for the payment of corporate
debts. (Halley v. Printwell, G.R. No. 157549,
May 30,2011; Ong v. T1'u, 401 SCRA 1)

VIII.
Barn filed an action to enjoin SN Company's
Board of Directors from selling a parcel of land
registered in the corporation’s name, to compel
the corporation to recognize Barn as a stockholder
with 50 shares, to allow him to inspect the corpo-
rate books, and to claim damages against the cor-
poration and its officers. Subsequently, the corpo-
ration and the individual defendants moved to
dismiss the complaint since the corporation’s cer-
tificate of registration was revoked by the SEC
during the pendency of Barn’s case on the ground
of non-compliance with reportorial requirements.
The special commercial court granted the motion
and reasoned that only an action for liquidation of
assets can be maintained when a corporation has
280 BAR Q & A IN COMMERCIAL LAW

been dissolved and Barn cannot seek reliefs which

in effect lead to the continuation of the corpora-
tion's business. The court also ruled that it lost ju-
risdiction over the intra-corporate controversy
upon the dissolution of the corporation.
(A) Was the court correct? (3%)
(B) Four years later, SN Company files an ac-
tion against Barn to recover corporate as-
sets allegedly held by the latter for liqui-
dation. Will this action prosper? (3%)

Answer:

(A) The court is not correct. An action to be

recognized as a stockholder and to inspect
corporate documents is an intra-corporate
dispute which does not constitute a con-
tinuation of business. The dissolution of the
corporation simply prohibits it from con-
tinuing its business. Moreover, under Sec-
tion 145 of the Corporation Code, no right or
remedy in favor of or against any corpora-
tion, its stockholders, members, directors
and officers shall be removed or impaired
by the subsequent dissolution of the corpo-
ration.
The dissolution does not automati-
cally convert the parties into strangers or
change their intra corporate relationship.
Neither does it terminate existing causes
of action which arose because of the cor-
porate ties of the parties. The cause of ac-
tion involving an intra-corporate contro-
 2015 BAR EXAMINATION 281

versy remains and must be filed as an in-

tra-corporate dispute despite the subse-
quent dissolution of the corporation.
(Aguirre v. FOB +7, Inc., G.R. No. 170770,
J anuaiy 9, 2013)
(B) The action cannot prosper because the cor-
poration has no more legal capacity to sue
after three years from its dissolution. (Ala-
bang Development Corporation v. Alabang
Hills Village Association, G.R. No. 187456,
June 2, 2014)

IX.

A) Able Corporation sold securities to 21

non-qualified buyers during a 15-month
period, without registering the securities
with the Securities and Exchange Com-
mission (SEC). Did Able Corporation vio-
late the Securities Regulation Code
(SRC)? Explain. (2%)
(B) Securities issued by the Philippine gov-
ernment are “exempt securities" and,
therefore, need not be registered with
the Securities and Exchange Commission
prior to their sale or offering to the pub-
lic in the Philippines. What is the ration-
ale behind this exemption? (2%)
(C) Why is the Securities Regulation Code
called a “truth in securities 1aw"? (2%)
282 BAR Q & A IN COMMERCIAL LAW

Answer:

(A) Yes because under the SRC, securities

shall not be sold or offered to be sold to
the public within the Philippines unless
the securities are registered with and ap-
proved by the SEC. Public means 20 or
more inventors. The fact that the securi-
ties were sold during a 15 month period is
immaterial.
(B) The rationale for the exemption is that the
public is amply protected even without
the registration of the securities to be is-
sued by the government.
(C) The Securities Regulation Code is called a
"truth in securities law“ because it re-
quires the issuer to make full and fair dis-
closure of information about securities be-
ing sold or offered to be sold within the
Philippines and penalizes manipulative
and fraudulent acts, devices and schemes.

X.

Mr. and Mrs. Reyes invested their hard-earned

savings in securities issued by LEAD Bank. After
discovering that the securities sold to them were
not registered with the Securities and Exchange
Commission (SEC) in violation of the Securities
Regulation Code (SRC), the spouses Reyes filed a
complaint for nullity of contract and for recovery
of a sum of money with the RTC. LEAD Bank
moved to dismiss the case on the ground that it is
the SEC that has primary jurisdiction over actions
 2015 BAR EXAMINATION 283

involving violations of the SRC. If you were the

judge, how would you rule on the motion to dis-
miss? (3%)

Answer
The motion should be denied. Civil suits falling
under the SRC, like liability for selling unregistered
securities, are under the exclusive original jurisdic-
tion of the RTC and hence, need not be first filed be-
fore the SEC unlike criminal cases, wherein the lat-
ter body exercises primary jurisdiction. (Pua v. Citi-
bank, G.R. No. 180064, September 16, 2013)

XI.
(A) Why is the Bangko Sentral ng Pilipinas
considered a lender of last resort? (2%)
(B) Distinguish a conservator from a receiver
of a bank. (2%)
(C) What is insider trading? (2%)

Answer:

(A) It is considered the lender of last resort be-

cause it lends to banks and similar institu-
tions under nancial distress when they
have no other means to raise funds.
(B) A conservator is appointed if a bank or
quasi-bank is in a state of continuing in-
ability or unwillingness to maintain a con-
dition of liquidity deemed adequate to pro-
tect the interest of creditors and depositors.
The conservator shall take charge of the as-
 BAR Q & A IN COMMERCIAL LAW

sets and liabilities of the bank and exercise

management and exercise other powers to
restore the bar1k’s viability. The conserva-
torship shall not exceed one year.
A receiver is appointed generally if
the realizable value of the bank's assets as
determined by BSP is less than its liabili-
ties. The receiver shall take charge of the
assets and liabilities of the institution and
administer the same for the benet of its
creditors. The receiver shall determine
within 90 days whether the bank can be
rehabilitated, otherwise, he shall recom-
mend the closure of the institution.

NB. Under RA 11211 (July 2018) which

amended Section 30 of RA 7653, the power
of the receiver to rehabilitate the bank was
removed. Upon its appointment as receiver
based on the statutory grounds, PDIC must
proceed forthwith to the liquidation of the
closed bank.
(C) Insider trading is the buying or selling by
securities by an insider while in the pos-
session of a material non-public informa-
tion.

XII.

A) Raymond invested his money in securities

issued by the Philippine government,
through his bank. Subsequently, the Bu-
reau of Internal Revenue asked his bank
to disclose his investments. His bank re-
 2015 BAR EXAMINATION 285

fused the request for disclosure on the

ground that the investments are confi-
dential under the Secrecy of Bank Depos-
its Law (RA 1405, as amended). Is the
bank’s refusal justified? Defend your an-
swer. (2%)
(B) First Bank received an order of garnish-
ment over a client’s peso and dollar de-
posits in First Bank. Should First Bank
comply with that order? Explain. (3%)

Answer:

(A) It is justified. Under Secrecy of Bank Depos-

its Law, investment in bonds issued by the
Philippine government is also absolutely
condential and may not be examined, in-
quired or looked into by any person, gov-
ernment official, bureau or office save for
the exceptions provided by law. None of
the exceptions apply in the present case.
(B) First Bank should comply with the order of
garnishment over a client’s peso deposits
because there is nothing in RA 1405 that
places bank deposits beyond the reach of
judgment creditor. And the disclosure of in-
formation on bank deposits pursuant to the
writ of garnishment is only incidental to the
execution process. (PCIB v. Court of Ap-
peals, 193 SCRA 452)
The dollar deposits, however, are ex-
empt from garnishment or court order un-
der the Foreign Currency Act (RA 6426).
286 BAR Q & A IN COMMERCIAL LAW

Thus, the bank should not comply with

this part of the gamishment.

XIII.

(A) A commercial bank wants to acquire

shares in a cement manufacturing com-
pany. Do you think it can do that? Why or
why not? (2%)
(B) What is the single borrower's limit? (2%)
Answer:

(A) A commercial bank cannot acquire shares

in a cement manufacturing company be-
cause a commercial bank can only invest in
the equity of allied undertakings, meaning,
undertakings related to banking. (Section
30 of RA 8791)
(B) Under the single borrower's limit, the total
amount of loans, credit accommodations
and guarantee that the bank may extend to
any person shall not exceed 25% of the
bank’s net worth.

XIV.

(A) Differentiate trademark, copyright and

patent from each other. (6%)
(B) What is the doctrine of equivalents? (2%)
(C) In what ways would a case for infringe-
ment of trademark be different from a
case for unfair competition? (3%)
 2015 BAR EXAMINATION 287

Answer:

(A) The distinctions between trademark, copy-

right and patent are as follows:
1. As to definition:
a. Trademark is any visible sign ca-
pable of distinguishing goods.
b. Copyright is an incorporeal right
granted by statute to the author or
creator of original literary and ar-
tistic works whereby he is in-
vested for a limited period of time
with the right carry out, authorize
and prevent the reproduction, dis-
tribution, transformation, rental,
public perfonnance and other
forms of communication of his
work to the public.
c. Patent is any technical solution of
any problem in any field of hmnan
activity which is new, requires an
inventive step and industrially ap-
plicable.
2. As to object
a. The object of trademark are goods.
b. The object of copyright are original
literary and artistic works.
c. The object of patent is invention.
3. As to tenn
a. The tenn of trademark is ten years.
288 BAR Q & A IN COMMERCIAL LAW

b. The term of copyright is generally

50 years.
c. The term of patent is 20 years from
application.
4. As to how acquired
a. Trademark is acquired through
registration and use.
NB This should be changed to
trademark is acquired through reg-
istration in accordance with law,
in view of the Zuneca case.
b. Copyright is acquired from the
moment of creation.
c. Patent is acquired through appli-
cation with the Intellectual Prop-
erty Office.

(B) Under the doctrine of equivalents, in-

fringement of patent occurs when a device
appropriates a prior invention by incorpo-
rating its innovative concept and albeit
with some modifications and change per-
forms the same function in substantially
the same way to achieve the same result.
(Godines v. Court of Appeals, 226 SCRA
338)

XV.

CHEN, Inc., a Taiwanese company, is a manu-

facturer of tires with the mark Light Year. From
2009 to 2014, Clark Enterprises, a Philippine regis-
 2015 BAR EXAMINATION 289

tered corporation, imported tires from CHEN, Inc.

under several sales contracts and sold them here
in the Philippines. In 2015, CHEN, Inc. filed a
trademark application with the Intellectual Prop-
erty Office (IPO) for the mark Light Year to be
used for tires. The IPO issued CHEN, Inc. a certifi-
cate of registration (COR) for said mark. Clark En-
terprises sought the cancellation of the COR and
claimed it had a better right to register the mark
Light Year. CHEN, Inc. asserted that it was the
owner of the mark and Clark Enterprises was a
mere distributor. Clark Enterprises argued that
there was no evidence on record that the tires it
imported from CHEN, Inc. bore the mark Light
Year and Clark Enterprises was able to prove that
it was the first to use the mark here in the Philip-
pines. Decide the case. (4%)

Answer:
While Republic Act No. 8293, otherwise known
as Intellectual Property Code of the Philippines, re-
moved the previous requirement of proof of actual
use prior to the filing of an application for registra-
tion of a mark, proof of prior and continuous use is
necessary to establish ownership of trademark.
Such ownership of the trademark confers the right
to register the trademark. Since Chen owns the
trademark as evidenced by its actual and continu-
ous use prior to the Clark Enterprises, then it is the
one entitled to the registration of the trademark. The
fact that Clark was the first one to use the mark here
in the Philippines will not matter. Chen's prior ac-
tual use of the trademark even in another country
bars Clark from applying for the registration of the
290 BAR Q & A IN COMMERCIAL LAW

same trademark. (E.Y Industrial Sales v. Shien Dar

Electricity and Machinery, G.R. No. 184850, October
20, 2010; Ecole de Cuisine Manille v. Renaud Coin-
treau, G.R. No. 185830, June 5, 2013)

NB This answer is no longer correct in

view of the Zuneca doctrine.

XVI.

(A) On the anti-money laundering laws:

1. What is the distinction between a
“covered transaction report" and a
“suspicious transaction report”? (2%)
2. Does the Anti-Money Laundering
Council have the authority to freeze
deposits? Explain. (2%)
(B) On foreign investments:
1. A foreign company has a distributor
in the Philippines. The latter acts in
his own name and account. Will this
distributorship be considered as do-
ing business by the foreign company
in the Philippines? (3%)
2. ABC Corporation was organized in
Malaysia but has a branch in the Phil-
ippines. It is entirely owned by Fili-
pino citizens. Can you consider ABC
Corporation a Philippine national?
(2%)
 2015 BAR EXAMINATION 291

Answer:

(A) (1) A covered transaction report involves

transaction/s in cash or other equiva-
lent monetary instrument involving a
total amount in excess of P500,000.00
within one banking day while suspi-
cion transaction report involves trans-
actions with covered institutions re-
gardless of the amounts involved made
under any of the suspicious circum-
stances enumerated by law.
No. The authority to freeze deposits is
lodged with and based upon the order
of the Court of Appeals. (Section 10 of
RA 9160, as amended)
(B) (1) The appointment of a distributor in the
Philippines is not sufficient to consti-
tute doing business unless it is under
the full control of the foreign corpora-
tion. If the distributor is an independ-
ent entity doing business for its own
name and account, the latter cannot be
considered as doing business. (Steel
Case v. Design International Selection,
G.R. No. 171995, April 18, 2012)
Yes it isa considered a Philippine na-
tional as long as it is registered as do-
ing business in the Philippines under
the Corporation Code. (Section 1 of RA
7042, as amended by Section 1 of RA
8179)
 2016 BAR EXAMINATION
I

What does “doing business in the Philippines"

under the Foreign Investments Act of 1991 mean?
(5%)
Answer:
The phrase “doing business in the Philippines“
under the Foreign Investments Act of 1991 include
soliciting orders, service contracts; opening offices
whether called liaison officers or branches’ appoint-
ing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the
country for a period or periods totaling 180 days or
more; participating in the management, supervision
or control of any domestic business, finn, entity or
corporation in the Philippines; and any other act or
acts that imply continuity of commercial dealings or
arrangements, and contemplate to that extent the
performance of acts or works or the exercise of some
of the functions nonnally incident to and in progres-
sive prosecution of, commercial gain or of the pur-
pose or object of the business organization.

II
Jason is the proud owner of a newly-built
house worth P5 million. As a protection against
any possible loss or damage to his house, Jason
applied for a fire insurance policy thereon with

292
 2016 BAR EXAMINATION 293

Shure Insurance Corporation (Shure) on October

11, 2016 and paid the premium in cash. It took the
company a week to approve Jason’s application.
On October 18, 2016, Shure mailed the approved
policy to Jason which the latter received five (5)
days later. However, Jason’s house had been
razed by fire which transpired a day before his re-
ceipt of the approved policy. Jason filed a written
claim with Shure under the insurance policy.
Shure prays for the denial of the claim on the
ground that the theory of cognition applies to con-
tracts of insurance.
Decide Jason's claim with reasons. (5%)

Answer:

No. What governs insurance contract is the

cognition theory whereby the insurance contract is
perfected only from the time the applicant came to
know of the acceptance of the offer by the insurer. In
this case, the loss occurred a day prior to Jason’s
knowledge of the acceptance by Shure of Jason’s
application. There being not perfected insurance
contract, Jason is not entitled to recover from Shure.

III
ABC Appliances Corporation (ABC) is a do-
mestic corporation engaged in the production and
sale of televisions and other appliances. YYY En-
gineers, a Taiwanese company, is the manufac-
turer of televisions and other appliances from
whom ABC actually purchases appliances. From
2000, when ABC started doing business with YYY,
294 BAR Q & A IN COMMERCIAL LAW

it has been using the mark “TTubes" in the Phil-

ippines for the television units that were bought
from YYY. In 2015, YYY filed a trademark applica-
tion for “TTubes.” Later, ABC also filed its applica-
tion. Both claim the right over the trademark
“TTubes" for television products. YYY relies on
the principle of “first to file" while ABC involves
the “doctrine of prior use."
(A) Does the fact that YYY filed its applica-
tion ahead of ABC mean that YYY has the
prior right over the trademark? Explain
briey. (2.5%)
(B) Does the prior registration also mean a
conclusive assumption that YYY Engi-
neers is in fact the owner of the trade-
mark “TTubes?" Briefly explain your an-
swer. (2.5%)

Answers:

(A) No. Since YYY is not the owner of the trade-

mark, it has no right to apply for registra-
tion. Registration of trademark, by itself, is
not a mode of acquiring ownership. It is the
ownership of a trademark that confers the
right to register the same. (Birkenstock Or-
thopaedia GMBH vs. Philippine Shoe Expo
Marketing Corporation, G.R. No. 194307,
November 20, 2013)
(b) No. Registration merely creates a prima fa-
cie presumption of the validity of the regis-
tration, of the registrant's ownership of the
trademark and the exclusive right to the
 2016 BAR EXAMINATION 295

use thereof. The presumption of ownership

accorded to a registrant is rebuttable and
must yield to evidence to the contrary.
NB The answer in letter ( a ) is no longer correct in
view of the Zuneca doctrine.

IV
X's “MINI-ME" burgers are bestsellers in the
country. Its “MINI-ME" logo, which bears the
color blue, is a registered mark and has been so
since the year 2010. Y, a competitor of X, has her
own burger which she named “ME-TOO” and her
logo thereon is printed in bluish-green. When X
sued Y for trademark infringement, the trial court
ruled in favor of the plaintiff by applying the Ho-
listic Test. The court held that Y infringed on X's
mark since the dissimilarities between the two
marks are too triing and frivolous such that Y's
“ME-TOO," when compared to X's “MINI-ME,"
will likely cause confusion among consumers.
Is the application of the Holistic Test correct?
(5%)

Answer:
The application of the Holistic Test is not cor-
rect. In a case involving burger products, the Su-
preme Court has consistently applied the domi-
nancy test. Under the dominancy test, the focus is
on the dominant feature of the competing trade-
marks. Big Mak has been held to be confusingly
similar with Big Mac and so with McDo and Mcjoy
both under the dominancy test. Accordingly, MINI-
296 BAR Q & A IN COMMERCIAL LAW

ME trademark is confusingly similar with the ME-

TOO mark. (McDonald's Corporation v. LC Big Mak
Burger, Inc., G.R. No. 143993, August 18, 2004)

V
MS Brewery Corporation (MS) is a manufac-
turer and distributor of the popular beer “MS
Lite." It faces stiff competition from BA Brewery
Corporation (BA) whose sales of its own beer
product, “BA Lighter,” has soared to new heights.
Meanwhile, sales of the “MS Lite" decreased con-
siderably. The distribution and marketing person-
nel of MS later discovered that BA has stored
thousands of empty bottles of “MS Lite" manufac-
tured by MS in one of its warehouses. MS filed a
suit for unfair competition against BA before the
Regional Trial Court (RTC). Finding a connection
between the dwindling sales of MS and the in-
creased sales of BA, the RTC ruled that BA re-
sorted to acts of unfair competition to the detri-
ment of MS. Is the RTC correct? Explain. (5%)
Answer:

The RTC is not correct. Hoarding, or the act of

accumulating empty bottles to impede circulation of
the bottled product, does not amount to unfair com-
petition. BA did not fraudulently “pass off“ its prod-
uct as that of MS Lite. There was no representation
or misrepresentation on the part of BA that would
confuse or tend to confuse its goods with those of
MS Lite. (Coca Cola Bottlers Philippines v. Gomez,
G.R. No. 154491, November 14, 2008)
 2016 BAR EXAMINATION 297

VI
Nautica Shipping Lines (Nautica) bought a
second hand passenger ship from Japan. It modi-
fied the design of the bulkhead of the deck of the
ship to accommodate more passengers. The ship
sunk with its passengers in Tablas Strait due to
heavy rains brought by the monsoon. The heirs of
the passengers sued Nautica for its liability as a
common carrier based on the reconfiguration of
the bulkhead which may have compromised the
stability of the ship. Nautica raised the defense
that the monsoon is a fortuitous event and, at
most, its liability is prescribed by the Limited Li-
ability Rule. Decide with reasons. (5%)

Answer:
The limited liability rule will not apply in this
case because there was contributory negligence on
the part of the shipowner. The reconguration of the
bulkhead of the deck of the ship to accommodate
more passengers made the vessel unseaworthy.
(Philippine General Insurance Company vs. Court of
Appeals, Z73 SCRA 262)

VII
A railroad track of the Philippine National
Railway (PNR) is located near a busy intersection
of Puyat Avenue and Osmea Highway. One af-
ternoon, the intersection was heavily congested,
as usual. Juan, the driver of a public utility jeep-
ney (PUJ), drove onto the railroad tracks but could
go no farther because of the heavy traffic at the
298 BAR Q 8. A IN COMMERCIAL LAW

intersection. After the jeepney stopped right on

the railroad track, it was hit and overturned by a
PNR train, resulting in the death of Kim, a pas-
senger of the PUJ, and injuries to Juan and his
other passengers. Juan, the injured passengers
and Kim's family sued the PNR for damages for its
negligence. It was established that the steel pole
barrier before the track was broken, and that the
PNR had the last clear chance of avoiding the ac-
cident. On the other hand, the PNR raised the de-
fense that the track is for the exclusive use of the
train and that motorists are aware that it is negli-
gence per se to stop their vehicles on the tracks.
Decide the case and explain. (5%)

Answer:

PNR should be held liable. PNR had the last

clear chance of avoiding the injury but did not exer-
cise the diligence expected of it under the circum-
stances.

VIII
In 2015, Total Bank (Total) proposed to sell to
Royal Bank (Royal) its banking business for P 10
billion consisting of specified assets and liabilities.
The parties reached an eventual agreement,
which they termed as “Purchase and Assumption
(P & A) Agreement,” in which Royal would ac-
quire Total's specified assets and liabilities, ex-
cluding contingent claims, with the further stipu-
lation that it should be approved by the Bangko
Sentral ngPi11'p1'nas (BSP). BSP imposed the condi-
 2016 BAR EXAMINATION 299

tion that Total should place in escrow Pl billion to

cover for contingent claims against it. Total com-
plied. After securing the approval of the BSP, the
two banks signed the agreement. BSP thereafter
issued a circular advising all bank and non-bank
intermediaries that effective January 1, 2016, “the
banking activities of Total Bank and Royal Bank
have been consolidated and the latter has carried
out their operations since then."
(A) Was there a merger and consolidation of
the two banks in point of the Corporation
Code? Explain. (2.5%)
(B) What is meant by a de facto merger? Dis-
cuss. (2.5%)

Answer:

(A) There was no merger or consolidation of

the two banks in point of the Corporation
Code. The Supreme Court ruled in Bank of
Commerce v. Radio Philippine Network, Inc.
(G.R. No. 195615, April 21, 2014) that there
can be no merger if the requirements and
procedure for merger were not observed
and no certificate of merger was issued by
the SEC.
(B) De facto merger means that a corporation
called the Acquiring Corporation acquired
the assets and liabilities of another corpo-
ration in exchange for equivalent value of
shares of stock of the Acquiring Corpora-
tion.
300 BAR Q & A IN COMMERCIAL LAW

IX

X insured his life for P20 million. X, plays golf

and regularly exercises everyday, hence is consid-
ered in good health. He did not know, however,
that his frequent headache is really caused by his
being hypertensive. In his application form for a
life insurance for himself, he did not put a check
to the question if he is suffering from hyperten-
sion, believing that because of his active lifestyle,
being hypertensive is a remote possibility. While
playing golf one day, X collapsed at the fairway
and was declared dead on arrival at the hospital.
His death certificate stated that X suffered a mas-
sive heart attack.
(A) Will the beneficiary of X be entitled to the
proceeds of the life insurance under the
circumstances, despite the non-disclosure
that he is hypertensive at the time of ap-
plication? (2.5%)
(B) If X died inan accident instead of a heart
attack, would the fact of X's failure to dis-
close that he is hypertensive be consid-
ered as material information? (2.5%)

Answer:
(A) No, the beneficiary of X is not entitled to
the proceeds of the life insurance. The fre-
quent headache, of X is a material fact that
should have been disclosed to the insurer.
The concealment of such material fact enti-
tles the insurer to rescind the insurance
policy. While his hypertension is not known
 2016 BAR EXAMINATION 301

to him and as such, may not be covered by

the rule on concealment, his frequent head
ache is a material fact known to him that
should have been disclosed to the insurer
prior to the effectivity of the insurance pol-
icy.
(b) It is still a material information. It is settled
that the insured cannot recover even
though the material fact not disclosed is
not the cause of the loss.

After securing a Pl million loan from B, A

drew in B's favor a bill of exchange with C as
drawee. The bill reads:
October 1, 2016.
Pay to the order of B the sum of P1 million.
To: C (drawee). Signed, A.
A then delivered the bill to B who, however,
lost it. It turned out that it was stolen by D, B's
brother. D lost no time in forging B's signature
and negotiated it to E who acquired it for value
and in good faith.
May E recover on the bill from C, the drawee?
Explain. (5%)
Answer:
E cannot recover from C, the drawee. The
forged endorsement of B did not result in transfer of
302 BAR Q & A IN COMMERCIAL LAW

title in favor of E
as no right can be acquired under
such forged endorsement.

XI

Royal Links Golf Club obtained a loan from a

bank which is secured by a mortgage on a titled
lot where holes 1, 2, 3 and 4 are located. The bank
informed the Board of Directors (Board) that if the
arrearages are not paid within thirty (30) days, it
will extra-judicially foreclose the mortgage. The
Board decided to offer to the members 200 pro-
prietary membership shares, which are treasury
shares, at the price of P175,000.00 per share even
when the current market value is P200,000.00.
In behalf and for the benefit of the corpora-
tion, Peter, a stockholder, filed a derivative suit
against the members of the Board for breach of
trust for selling the shares at P25,000.00, lower
than its market value, and asked for the nullifica-
tion of the sales and the removal of the board
members. Peter claims the Club incurred a loss of
PS million. The Board presented the defense that
in its honest belief any delay in the payment of
the arrearages will be prejudicial to the Club as
the mortgage on its assets will be foreclosed and
the sale at a lower price is the best solution to the
problem. Decide the suit and explain. (5%)
Answer:
The derivative suit will not prosper because
while it was filed by a stockholder on behalf of the
corporation the complaint did not allege the other
 2016 BAR EXAMINATION 303

elements of derivative suit namely; a) exhaustion of

intra corporate remedies available under the articles
of incorporation, by-laws and rules and regulations
goveming the corporation to obtain the relief the
stockholder desires; b) it is not a nuisance suit; and
c) appraisal right not available. (Ching v. Subic Bay
Golf and Country Club, G.R. No. 174353, September
10, 2014)

Furthennore, there was no wrongful act on the

part of the board of director for simply selling the
treasury shares below market value given the cir-
cumstances obtaining in the corporation. The terms
and conditions of the sale of treasury shares are rea-
sonably determined by the board of directors under
the business judgment rule. Under such rule, ques-
tions of policy and management are left to the sound
discretion of the board of directors and their acts are
valid for as long as they acted in good faith and not
contrary to law.

XII
X owns 10,000 shares in Z Telecoms Corp. As
he is in immediate need of money, he offered to
sell all his shares to his friend, Y, at a bargain
price. Upon receipt of the purchase price from Y,
X proceeded to indorse in blank the certificates of
shares and delivered these to Y. The latter then
went to the corporate secretary of Z Telecoms
Corp. and requested the transfer of the shares in
his name. The corporate secretary refused since X
merely indorsed the certificates in blank to Y. Ac-
cording to the corporate secretary, the certificates
should have been specifically indorsed to the pur-
3()4 BAR Q & A IN COMMERCIAL LAW

chaser, Y. Was the corporate secretary justified in

declining Y's request? Discuss. (5%)
Answer:

The Corporate Secretary is not justified in de-

clining Y's request. Under Section 63 of the Corpora-
tion Code, shares of stock covered by a stock certifi-
cate may be transferred by the delivery of the cer-
tificate endorsed by the stockholder-owner or his
authorized representative or other person legally au-
thorized to make the transfer. The endorsement
need not be specifically in favor of the purchaser.

XIII
C Corp. is the direct holder of 10% of the
shareholdings in U Corp., a nonlisted (not public)
firm, which in turn owns 62% of the sharehold-
ings in H Corp., a publicly listed company. The
other principal stockholder in H Corp. is C Corp.
which owns 18% of its shares. Meanwhile, the ma-
jority stocks in U Corp. are owned by B Corp. and
v. Corp. at 22% and 30%, respectively. B Corp. and
v. Corp. later sold their respective shares in U
Corp. to C Corp., thereby resulting in the increase
of C Corp.’s interest in U Corp., whether direct or
indirect, to more than 50%.
(A) Explain the Tender Offer Rule under the
Securities Regulation Code. (2.5%)
(B) Does the Tender Offer Rule apply in this
case where there has been an indirect ac-
 2016 BAR EXAMINATION 305

quisition of the shareholdings in H Corp.

by C Corp.? Discuss. (2.5%)

Answer:

(A) Tender offer means a publicly announced

intention by a person acting alone or in
concert with other persons to acquire the
outstanding equity securities of a public
company or outstanding equity securities
of an associate or related company of such
public company which controls said public
company. (Section 19.1.8 of the SRO Imple-
menting Rules and Regulations)
(B) Yes, the mandatory tender offer is still ap-
plicable even if the acquisition, direct or in-
direct, is less than 35% when the purchase
would result in direct or indirect ownership
of over 50% of the total outstanding equity
securities of a public company. (Cemco
Holdings v. National Life Insurance Com-
pany of the Philippines, G.R. No. 171815,
August 7, 2007)

XIV
X, a government official, has a number of
bank accounts in T Bank containing millions of
pesos. He also opened several trust accounts in
the same bank which specifically covered the
placement and/or investment of funds. X was later
charged with graft and corruption before the
Sandiganbayan (SB) by the Ombudsman. The Spe-
cial Prosecutor filed a motion praying for a court
306 BAR Q & A IN COMMERCIAL LAW

order authorizing it to look into the savings and

trust accounts of X in T Bank. X opposed the mo-
tion arguing that the trust accounts are not “de-
posits" under the Law on Secrecy of Bank Depos-
its (Rep. Act No. 1405). Is the contention of X cor-
rect? Explain. (5%)

Answer:

The contention of X is not correct. Deposits in

the context of the Secrecy of Philippine currency de-
posits include deposits of whatever nature and kind.
They include funds deposited in the bank giving rise
to creditor-debtor relationship, as well as funds in-
vested in the bank like trust accounts. (Ejercito v.
Sandiganbayan, G.R. No. 157294-95, November 30,
2006)

XV

ABC Corp. is engaged in the pawnshop busi-

ness involving cellphones, laptops and other gadg-
ets of value. In order to expand its business and
attract investors, it offered to any person who in-
vests at least Pl 00,000.00 a “Promissory Note”
where it obligated itself to pay the holder a 50%
return on investment within one month. Due to
the attractive offer, many individuals invested in
the company but not one of them was able to real-
ize any profit after one month.
Has ABC Corp. violated any law with its
scheme? Explain. (5%)
 2016 BAR EXAMINATION 307

Answer:

Yes, ABC Corporation violated the provisions of

the Securities Regulation Code that prohibits sale of
securities to the public, like promissory notes, with-
out a registration statement led with and approved
by the Securities and Exchange Commission.

XVI
Henry is a board director in XYZ Corporation.
For being the “fiscalizer" in the Board, the major-
ity of the board directors want him removed and
his shares sold at auction, so he can no longer par-
ticipate even in the stockholders’ meetings. Henry
approaches you for advice on whether he can be
removed as board director and stockholder even
without cause. What is your advice? Explain
“amotion" and the procedure in removing a direc-
tor. (5%)
Answer:

Henry cannot be removed by his fellow direc-

tors. The power to remove belongs to the stockhold-
ers. He can only be removed by the stockholders
representing at least 2/ 3s of the outstanding capital
stock in a meeting called for that purpose. The re-
moval may be with or without cause except that in
this case, the removal has to be with cause because
it is intended to deprive minority stockholders of the
right of representation.
He can not likewise be removed as a stock-
holder. Unlike in a non-stock corporation where a
308 BAR Q & A IN COMMERCIAL LAW

member may be removed for causes specified in the

by-laws, Philippine laws do not allow the removal of
a stockholder in a stock corporation .

A motion is the premature ousting of a director

or officer from his post in the corporation.

XVII
PJ Corporation (PJ) obtained a loan from ABC
Bank (ABC) in the amount of P10 million for the
purchase of 100 pieces of ecodoors. Thereafter, a
Letter of Credit was obtained by PJ against such
loan. The beneficiary of the Letter of Credit is
Scrap Metal Corp. (Scrap Metal) in Beijing, China.
Upon arrival of 100 pieces of ecodoors, PJ exe-
cuted a Trust Receipt in favor of ABC to cover for
the value of the ecodoors for its release to PJ. The
terms of the Trust Receipt is that any proceeds
from the sale of the ecodoors will be delivered to
ABC as payment. After the ecodoors were sold, PJ,
instead of paying ABC, used the proceeds of the
sale to order from Scrap Metal another 100 pieces
of ecodoors but using another bank to issue a new
Letter of Credit fully covered by such proceeds.
PJ refused to pay the proceeds of the sale of
the first set of ecodoors to ABC, claiming that the
ecodoors that were delivered were defective. It
then instructed ABC not to negotiate the Letter of
Credit that was issued in favor of Scrap Metal.
(A) Explain what is a “Letter of Credit” as a
financial device and a “Trust Receipt” as
a security to the Letter of Credit. (2.5%)
 2016 BAR EXAMINATION 309

(B) As counsel of ABC, you are asked for ad-

vice on whether or not to grant the in-
struction of PJ. What will be your advice?
(2.5%)

Answer:

(A) Letter of credit is any arrangement how-

ever named or described whereby a bank
acting upon the request of its client or on
its behalf agrees to pay another against
stipulated documents provided that the
tenns of the credit are complied with. (Sec-
tion 2 of the Uniform Customs and Practices
for Documentary Credit)
Trust receipt is an arrangement
whereby the issuing bank (referred to as
the entruster under the trust receipt), re-
leases the imported goods to the importer
(referred to as the entrustee), but that the
latter in case of sale must deliver the pro-
ceeds thereof to the entruster up the ex-
tent of the amount owing to the entruster,
or to return the goods in case of non-sale.
(b) I will not grant the instruction of PJ. Under
the independence principle, the obligation
of the bank to pay the Scrap Metal Corpora-
tion is not dependent on the fulfillment or
non-fulfillment of the main contract under-
lying the letter of credit but conditioned
only on its submission of the stipulated
documents to ABC Bank.
310 BAR Q & A IN COMMERCIAL LAW

XVIII
B Bank, a large universal bank, regularly ex-
tends revolving credit lines to business establish-
ments under what it terms as socially responsible
banking and private business partnership rela-
tions. All loans that are extended to clients have a
common “Escalation Clause," to wit: "B Bank
hereby reserves its right to make successive in-
CTGGSGS in interest rates in accordance with the
bank's adopted policies as approved by the Mone-
tary Board; Provided that each successive increase
shall be with the written assent of the depositor.”

(A) X, a regular client of the bank, contends

that the “Escalation Clause” is unfair, un-
conscionable and contrary to law, morals,
public policy and customs. Rule on the is-
sue and explain. (2.5%)
(B) Suppose that the “Escalation Clause" in-
stead reads: “B Bank hereby reserves the
right to make reasonable increases in in-
terest rates in accordance with bank poli-
cies as approved by the Monetary Board;
Provided, there shall be corresponding
reasonable decreases in interest rates as
approved by the Monetary Board.” Would
this be valid? Explain. (2.5%)
Answer:

(A) The “escalation clause" is valid because

each successive increase shall be with the
written assent of the depositor. This stipu-
 2016 BAR EXAMINATION 311

lation does not violate the principle of mu-

tuality of contracts. The stipulation would
have been void if the supposed consent is
given prior to the increase in interest rate.
(b) An escalation clause with a de-escalation
clause is valid provided that the client's
consent is still secured prior to any in-
crease in interest rate. Otherwise, the esca-
lation clause is void. Client's consent to the
increase is not necessary if the escalation
clause provides that 1) there can be an in-
:

crease in interest rates if allowed by law or

by the Monetary Board; and 2) that there
must be a stipulation for the reduction of
the stipulated interest rate in the event that
the applicable maximum rates of interest
are reduced by law or the Monetary Board.
This is not the case obtaining in the prob-
lem because the increase is still based on
the bank policies not by law or the Mone-
tary Board.

XIX

In 2015, R Corp., a domestic company that is

wholly owned by Filipinos, filed its opposition to
the applications for Mineral Production Sharing
Agreements (MPSA) of O Corp., P Corp., and Q
Corp. which were pending before the Panel of Ar-
bitrators (POA) of the Department of Environment
and Natural Resources (DENR). The three corpora-
tions wanted to undertake exploration and mining
activities in the province of Isabela. The oppositor
alleged that at least 60% of the capital sharehold-
312 BAR Q & A IN COMMERCIAL LAW

ings of the applicants are owned by B Corp., a

100% Chinese corporation, in violation of Sec. 2,
Art. XII of the Constitution. The applicants coun-
tered that they are qualified corporations as de-
fined under the Philippine Mining Act of 1995 and
the Foreign Investments Act of 1991 since B Corp.
holds only 40% of the capital stocks in each of
them and not 60% as alleged by R Corp.
The Summary of Significant Accounting Poli-
cies statement of B Corp. reveals that the joint
venture agreements of B Corp. with Sigma Corp.
and Delta Corp. involve the 0 Corp., P Corp., and Q
Corp. The ownership of the layered corporations
and joint venture agreements show that B Corp.
practically exercises control over the 0, P and Q
corporations. 0, P and Q corporations contend that
the control test should be applied and its MPSA
applications granted. On the other hand, R Corp.
argues that the “grandfather rule" should be ap-
plied. Decide with reasons. (5%)

Answer:

The grandfather rule should apply. The Su-

preme Court held in a similar case that even though
on paper the capital shareholding in a mining com-
pany is 6O% owned by Filipinos and 40% by foreign-
ers, if there is a doubt as to the locus of the benefi-
cial ownership and control, the grandfather rule
should apply. Based on the facts, B Corporation, a
Chinese corporation, practically exercises control
over O, P and Q Corporations. Such circumstance
creates a doubt as to where control and beneficial
ownership reside that warrants application of the
 2016 BAR EXAMINATION 313

grandfather rule. (Narra Nickel Mining and Devel-

opment Corporation vs. Redmont Consolidated Mines
Corp, GR No. 195580, January 28, 2015)

XX

Company X issued a Bank A Check No. 12345

in the amount of P500,000.00 payable to the Bu-
reau of Internal Revenue (BIR) for the company's
taxes for the third quarter of 1997. The check was
deposited with Bank B, the collecting bank with
which the BIR has an account. The check was
subsequently cleared and the amount of
P500,000.00 was deducted from the company's
balance. Thereafter, Company X was notified by
the BIR of its non-payment of its unpaid taxes de-
spite the P500,000.00 debit from its account. This
prompted the company to seek assistance from
the proper authorities to investigate on the mat-
ter.
The results of the investigation disclosed that
unknown then to Company X, its chief accountant
Bonifacio Santos is part of a syndicate that de-
vised a scheme to syphon its funds. It was discov-
ered that though deposited, the check was never
paid to the BIR but was passed on by Santos to
Winston Reyes, Bank B's branch manager and
Santos‘ co-conspirator. Instead of bringing the
check to the clearing house, Reyes replaced Check
No. 12345 with a worthless check bearing the
same amount, and tampered documents to cover
his tracks. No amount was then credited to the
BIR. Meanwhile, Check No. 12345 was subse-
quently cleared and the amount therein credited
314 BAR Q & A IN COMMERCIAL LAW

into the accounts of fictitious persons, to be later

withdrawn by Santos and Reyes.
Company X then sued Bank B for the amount
of P500,000.00 representing the amount deducted
from its account. Bank B interposed the defense
that Company X was guilty of contributory negli-
gence since its confidential employee Santos was
an integral part of the scheme to divert the pro-
ceeds of Check No. 12345. Is Company X entitled
to reimbursement from Bank B, the collecting
bank? Explain. (5%)

Answer:

Yes Company X is entitled to reimbursement

from the collecting bank. In a similar case, the Su-
preme Court ruled that the drawer could recover the
amount deducted from its account because it failed
to ensure that the check be paid to the designated
payee while the collecting bank should share % of
the loss because its branch manager conspired in
the fraud. (Philippine Commercial International Bank
v. Court ofAppeals, 350 SCRA 446)
 2017 BAR EXAMINATION

I.

A.

Absolute Timber Co. (ATC) has been engaged

in the logging business in Isabela. To secure one
of its shipments of logs to be transported by An-
dok Shipping Co., ATC purchased a marine policy
with an “all risks" provision. Because of a strong
typhoon then hitting Northern Luzon, the vessel
sank and the shipment of logs was totally lost.
ATC filed its claim, but the insurer denied the
claim on several grounds, namely: (1) the vessel
had not been seaworthy; (2) the vessel's crew had
lacked sufficient training; (3) the improper loading
of the logs on only one side of the vessel had led to
the tilting of the ship to that side during the
stormy voyage; and (4) the extremely bad weather
had been a fortuitous event.
ATC now seeks your legal advice to know if
its claim was sustainable. What is your advice?
Explain your answer. (3%)
Answer:
ATC’s claim is sustainable. The all-risk policy
that ATC procured from the insurer insures against
all causes of conceivable loss or damage except
when the loss or damage was due to fraud or inten-
tional misconduct committed by ATC. The grounds

315
316 BAR Q &A IN COMMERCIAL LAW

of denial that the insurer invoked are not due to the

fraud or intentional misconduct of the insurer. (New
World International Development vs. NYK FilJapan
Shipping Corporation, 656 SCRA 129)

B.

The newly restored Ford Mustang muscle car

was just released from the car restoration shop to
its owner, Seth, an avid sportsman. Given his pas-
sion for sailing, he needed to go to a round-the-
world voyage with his crew on his brand-new 180-
meter yacht. Hearing about his coming voyage,
Sean, his bosom friend, asked Seth if he could bor-
row the car for his next roadshow. Sean, who had
been in the business of holding motor shows and
promotions, proposed to display the restored car
of Seth in major cities of the country. Seth agreed
and lent the Ford Mustang to Sean. Seth further
expressly allowed Sean to use the car even for his
own purposes on special occasions during his ab-
sence from the country. Seth and Sean then went
together to Bayad Agad Insurance Co. (BAIC) to
get separate policies for the car in their respective
names.
BAIC consults you as its lawyer on whether
separate policies could be issued to Seth and Sean
in respect of the same car.
(a) What is insurable interest? (2%)
(b) Do Seth and Sean have separate insurable
interests? Explain briefly your answer.
(3%)
 2017 BAR EXAMINATION 317

Answer:

(a) Insurable interest is that interest which a

person is deemed to have in the subject
matter of the insured where he has a rela-
tion or connection to it such that the person
will derive pecuniary benefit or advantage
from the preservation of the subject matter
or will suffer pecuniary loss or damage from
its destruction, termination or injury by the
happening of the event insured against it.
(b) Seth and Sean have separate insurable in-
terests. Seth's insurable interest is his legal
and and/or equitable interest over the vehi-
cle as an owner while Sean’s insurable in-
terest is the safety of the vehicle which
may become the basis of liability in case of
loss or damage to the vehicle. (Malayan In-
surance vs. Philippine First Insurance Co,
676 SCRA 268)

II.

A.

Morgan, a lawyer, received a lot of diving and

other water sports equipment as payment of his
professional fees by Dennis, his client in a child
custody case. Dennis owned a diving and water
sports dealership in Anilao, Batangas. Morgan de-
cided to name Dennis as entrustee because he did
not have any experience in selling such special-
ized sports equipment. They executed a trust re-
ceipt agreement, with Morgan as entruster and
Dennis as entrustee.
318 BAR Q & A IN COMMERCIAL LAW

Before the sports equipment could be sold, a

strong typhoon hit Batangas. Anilao and other
parts of Batangas experienced power outage. Tak-
ing advantage of the total darkness, unidentified
thieves destroyed the padlocks of the establish-
ment of Dennis, and carted off the equipment in-
side.
Morgan demanded that Dennis pay the value
of the stolen equipment, but the latter refused on
the ground that he also had suffered from the ef-
fects of the typhoon, and insisted that the cause of
the loss was a fortuitous event or force majeure.
Is the justification of Dennis warranted? Ex-
plain your answer. (4%)
Answer:

The transaction is not really a trust receipt

within the ambit of Presidential Decree No. 115,
otherwise known as Trust Receipts Law, since there
is no loan component in the transaction. In a trust
receipt, the entruster granted the loan to finance the
acquisition of the goods, which goods are held in
trust for the benefit of the entruster pending their
disposition. Not being a trust receipt, where force
majeure would not have been a defense, the sup-
posed entrustee is not liable for the loss of the
sports equipment following general principle that
force majeure exempts the obligor from liability.

B.

Safe Warehouse, Inc. (Safe) issued on various

dates negotiable warehouse receipts to Peter, Paul
 2017 BAR EXAMINATION 319

and Mary covering certain goods deposited by the

latter with the former. Peter, Paul and Mary then
negotiated and endorsed the warehouse receipts
to Cyrus, Magnus and Charles upon payment by
the latter of valuable consideration for the ware-
house receipts. Cyrus, Magnus and Charles were
not aware of, nor were they parties to any irregu-
larity or infirmity affecting the title or the face of
the warehouse receipts.
On due dates of the warehouse receipts,
Cyrus, Magnus and Charles demanded that Safe
surrender the goods to them. Safe refused because
its warehouseman’s claim must first be paid.
Cyrus, Magnus and Charles refused to pay, and
insisted that such claim was the liability of Peter,
Paul and Mary.
(a) What is a warehouseman's claim? (3%)
(b) Is Safe’s refusal to surrender the goods to
Cyrus, Magnus and Charles legally justi-
fied? Explain your answer. (3%)

Answer:
(a) A warehousemarl’s lien consist of the stor-
age charges as well as other fees and
charges as may be stipulated in the ware-
house receipt.
(b) Yes, Safe's refusal to surrender the goods is
justified. Under the Warehouse Receipts
Law, the Warehouseman may withhold de-
livery of the goods unless the demand to
deliver is accompanied by an offer to pay
the wa.rehouseman’s lien. The lien is pos-
320 BAR Q & A IN COMMERCIAL LAW

sessory in nature. It attaches to the goods

regardless of who the owner thereof.

III.

A.

Data Realty, Inc. (DRI) was engaged in realty

development. The family of Matteo owned 100°/0
of the capital stock of ORI. Matteo was also the
President and Chairman of the Board of Directors.
Other members of Matteo's family held the major
positions in ORI. Because of a nasty takeover fight
with D&E Realty Co., Inc. (D&E), another realty
developer, for the control of a smaller realty com-
pany with vast landholdings, ORI and D&E en-
gaged in an expensive litigation that eventually
led to a money judgment being rendered in favor
of D&E.
Meantime, DRI, facing inability to pay its li-
abilities as they fall due but still holding substan-
tial assets, filed a petition for voluntary rehabilita-
tion. Trying to beat the consequences of rehabili-
tation proceedings, D&E moved in the trial court
for the issuance of a writ of execution. The trial
court also happened to be the rehabilitation court.
The writ of execution was issued.
Serving the writ of execution, Merto, the court
sheriff who had just passed his Credit Transac-
tions subject in law school, garnished Matteo’s
bank accounts, and levied his real properties, in-
cluding his house and lot in Makati.
 2017 BAR EXAMINATION 321

Are the garnishment and levy of Matteo’s as-

sets lawful and proper? Explain your answer. (4%)

Answer:

The garnishment and levy of Mateo's assets are

not valid because Mateo is not covered by the reha-
bilitation proceedings or any stay order that the re-
habilitation court may issue. It is DRI, with a legal
personality separate and distinct from Mateo, which
filed the petition for rehabilitation and would have
been entitled to the effects of any commencement
order (arid stay order) that the court may issue. The
commencement order would have the effect of set-
ting aside any seizure of property or attempt to en-
force a claim against the debtor.
It would have been different if Mateo acted as
surety and the court issues a commencement order
(with stay order), the effects of which are retroactive
to the filing of the petition. In which event, the gar-
nishment of his deposits and level of assets would
have been valid.

B.

Sid used to be the majority stockholder and

President of Excellent Corporation (Excellent).
When Meridian Co., Inc. (Meridian), a local con-
glomerate, took over control and ownership of Ex-
cellent, it brought along its team of officers. Sid
thus became a minority stockholder and a minor-
ity member of the Board of Directors. Excellent,
being the leading beverage manufacturer in the
country, became the monopoly when Meridian's
322 BAR Q & A IN COMMERCIAL LAW

own beverage business was merged with Excel-

lent's, thereby making Excellent virtually the only
beverage manufacturer in the country.
Left out and ignored by the management, Sid
became a fiscalizer of sorts, questioning during
the Board meetings the direction being pursued
by Excellent's officers.
Ultimately, Sid demanded the inspection of
the books and other corporate records of Excel-
lent. The management refused to comply, saying
that his right as a minority stockholder has been
much reduced.
State under what conditions may Sid properly
assert his right to inspect the books and other cor-
porate records of Excellent. Explain your answer.
(3%)

Answer:

Sid may properly assert his right to inspect the

books and other corporate records of Excellent pro-
vided the following conditions are met:
1. the purpose of his inspection is legitimate
and germane to his interest as a stock-
holder;
2. the right should be exercised during rea-
sonable hours on business day; and
3. he has not improperly used any information
secured in previous examination. (Section
74 of the Corporation Code; Terelay Invest-
ment v. Yulo, G.R. No. 160924, August 5,
2016).
 2017 BAR EXAMINATION 323

IV.

Procopio, a Director and the CEO of Parisian

Hotel Co., Inc. (Parisian), was charged along with
other company officials with several counts
of estafa in connection with the non-remittance of
SSS premiums the company had collected from its
employees. During the pendency of the cases, Pa-
risian filed a petition for rehabilitation. The court,
finding the petition to be sufficient in form and
substance, issued a commencement order to-
gether with a stay or suspension order.
Citing the commencement order, Procopio
and the other officers facing the criminal charges
moved to suspend the proceedings in
the estafa cases.
(8) What is a commencement order, and
what is the effect of its issuance? Explain
your answer. (4%)
(b) Suppose you are the trial judge, will you
grant the motion to suspend of Proco-
pio, et aI.?Explain your answer. (4%)

Answer:
(a) A commencement order is an order issued
by the Rehabilitation Court if the petition
for rehabilitation filed by the financially dis-
tressed debtor or by its creditor is sufficient
in form and substance. The rehabilitation
proceedings are commenced upon issuance
by the rehabilitation court of a commence-
ment order. The stay order which is in-
cluded in the commencement order shall
324 BAR Q & A IN COMMERCIAL LAW

suspend all actions or proceedings for the

enforcement of claims against the debtor.
(Section 16 of the Financial Rehabilitation
and Insolvency Act)
(b) No, considering that the stay order does
not include criminal action against the in-
dividual debtor, or owner, partner, director
or officer of the debtor. (Section 18 of the
Financial Rehabilitation and Insolvency
Act)

V.

A.

Under the Nell Doctrine, so called because it

was first pronounced by the Supreme Court in the
1965 ruling in Ne]! v. Pacic Farms, Inc. (15 SCRA
415), the general rule is that where one corpora-
tion sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the
debts and liabilities of the transferor.
State the exceptions to the Nell Doctrine. (4%)

Answer:
1. The exceptions to the Nell doctrine are as
follows:
2. When the buyer expressly or impliedly as-
sumes the liabilities of the seller;
3. If the sale amounts to a merger or consoli-
dation;
4. If the sale is entered into fraudulently or
made in bad faith; and
 2017 BAR EXAMINATION 325

5. If the buyer is merely a continuation of the

personality of the seller or the so called
business - enterprise transfer rule.

B.

Santorini Corporation (Santorini) was in dire

straits. In order to firm up its financial standing, it
agreed to entertain the merger and takeover offer
of Proficient Corporation (Proficient), the leading
company in their line of business. Erica, the major
stockholder of Santorini, strongly opposed the
merger and takeover. The matter of the merger
and takeover by Proficient was included in the
agenda of the next meeting of Santorini's Board of
Directors. However, owing to Erica's serious ill-
ness that required her to seek urgent medical
treatment and care in Singapore, she failed to at-
tend the meeting and was consequently unable to
cast her vote. The Board of Directors approved the
merger and takeover. At the time of the meeting,
Santorini had been in the red for a number of
years owing to its recurring business losses and
reverses.
Erica seeks your legal advice regarding her
right as a stockholder opposed to the corporate
action. Explain your answer. (4%)
Answer:
Erica may exercise her appraisal right. Ap-
praisal right is the right of the stockholder to de-
mand the payment of the fair value of his shares af-
ter dissenting from a corporate act in the cases
326 BAR Q & A IN COMMERCIAL LAW

specified by law, like in the case of merger. It is im-

perative however that she attends the stockholders’
meeting where the proposed merger will be taken
up or les her written dissent against it, otherwise,
she cannot exercise such right.

C.

Samito is the President and a Director of

Lucky Bank (Lucky), a commercial bank holding
its main office in Makati. His brother, Othello,
owned a big fishing business based in Malabon.
Othello applied for a loan of PSO Million with
Lucky. Othello followed the ordinary banking pro-
cedures in all the stages of the processing of his
application. When required, he made the neces-
sary arrangements to guarantee the loan. Thus, in
addition to the real estate mortgage, Othello exe-
cuted a joint and solidary suretyship, issued post-
dated checks, and submitted all other require-
ments prescribed by Lucky.
When the loan application was about to be
approved and the proceeds released, BG Com-
pany, a keen competitor of Othello in the fishing
industry, wrote to the Board of Directors and the
management of Lucky questioning the loan on the
ground of conict of interest due to Samito and
Othello being brothers, citing the legal restriction
against bank exposure of directors, officers,
stockholders or their related interests (DOSRI).
(a) What are the three restrictions imposed
by law on DOSRI transactions? (4%)
 2017 BAR EXAMINATION 327

(b) Is BG Company’s opposition based on

conict of interest and violation of the
restrictions on DOSRI transactions le-
gally and factually correct? Explain your
answer. (4%)

Answers:

(a) The restrictions are as follows:

1. The Transactions must be approved
by at least majority of the entire
board excluding the director con-
cerned;
2. The required approval shall be en-
tered upon the records of the bank
and copy of such entry shall be sub-
mitted to the BSP; and
3. Unless the loan is non-risk, the loan
must not exceed the book value of
the paid up shares of the borrowing
DOSRI and the amount of unencum-
bered deposits. (Section 36 of RA
8791).

(b) BG Company’s opposition based on con-

ict of interest and violation of the restric-
tions on DOSRI transactions are not le-
gally and factually correct. The “related
interest” referred to under DOSRI extends
only to spouse of the Directors, Officers
and Stockholders, their ascendants and
descendants up to the first degree of affin-
ity or consanguinity. Brothers are second
328 BAR Q & A IN COMMERCIAL LAW

degree relatives and as such, cannot be

considered “related interest".

VI.

A.

Hortencio owned a modest grocery business

in Laguna. Because of the economic downturn, he
incurred huge financial liabilities. He remained
aoat only because of the properties inherited
from his parents who had both come from landed
families in Laguna. His main creditor was Pure-
silver Company (Puresilver), the principal supplier
of the merchandise sold in his store. To secure his
credit with Puresilver, he executed a real estate
mortgage with a dragnet clause involving his fam-
ily's assets worth several millions of pesos.
Nonetheless, Hortencio, while generally in the
black, now faces a situation where he is unable to
pay his liabilities as they fall due in the ordinary
course of business. What will you advise him to do
to resolve his dire financial condition? Explain
your answer. (5%)
Answer:
If I-Iortencio is doing business as a registered
sole proprietorship, he can file a petition for rehabili-
tation. Under the Financial Rehabilitation and Insol-
vency Act (FRIA), a sole proprietorship can now le
a petition for rehabilitation. The remedy may be
availed of in case of actual or technical insolvency.
In the petition, he can pray for the issuance of a
commencement order which includes a stay order.
 2017 BAR EXAMINATION 329

The stay order, once issued, has the effect of enjoin-

ing the enforcement of claims against Hortencio.
If Hortencio is not registered as a sole proprie-
torship, he can file a petition for suspension of pay-
ments in the city or province in which he has re-
sided for six months prior to the filing of the petition,
a remedy available for an individual debtor who has
more assets than liabilities but foresees the impos-
sibility of paying his debts when they respectively
fall due. (Section 94 of FRIA).

B.

Wyatt, an internet entrepreneur, engaged in a

sideline business of creating computer programs
for selected clients on a per project basis and for
servicing basic computer problems of his friends
and family members. His main job was being an
IT consultant at Futurex Co., a local computer
company.
Because of his ill-advised investments in the
stock market and the fraud perpetrated against
him by his trusted confidante, Wyatt was already
drowning in debt, that is, he had far more liabili-
ties than his entire assets.
What legal recourse remained available to
Wyatt? Explain your answer. (5%)
Answer:
If Wyatt is registered as sole proprietorship, he
may file a petition for rehabilitation or voluntary liq-
uidation. Under the Financial Rehabilitation and In-
330 BAR Q & A IN COMMERCIAL LAW

solvency Act (FRIA), an insolvent debtor may le a

petition for rehabilitation even if the assets are less
than liabilities. The petition should include a reha-
bilitation plan and nominee for rehabilitation re-
ceiver. He can also le a petition for voluntary liqui-
dation since his liabilities exceed his assets. The ob-
jective of liquidation is to get a discharge, maximize
recovery of assets and effect equitable distribution
of such assets based on the rules on concurrence
and preference of credit.
If he is not registered as a sole proprietorship,
he may only file a petition for voluntary liquidation
since his assets are less than liabilities (Section 103
of FRIA). Petition for suspension of payments is not
available as a remedy to an individual debtor not
registered as a sole proprietorship.

VII.

A.

Virtucio was a composer of Ilocano songs who

has been quite popular in the Ilocos Region. Pas-
cuala is a professor of music in a local university
with special focus on indigenous music. When she
heard the musical works of Virtucio, she pur-
chased a CD of his works. She copied the CD and
sent the second copy to her Music instructions for
the class to listen to the CD and analyze the works
of Virtucio.
Did Pascuala thereby infringe Virtucio's copy-
right? Explain your answer. (4%)
 2017 BAR EXAMINATION 331

Answer:

Pascuala did not infringe on the rights of Vir-

tucio. The fair use of a copyrighted work for criti-
cism, comment, news reporting, teaching including
limited number of copies for classroom use, scholar-
ship, research and similar purposes is not an in-
fringement of copyright. (Section 185 of RA 8293, as
amended)
In this case, Virtucio's reproduction of the lim-
ited number of CD was for classroom use and edu-
cational purposes thus negating copyright infringe-
ment.

B.

Super Biology Corporation (Super Biology) in-

vented and patented a miracle medicine for the
cure of AIDS. Being the sole manufacturer, Super
Biology sold the medicine at an exorbitant price.
Because of the sudden prevalence of AIDS cases in
Metro Manila and other urban areas, the Depart-
ment of Health (DOH) asked Super Biology for a
license to produce and sell the AIDS medicine to
the public at a substantially lower price. Super Bi-
ology, citing the huge costs and expenses incurred
for research and development, refused.
Assuming you are asked your opinion as the
legal consultant of the DOH, discuss how you will
resolve the matter. (4%)
332 BAR Q & A IN COMMERCIAL LAW

Answer:

DOH may file a petition for compulsory license

with the Director of Legal Affairs of the Intellectual
Property Office to exploit the patented medicine
even Without the agreement of the patent owner on
the ground of public interest, in particular, health
and safety of the public. (Section 193 of RA 8293, as
amended)
Once granted, the DOH may then produce and
sell the AIDS medicines for a cheaper price subject
to payment of reasonable royalties to Super Biology.

VIII.

A.

Flora, a frequent traveller, found a purse con-

cealed between the cushions of a large sofa inside
the VIP lounge in NAIA while she was waiting for
her ight to be called. Inside the purse was a very
valuable diamond-studded necklace. She decided
not to turn over the purse to the airport manage-
ment, and instead to keep it. On her return from
her travels, she had a dependable jeweller ap-
praise the necklace, and the latter told her that
the necklace was easily worth at least P5,000,000.00
in the open market. To test the ap-praisal, she
pawned the necklace for P2,000,000.00. She then
deposited the entire amount in her checking
account with Metro Bank. Promptly, Metro Bank
reported the transaction to the Anti-Money
Laundering Council (AMLC).
 2017 BAR EXAMINATION 333

Given that her appropriation of the necklace

was theft, may Flora be successfully prosecuted
for money laundering? Explain briefly your an-
swer. (4%)

Answer:

Flora may not be prosecuted for money launder-

ing. Money laundering is a crime whereby the pro-
ceeds of an unlawful activity are transacted making
it appear that they originated from legitimate
sources. One of the ways of committing money
laundering is if a person knows the cash relates to
unlawful activity and transacts. Under the rules im-
plementing the Anti-Money Laundering law, how-
ever, only qualied theft (not simple theft) is consid-
ered an unlawful activity. In the case presented, the
theft committed by Flora did not become qualified
because it was not committed with grave abuse of
confidence.

B.

Prosperous Bank is a domestic bank with

head office in Makati. It handles the banking re-
quirements of thousands of clients.
The AMLC initiated a discreet investigation of
the financial transactions of Lorenzo, a suspected
drug trafficker based in Naga City. The intelli-
gence group of the AMLC, in coordination with
the counterpart group from the PDEA and the
NBI, gathered ample evidence establishing
Lorenzo's unlawful drug activities. The AMLC had
probable cause that his deposits and investments
334 BAR Q & A IN COMMERCIAL LAW

in various banks, including Prosperous Bank, were

related to money laundering.
Accordingly, the AMLC now transmits to
Prosperous Bank a formal demand to allow its
agents to examine the banking transactions of
Lorenzo, but Prosperous Bank refuses the de-
mand.
Is Prosperous Bank’s refusal justified? Explain
your answer. (4%)
Answer:

Prospero's refusal is not justified. Notwith-

standing the provisions of RA 1405, RA 6426 and RA
8791, the AMLC may inquire into or examine any
particular deposit or investment with any bank or
non-bank financial institution if there is a probable
cause that the deposits are related to unlawful ac-
tivity under the Anti-money laundering law, as in
this case. Bank inquiry order from the court is not
necessary since the predicate crime is violation of
the Dangerous Drugs Law. (Section 11 of RA 9160, as
amended)

IX.

A.

Alfred issued a check for P1,000.00 to Benja-

min, his friend, as payment for an electronic
gadget. The check was drawn against Alfred's ac-
count with Good Bank. Benjamin then indorsed
the check specially in favor of Cesar. However,
 2017 BAR EXAMINATION 335

Cesar misplaced the check. Dexter, a dormmate of

Cesar, found the check, altered its amount to
P91,000.00, and forged Cesar’s indorsement by
way of a blank indorsement in favor of Felix, a
known jeweler. Felix then caused the deposit of
the check in his account with Solar Bank. As col-
lecting bank, Solar Bank stamped “all previous in-
dorsements guaranteed” on the check. Seeing
such stamp of the collecting bank, Good Bank paid
the amount of P91,000.00 on the check.
May Good Bank claim reimbursement from
Alfred? Explain your answer. (4%)

Answer:
Good Bank may claim reimbursement from Al-
fred but only for the amount of P 1,000. It cannot re-
cover the Php90,000 difference because payment
made under a materially altered check is not pay-
ment done in accordance with the instructions of
the drawer. When Good Bank did not pay according
to the tenor of the instrument, then it has no right to
claim reimbursement from Alfred much less the
right to deduct the erroneous payment it made from
Alfred's account. (Metrobank vs. C’ab1'1zo, 510 SCRA
259; Areza vs. Express Savings Bank, G.R. No.
176697, September 10, 2014)

B.

In 2006, Donald, an American temporarily re-

siding in Cebu City, issued to Rhodora a check for
$50,000.00 drawn against Wells Fargo Bank with
offices in San Francisco, California. Rhodora nego-
336 BAR Q & A IN COMMERCIAL LAW

tiated the check and delivered it to Yaasmin, a

Filipina socialite who frequently travelled locally
and internationally. Because of her frequent trav-
els, Yaasmin misplaced the check. It was only 11
years later on, in 2017, when she found the check
inside a diary kept in her vault in her Hollywood,
California house.
Discuss and explain the rights of Yaasmin on
the check. (4%)
Answer:
This is a case of stale check, a check not pre-
sented within a reasonable time from issuance.
Hence, Wells Fargo will be justified in refusing to
honor the check if presented for payment. What
Yasmin can do is to request Donald the drawer to
issue a new check to Yasmin in her capacity as the
endorsee of Rhodora, the original payee. Donald, the
drawer shall be discharged from liability only if the
delay caused him prejudice. (Art 1249 of the Civil
Code)

X.

Wisconsin Transportation Co., Inc. (WTC)

owned and operated an inter-island de luxe bus
service plying the Manila-Batangas-Mindoro
route. Three friends, namely: Aurelio, Jerome and
Florencio rode on the same WTC bus from Manila
bound for Mindoro. Aurelio purchased a ticket for
himself. Jerome, being a boyhood friend of the
bus driver, was allowed a free ride by agreeing to
sit during the trip on a stool placed in the aisle.
 2017 BAR EXAMINATION 337

Florencio, already penniless after spending all of

his money on beer the night before, just stole a
ride in the bus by hiding in the on-board toilet of
the bus.
During the trip, the bus collided with another
bus coming from the opposite direction. The three
friends all suffered serious physical injuries.
What are WTC’s liabilities, if any, in favor of
Aurelio, Jerome and Florencio? Explain your an-
swer. (4%)

Answer:

WTC, as a common carrier, is liable to Aurelio

for breach of contract of carriage. In case of death or
injury to passenger, there is a presumption of fault
on the part of the common carrier unless it exercised
extraordinary diligence in ensuring the safety of its
passengers. WTC is also liable to Jerome for breach
of contract although Jerome was carried gratui-
tously. However, for Jerome, a stipulation limiting
the liability of WTC for negligence is valid but not
for willful acts or gross negligence (Article 1758 of
the Civil Code). WTC is not liable to Florencio there
being no contract of carriage between the two.

x1.

TRUE or FALSE - Explain briey your answer.

(a) A conviction under the Trust Receipts

Law shall bar a prosecution for estafa
under the Revised Penal Code. (2%)
338 BAR Q & A IN COMMERCIAL LAW

(b) The term capital in relation to public

utilities under Sec. 11, Art. XII of the
1987 Constitution refers to the total out-
standing capital stock comprising both
common and non-voting preferred
shares. (2%)

(C) Forgery is a real defense but may only

be raised against a holder not in due
course. (2%)

(<1) News reports are not copyrightable. (2%)

(B) The law on life insurance prohibits dou-

ble insurance. (2%)

Answer:

(a) True, because the criminal violation of the

trust receipts agreement as when the en-
trustee does not deliver the proceeds of
the sale of the goods subject of the trust
receipt or fails to retum the goods in case
of non-sale already constitutes estafa un-
der the Revised Penal Code.

(b) True. In the case of Roy III v. Herbosa (G.R.

No. 207246, November 22, 2016), the Su-
preme Court held that the required per-
centage of Filipino ownership shall be ap-
plied to BOTH (a) the total number of out-
standing shares of stock entitled to vote in
the election of directors; AND (b) the total
nurnber of outstanding shares of stock,
 2017 BAR EXAMINATION 339

whether or not entitled to vote in the elec-

tion of directors.

(c) False, because forgery, as a real defense,

can be raised even against a holder in due
course.

(d) True, news reports are not subject to

copyright by express provision of the In-
tellectual Property Code. It is the expres-
sion of the nevvs that is copyrightable.

(e) False, double insurance only applies to

property insurance.

XII.

Onassis Shipping, Inc. (Onassis) operated pas-

senger vessels and cargo trucks, and offered its
services to the general public. In line with its vi-
sion and mission to protect the environment, Go-
Green Asia (Go-Green), an NGO affiliated with
Greenpeace, entered into a contract with Onassis
whereby Go-Green would operate with its own
crew the MN Dolphin, an ocean-going passenger
vessel of Onassis.
While on its way to Palawan carrying Go-
Green's invited guests who were international and
local observers desirous of checking certain envi-
ronmental concerns in the area, the MN Dolphin
encountered high waves and strong winds caused
by a typhoon in the West Philippine Sea. The
rough seas led to serious physical injuries to some
of the guests.
340 BAR Q & A IN COMMERCIAL LAW

Discuss the liabilities of Onassis and Go-Green

to the passengers of the M/V Dolphin. Explain
briey your answer. (3%)

Answer:

The contract that Onassis and Greenpeace en-

tered into is a bareboat or demise charter because
Greenpeace was not only given possession of the
vessel but also the command and control of the
navigation as shown by its authority to hire its own
crew who will man the vessel. The bareboat charter
effectively converts Onassis from a common carrier
to a private carrier. (Federal Phoenix Assurance v.
Fortune Sea Carrier, G.R. No. 188118, November 23,
2015)
Being a mere lessor and having ceased to be
the owner of the vessel with respect to the naviga-
tion, Onassis has no liability to the passengers who
contracted with Greenpeace. Greenpeace is the one
liable to the passengers for the injuries they sus-
tained in the course of the navigation.
 2018 BAR EXAMINATION

I.

Yeti Export Corporation (YEC), thru its President,

negotiated for Yahoo Bank of Manila (YBM) to is-
sue a letter of credit to course the importation of
electronic parts from China to be sold and distrib-
uted to various electronic manufacturing compa-
nies in Manila. YBM issued the letter of credit and
forwarded it to its correspondent bank, Yunan
Bank (YB) of Beijing to notify the Chinese export-
ers to submit the bill of lading in the name of YBM
covering the goods to be exported to Manila and
to pay the Chinese exporters the purchase price
upon verification of the authenticity of the ship-
ping documents.
The electronic parts arrived in the Port of Manila,
and YBM released them to the custody of YEC as
an entrustee under a trust receipt. When YEC un-
packed the imported parts in its warehouse, it
found that they were not only of inferior quality
but also did not fit the descriptions contained in
the bill of lading. YEC refused to pay YBM the
amount owed under the trust receipt. YBM there-
after commenced the following:
a) Civil suit to hold YB liable for failure to
ensure that the electric parts loaded for
exportation in China corresponded with
those described in the bill of lading. Is

341
342 BAR Q & A IN COMMERCIAL LAW

there any merit in the case against YB?

(2.5%)

b) Criminal suit against YEC and its Presi-

dent for estafa, and sought the payment
of the amount covered in the trust re-
ceipt. The defense of the YEC President is
that he cannot be held liable for a trans-
action of the corporation, of which he
only acted as an officer, and that it is YEC
as the principal that should be held liable
under the trust receipt, which was en-
tered into in the name of YEC and pursu-
ant to YEC’s corporate purposes. He cited
as his legal ground the “Doctrine of Sepa-
rate Juridical Personality." Is the Presi-
dent’s contention meritorious? (2.5%)

ANSWER:

1. There is no merit in the case against YB. YB

only acted as an advising bank whose only
obligation after determining the apparent
authenticity of the letter of credit is to
transmit a copy thereof to the beneciary of
the letter of credit. It has no obligation to
ensure that the goods loaded for expor-
tation corresponded with those described
in the bill of lading. YB can not be
considered a confirming bank because to
be one it must have assumed a direct
obligation to the seller as if it has issue the
letter of credit. (Marphil Export Corporation
vs. Allied Banking Corporation, G.R. No.
187922, September 21, Z016) Neither is YB a
 h

2018 BAR EXAMINATION 343

negotiating bank because it did not buy the

draft of the beneficiary of the letter of
credit. But even if YB acted as a confirming
or negotiating bank, such kind of corres-
pondent bank has no similar obligation to
ensure that the goods shipped match with
those described in the bill of lading.

2) The President of YEC can not invoke as a

defense the doctrine of separate juridical
personality to avoici criminal liability. The
law specifically makes the director, officer
or any person responsible for the violation
of the Trust receipt agreement criminally
liable precisely for the reason that a
Corporation, being a juridical entity, can
not be the subject of the penalty of
imprisonment. Nevertheless, following the
same doctrine of separate legal personality,
he can not be civilly liable there being no
showing that he binds with YEC to pay the
loan. Only YEC is liable to pay the loan
covered by the letter of credit/trust receipt.
(Ching vs. Secretary of Justice, 481 SCRA
609 (2006) and Section 13 of PD 115)

II.
Yolanda executed and signed a promissory
note with all the requisites for negotiability being
present, except from the amount which was left
blank. She kept the promissory note in her desk
and decided to place the amount at a later date.
The indicated payee, Yohann, managed to obtain
the promissory note from Yolanda’s desk and
344 BAR Q & A IN COMMERCIAL LAW

filled out the amount for the sum of PhP10 mil-

lion, which was the amount actually lent by him
to Yolanda, but excluding the agreed interest. Yo-
hann later endorsed and delivered the check to
Yvette, under circumstances that would constitute
the latter to be a holder in due course.
a) May Yvette hold Yolanda liable on the
note? (2.5%)

b) Would your answer be the same if the

promissory note was actually completed
by Yolanda (including the amount of
PhP10 million), but stolen from her desk
by Yohann? Can Yvette enforce the note
against Yolanda? (2.5%)

ANSWER:

a) Yvette can not hold Yolanda liable on the

note. This a case of incomplete and
undelivered instrument insofar as Yolanda
is concemed. Where an incomplete instru-
ment has not been delivered, it will not, if
completed and negotiated without autho-
rity, be a valid contract in the hands of any
holder, including a holder in due course as
against Yolanda, whose signature was
placed thereon before delivery (Section 15
of the Negotiable instruments law)

b) The answer will not be the same. Now that

the instrument is complete but undelivered
and in the hands of Yvette, a holder in due
course, a valid and intentional delivery to
 2018 BAR EXAMINATION 345

make all parties prior to Yvette liable is

conclusively presumed under Section 16 of
the NIL. Therefore, Yvette can hold Yolanda
, a prior party, liable. A complete but
undelivered instrument is only a personal
defense not available againt a holder in due
course.

III.
On November 23, 2017, Yas Ysmael (Ysmael)
loaned the amount of PhP5 million to Yarn 8:
Thread Corporation (YTC), though its President.
Ylmas Yektas (Yektas). Which loan was evidenced
by a Promissory Note (PN), which reads as follow:

Date:

Within one year from date hereof, I prom-

ise to pay to the order of YAS YSMAEL,
the sum of PhP5 million with interest at
120% per annum.

YARN 85 THREAD CORPORATION

By: (Sgd.)
Ylmas Yektas

Yektas was the controlling stockholder of YTC

at the time the PN was issued. As security for the
payment of the PN, Yektas issued and delivered to
Ysmael as postdated personal check covering the
face value of the PN drawn from his account with
346 BAR Q & A IN COMMERCIAL LAW

Yellow Bell Bank and Trust Company. The pro-

ceeds of the loan under the PN were used by YTC
as working capital.

A year later, Ysmael inserted the date of "No-

vember 23, 2017" on the date section of the PN,
and made a formal demand upon YTC, through
Yektas, to pay the note, but which was refused on
the ground that Yektas was no longer the presi-
dent and controlling shareholder of YTC. By this
time, all the shares of YTC had already been sold
to a new group of investors. Ysmael deposited the
personal check issued by Yektas which was dis-
honored. He then files a collection suit against
YTC and Yektas including the accrued interest.
The defendants raised the following defenses
in the collection suit. Rule on the merits of each
defense. (2% each)

a) A PN issued with a blank date is one that

is not payable on demand or on a fixed
or determinable future time, and there-
fore the insertion of the date constituted
material alteration that nullified it, so
that no cause of action arose.
b) Yektas cannot be made liable on the PN
since he signed in his capacity as Presi-
dent of YTC, which fact was known to
Ysmael although not indicated on the
PN.

c) Yektas signed the merely merely as an

accommodation to YTC. As he received
 /

2018 BAR EXAMINATION 347

no consideration for the PN, it is void for

lack of consideration.

d) YTC, now owned by new owners, cannot

be held liable on the PN since it was en-
tered into by its former owner and
President, which act the new Board of
Directors did not ratify.
e) The PN is void for being in violation of
the Usury Law seeking interest at an un-
conscionable rate of 120% p.a.

ANSWER:

1. The defense is not meritororious. Where the

instrument is not dated, it will be consi-
dered to be dated as of the time it was
issued (Section 17 of NIL (C). Section 14 of
NIL also concedes to the payee the prima
facie authority to fill-in the blanks in a
negotiable instrument. Such prima facie
stands in the absence of evidence to the
contrary.
2. The defense is not meritorious. Where the
instrument contains or a person adds to his
signature words indicating that he signs
for or on behalf of a principal or in a.
representative capacity, he must disclose
his principal and must indicate that he is
acting on benalf of his principal (Section ZO
of NIL).
348 BAR Q & A IN COMMERCIAL LAW

Alternative answer
The defense is meritorious. Since the matter of
signing the note by Yektas on behalf of YTC is
known to Ysmael, then, Yektas has no personal
liability as it may be inferred from the note that he is
acting only in a representative capacity.
1. The defense is not meritorius. An
accommodation party signs a negotiable
instrument as a maker, drawer, endorser,
acceptor without receiving value therefor
and only for the purpose of lending his
name in another. He is liable to a holder for
value notwithstanding such holder, at the
time of taking the instrument, knew him
only to be an accommodation party (Section
29 of NIL)
2. The defense is not meritorius. In stock
sales, where shareholder sell a block of
stock to new or existing shareholders, the
transaction takes place at the shareholder
level only. Because the corporation has a
legal personality separate and distinct from
that of its shareholders, a change in the
composition of shareholders will not affect
its existence nor extinguish its separate
legal personality (SME Bank vs. Samson,
G.R. No. 186641, October 8, 2013)
3. The defense is not meritorius. The Usury
law is currently suspended in view of CB
Circular 905 series of 1982 which lifted the
ceiling on interest rate for loans. Moreover,
if the interest rate is deemed to be
 2018 BAR EXAMINATION 349

unconscionable despite the absence of the

Usury Law, the legal rate of interest shall
be deemed to apply. Thus, the PN remains
valid

IV.

Ysidro, a paying passenger, was on board Bus

No. 904 owned and operated by Yatco Transporta-
tion Company (Yatco). He boarded the bus at Mu-
oz, Nueva Ecija with Manila as his final destina-
tion. He was seated on the first row, window seat
on the left side of the bus. As the bus was negoti-
ating the national highway in front of the public
market of Gerona, Tarlac, the bus came to a full
stop because of the traffic. The driver of the bus
took this opportunity to check on the tires of the
bus and to relieve himself. As he was alighting
from the bus to do these, an unidentified man
standing along the highway hurled a huge rock at
the left side of the bus and hit Ysidro between his
eyes. He lost consciousness and immediately the
driver, with the conductor, drove the bus to bring
him to the nearest hospital.
Ysidro’s wife and children brought a civil ac-
tion to collect damages from Yatco, alleging that
as a common carrier, it was required to exercise
extraordinary diligence in ensuring the safety of
its passengers. They contended that, in case of in-
juries and/or death on the part of any of its pas-
sengers, the common carrier is presumed to be at
fault. In its defense, Yatco alleged that it is not an
absolute insurer of its passenger and that Ysidro’s
death was not due to any defect in the means of
350 BAR Q & A IN COMMERCIAL LAW

transport or method of transporting passengers, or

the negligent acts of its employees. Since the ac-
cident was due to the fault of a stranger over
whom the common carrier had no control, or of
which it did not have any prior knowledge to be
able to prevent it, the cause of Ysisdro’s death
should be considered a fortuitous event and not
the liability of the common carrier.

a) Is a common carrier presumed to be at

fault whenever there is death or injury
to its passengers, regardless of the cause
of death or injury? (2.5%)
b) What kind of diligence is required of
common carriers like Yatco for the pro-
tection of its passengers? (2.5%)
c) Will your answer be the same as your
answer in (b) above, if the assailant was
another paying passenger who boarded
the bus and deliberately stabbed Ysidro
to death? (2.5%)

ANSWER:

Yes, by express provision of law, in case of

death or injuries to passengers, common
carriers are presmned to have been fault or
to have acted negligently unless they
proved that they exercised extraordinary
diligence (Art. 1756 of the Civil Code)
A common carrier is bound to carry the
passengers safely as far as human care and
foresight can provide, using the utmost
 2018 BAR EXAMINATION 351

diligence of a very cautious person with a

due regard form-,,al,l.,¢,itb.e circumstances or
simply put, with extraordinary diligence .

(Art. 1755 of the Civil Code )

My answer will be different. A common
carrier is responsible for death or injuries
caused by wilfull acts of other passengers
or strangers, only if the common carrier's
employees through the exercise of the
diligence of a good father of a family could
have prevented the act (Art. 1763 of the
Civil Code). (GV Florida Transport vs. Heirs
of Romeo Battung, Jr., G.R. No. 208802, 14
October 2015)

V.

Yellow Fin Tuna Corporation (Yellow Fin), a

domestic corporation, applied for a credit facility
in the amount of PhP50 million with Yengzi Fi-
nancial Corporation (YFC). The application was
approved and the Credit Agreement was signed
and took effect. Ysko and Yuan, Yellow Fin
Chairman and President, respectively, executed a
continuing Suretyship Agreement in favor of YFC
wherein they guaranteed the due and full pay-
ment and performance of Yellow Fin’s guarantee
obligations under the credit facility. YFC soon dis-
covered material inconsistencies in the financial
statements given by Yellow Fin, drawing YFC to
conclude that Yellow Fin committed misrepresen-
tation. Under the Credit Agreement, any misrep-
resentation by Yellow Fin or its sureties will con-
352 BAR Q & A IN COMMERCIAL LAW

stitute an event of default. YFC thus called an

event of default and filed a complaint for sum of
money against Yellow Fin, Ysko, and Yuan. Im-
mediately thereafter, Yellow Fin filed a petition
for rehabilitation. The court suspended the pro-
ceedings in YFC’s complaint until the rehabilita-
tion court disposed of the petition for rehabilita-
tion. YFC posits that the suspension of the pro-
ceedings should only be with respect to Yellow
Fin but not with respect to Ysko and Yuan.
Is YFC correct? (2.5%)

ANSWER:

YFC is correct. Actions or proceedings against

the surety of the insolvent debtor that led a
petition for rehabilitation are not subject to the stay
order. Consequently, the suit may continue against
him. (Section 18 (c) of FRIA)

VI.

Shortly after Yin and Yang were we, they

each took out separate life insurance policies on
their lives, and mutually designated one another
as sole beneficiary. Both life insurance policies
provided for a double indemnity clause, the cost
for which was added to the premium rate. During
the last 10 years of their marriage, the spouses
had faithfully paid for the annual premiums over
the life policies from both their salaries. Unfortu-
nately, Yin fell in Love with his officemate, Yessel,
and they carried on an affair. After two years,
their relationship bore them a daughter named
 2018 BAR EXAMINATION 353

Yinsel. Without the knowledge of Yang, Yin

changed the designation of the beneficiary to an
“irrevocable designation" of Yinsel and Yessel
jointly. When Yang learned of the affair, she was
so despondent that, having chanced up Yin and
Yessel on a date, she rammed them down with the
car she was driving, resulting in Yin’s death and
Yessel's complete loss of mobilization. Yang was
sued for parricide, and while the case was pend-
ing, she filed a claim on the proceeds of the life
insurance of Yin as irrevocable beneficiary, or at
least his legal heir, and opposed the claims on be-
half of Yessel and her daughter Yinsel. Yang
claimed that her designation as beneficiary in
Yin’s life insurance policy was irrevocable, in the
nature of “one coupled interest," since it was
made in their accordance with their mutual
agreement to designate one another as sole bene-
ficiary in their respective life policies. She also
claimed that the beneficiary designation of Yessel
and the legitimate minor child Yinsel was void be-
ing the product of an illicit relationship and there-
fore without “insurable interest."

a) Is Yang correct in saying that her desig-

nation as beneficiary was irrevocable?
(2.5%)

b) Do Yessel and Yinsel have “insurable in-

terest” on the life of Yin? (2.5%)
ANSWER:

a) Yang is not correct. The insured shall have

the right to change the beneficiary he
354 BAR Q & A IN COMMERCIAL LAW

designated in the policy unless he has

expressly waived this right in the policy.
There is nothing in the life insurance
policy taken by Yang which indicated that
the designation of Ying is irrevocable. As
such, it is deemed to be revocable.

b) Yessel has no insurable interest on the life

of Yin because she can not be lawfully
designated as beneciary. Persons who
are proscribed to become donees under
the rules on donation can not be
appointed as beneficiary. These include
persons in illicit relations as in the case of
Yin and Yeseel. Yinsel, however , has
insurable interest on the life of Yin. There
is no proscription in naming an
illegitimate child as a beneficiary. (Heirs of
Loreta Maramag vs. Maramag, G.R. No.
181132, June 5,2009)

VII.

Yelp Pictures Inc. (Yelp Pictures), a movie

production company based in California USA, en-
tered into a contract with Yehey Movies Inc., a
Filipino movie production and distribution com-
pany which is registered in the Philippines under
the Securities Regulation Code (SRC) and listed in
the Philippine Stock Exchange Inc. (PSE), for the
exclusive distribution in the Philippines of movies
produced in the USA by Yelp Pictures. Yehey Mov-
ies is currently owned 85% by Yavic Yamson, and
the balance, by the Republic of the Philippines.
For the purposes of entering into the contract, su-
 2018 BAR EXAMINATION 355

ing for breach of such contract, and prosecuting

unauthorized showing movies produced by Yelp
Pictures, it appointed Atty. Yson, a local lawyer,
as its attorney-in-fact.

Simultaneously with the execution of the film

distribution agreement, Yehey Movies also
granted Yelp Pictures an option to acquire up to
40% of the total outstanding capital stock in Ye-
hey Movies post-exercise of the option, at the op-
tion price of Php.01 per number of shares covered
by the option, exercisable within a period of one
(1) year from the date of the grant, at the exercise
price of PhP100 per share. Once exercised, Yelp
Pictures was granted the right to nominate two (2)
directors of the Board Yehey Movies, and Yavic
Yamson agreed to vote all his shares for the elec-
tion of directors to be nominated by Yelp Pictures.
a) May the acts of entering into the film
distribution contract, the subsequent
execution and performance of the terms
of the contract in the Philippines, and
the appointment of Atty. Yson, be con-
sidered as act of “doing business" in the
Philippines that will require Yelp Pic-
tures to register as a foreign corporation
and obtain license to do business in the
business? (2.5%)

b) Will your answer in (a) be the same if

Yelp Pictures exercises the option be-
comes a substantial shareholder, and is
able to elect two (2) directors in the
Board of Yehey Movies? (2.5%)
356 BAR Q & A IN COMMERCIAL LAW

c) Must the option granted Yelp Pictures be

registered under the SRC? (2.5%)

ANSWER:

a. A foreign Corporation which owns the

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

b. It will be the same. Mere passive

investment in equity and voting the equity
shares of the corporation to elect its
director in the board of a domestic
corporation is not tantamount to doing
business.

c. While options are securities, the option

was granted only to Yelp Pictures and not
to the public. As a consequence, the
option need not be registered with the
SEC.

VIII.
Yenkell Cement Corporation (YCC) is a public
corporation whose shares are listed as the PSE. It
is 60% owned by Yenkell Holdings Corporation
 2018 BAR EXAMINATION 357

(YHC) and 20% by Yengco Exploration Inc (YEI).

The remaining 20% is held by the public. YHC is a
private non-listed corporation which, in turn, is
60% owned by Yatlas Mines Inc. (YMI), and 40%
by Yacnotan Consolidated Inc (YCI). On August 8,
2008, the Board of Directors of YEI passed a reso-
lution approving the acquisition of 50% and 25%
of the shares held by YMI and YCI, respectively, in
the authorized capital stock of YHC.
Yolly one of the staff members in the office of
the Corporate Secretary of YEI, was immediately
asked to type the resolution and file the disclosure
with the PSE and the Securities and Exchange
Commission (SEC). Before doing that, she secretly
called her brother who works with a stock broker-
age company, to purchase, in the name of Yolly’s
husband, 5,000 shares in YCC. After the acquisi-
tion was disclosed to the SEC and the PSE, the
market price of YCC increased by 50%.

a) In acquiring 75% of the total capital

stock of YHC, should YEI be required to
do a mandatory tender offer? (2.5%)

b) Can Yolly be held liable for insider trad-

ing? (2.5%)
ANSWER:

a) In acquiring 75% of the total capital stock

of YHC, YEI should be required to do a
mandatory tender offer. By acquiring the
combined 75% shareholdings of YMI and
YCI in YCC, YEI effectively owns 45% of
 BAR Q & A IN COMMERCIAL LAW

YCC. Add that to the 20% it directly owns

in YCC, YEI now owns and controls 65% of
YCC. Once a person singly or in concert
with others acquires more than 50% of the
voting stock of a public company, manda-
tory tender offer rule. The tender offer rule
covers not only direct acquisition but also
indirect acquisition or any type of
acquisition. Whatever may be the method
by which control of a public company is
obtained either through the direct pur-
chase of its stocks or through indirect
means, mandatory tender offer rule
applies. (Cemco Holdings vs. National
Life Insurance Company, 529 SCRA 2007)
Yolly can not be held liable for insider
trading per se. Insider trading is the
buying or selling of securities by an
insider while in the possession of a
material non-public information. While
Yolly is an insider because, she has access
to material non-public information by
reason of her relationship with the Issuer,
she did not, however, buy or sell securi-
ties. She is liable, however, for having
communicated material non-public
information about the issuer to any person
who by virtue of such communication
becomes an insider where the insider
communicating the information knows or
has reason to believe that such person will
likely buy or sell a security of the issuer
while in possession of such infonnation
(Section 27.3 of the SRC) The law makes
 2018 BAR EXAMINATION 359

no distinction that the insider is buying for

himself or for the account of another. As
such, it is immaterial that the broker
purchased securities for the account of
Yol1y’s husband. The information about
the MTO is also material as it will likely
affect the decision of a reasonable person
to buy or sell the securities.

Alternative answer.
Yolly can be held liable for insider trading.
Insider trading is the buying or selling of securities
by an insider while in the possession of material non
public information. Yolly is an insider because by
reason of her position, she had access to material
non public information. While the purchase was in
the name of the husband, it is clear from the facts
that she was the one who purchased the shares but
concealed it in the name of her husband.

IX.

Yangchou Inc.’s (YI) Articles of Incorporation

(AOI) provides two (2) types of shares of stock:
common and preferred shares. Its AOI further
provides that “the preferred shares shall have a
guaranteed annual dividend of 3% of the par
value." Its By-Laws also specifically provides that
“preferred shareholdings shall be cumulative and
participating." No other terms of preference are
provided for preferred shares in either the AOI or
By-Laws of YI.
360 BAR Q &A IN COMMERCIAL LAW

For the first five years of operations, the com-

pany was operating at a loss. At the end of the
sixth year, YI realized a net profit of PhP100 mil-
lion, and unrestricted retained earnings of PhP30
million. The YI Board of Directors declared and
paid out dividends of 1% on common shares, and
5% on preferred shares, which amounted to a total
of PhP30 million.
However, the preferred shareholders made a
formal demand that they be given an additional
3% dividend for each of the five (5) years based on
the preferred shares features of “cumulative and
participating," and an additional 1% given to the
common shareholders, which could all be accom-
modated within the remaining balance of the net
profits.
Should YI's Board heed the demand of its pre-
ferred shareholders? (2.5%)
ANSWER:

YI’s Board should not heed the demand of its

preferred shareholders. While the preferred shares
are cumulative and participating, the holders there-
of are entitled to dividends only if the unrestricted
retained earnings are sufficient to pay such divi-
dends. Dividends are declared based on unrestric-
ted retained eamings and not on the amount of net
profit. Republic Planters Bank vs. Agana, G.R. No.
51765, March 3, 1997 ) Section 43 of the Corporation
Code
 2018 BAR EXAMINATION 361

X.

Ybarra is the registered shareholders of 500

shares in Yakal Inc., of which only 50% has been
paid up, but for which the corporation had erro-
neously issued a covering certificate of stock for
the entire 500 shares. Ybarra sells the entire 500
shares for cash pursuant to a notarized Deed of
Sale in favor of Ynchon, and which certificate was
duly endorsed and delivered. When Ynchon pre-
sented the Deed of Sale and the endorsed certifi-
cate of stock, as well as proof of payment to the
Bureau of Internal Revenue (BIR) of the tax due on
the sale of shares, the Corporate Secretary of Ya-
kal Inc. refused to register the sale on the gorund
of lack of written authority from Ybarra to cancel
the certificate and have the shares registered in
the name of Ynchon.

a. Does Ynchon have a cause of action to

file petition for mandamus to compel
a
the corporation to register the 500 shares
in his name in the corporation books?
(2.5%)

b. Who is liable to pay the remaining un-

paid 50% balance — Ybarra or Ynchon?
(2.5%)

ANSWER:

a) Yes Ynchon has a cause of action to le the

petition for mandamus to compel the corpo-
ration to register the 500 shares in the
corporation's books. In Andaya vs. Rural
362 BAR Q & A IN COMMERCIAL LAW

Bank of Cabadbaran, G.R. No. 188769,

August 3, 2016, the Supreme Court (aban-
doning its previous ruling in Ponce vs
Alsons Cement) ruled that the transferees
of shares of stock are real parties in interest
having a cause of action for mandamus to
compel the registration of transfer and the
corresponding issuance of stock certificates
even without the written authority from the
seller to cancel the certificate and register
the shares in the books of the corporation

b) Ynchon should be the one to pay the

remaining balance but without prejudice to
his right to recover from Ybarra. The effect
of the sale of the shares was to extinguish
the obligation of the seller to the Corpora-
tion to pay whatever is the balance in the
contract of subscription. The sale of shares
to the buyer with the consent of the
corporation effectively resulted in novation.
(Interport Resources Corporation vs. Securi-
ties Specialist Inc., G.R. No. 154069, June 6,
2016 )

XI.

Yenetic Corporation wants to increase its Au-

thorized Capital Stock (which is currently fully
subscribed and issued) to be able to increase its
working capital to undertake business expansions.
The board of directors consults with you as
legal counsel on the proper answers to the follow-
ing issues: (2.5% each)
 2018 BAR EXAMINATION 363

a) Can Yenetic's AOI be formally amended

to remove the right of appraisal on all
dissenting stockholders in all matters
under the law which requires a ratifica-
tion vote of the stockholders?

b) If the increase in Authorized Capital

Stock is formally submitted to the stock-
holders in a meeting duly called for the
purpose, what is the vote necessary for
the stockholders’ ratification, and may
then dissenting stockholders exercise
their appraisal right?

C) Once the increase in the Authorized

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

ANSWER:

a) Yenetic’s AOI can not be amended to

remove appraisal right of the stockholders
on matters requiring their approval in
cases where the law grants them such
appraisal right, like:
i. In case any amendment to the articles
of incorporation has the effect of
changing or restricting the rights of
364 BAR Q & A IN COMMERCIAL LAW

any stockholder or class of shares, or of

authorizing preferences in any respect
superiors to those of outstanding
shares of any class, or of extending or
shortening the term of corporate
existence;
ii. In case of sale, lease, exchange,
transfer mortgage, pledge or other
,

disposition of all or substantially all of

the corporate property and assets;
iii. In case of merger, (Section 81 of the
Corporation Code)
iv. In case of investment of funds in the
secondary purpose of the corporation
or another business (Section 42)

Appraisal right is a statutory right. It can not be

denied to the stockholders in cases where the law
allows such right. For all the other matters under
the Corporation Code which require ratificatory
approval of the shareholders, the AOI may be
formally amended to remove appraisal right because
the right does not exist anyway in those cases.

a) Any provision or matter stated in the AOI

may be amended by a Majority vote of the
board of directors and the vote or written
assent of the stockholders representing at
least 2/3s of the outstanding capital stock.
Stockholders can not exercise any appraisal
right in case of amendment to the articles
of incorporation to increase capital stock
because this is not one of the cases allowed
by law where appraisal right may be exer-
 2018 BAR EXAMINATION 365

cised (Articles 81 and 42 of the Corporation

Code) unless the corporation is a close
corporation where a stockholder may
demand the payment of the fair value of his
shares for any reason whatsoever (Section
105 of the Corporation Code)

XII.

Yashtag Holdings, Inc.’s (Yashtag Holdings)

AOI states that its primary purpose is to invest in
real and personal properties of every kind or oth-
erwise acquire and deal with stocks, bonds, and
other securities or evidence or indebtedness of
any other corporation, and to hold or to own, use,
sell in, and dispose of, any such stock." It further
states that it has an authorized capital stock of
PhP 1 million, all of which have been fully sub-
scribed and paid up.
Yashtag Holdings’ President, Mr. Yokada,
convinced Yeh, Yah and Yo to lend/invest money
with Yashtag, which money will be invested in a
sister company, Yashtag realty, Inc. (Yashtag Re-
alty), a corporation that develops premium real
state projects in the Philippines. For the amount
loaned/invested, yashtag Holdings issued two (2)
postdated checks to each lender/investor, one rep-
resenting the principal amount, and the other
covering the guaranteed interest that ranged be-
tween 18-32% p.a. On the maturity dates of the
checks, the individual lender/investor can review
the loans/investment, and may either collect only
the interest or roll over the same with the princi-
pal amounts. Eventually, the bursting of the real
366 BAR Q & A IN COMMERCIAL LAW

state bubble brought about a serious financial cri-

sis around the world including the Philippines.
Yashtag Realty collapsed and with it Yashtag
Holdings defaulted in the payment of its
loans/investments, as well as the dishonor of the
tens of thousands of postdated checks issued to its
various lenders/investors.
Yeh, Yah and Yo filed several charges against
Yashtag Holdings and its President, making them
solidarily liable for the investments they failed to
recover. Yeh, Yah and Yo proved that the Yashtag
Holdings, acting through Mr. Yokada, was able to
get a total of PhP 800 million of loans/investments
from the public under the scheme, and from
which Mr. Yokada, as the controlling stockholders,
was able to withdraw a total amount of PhP300
million for his personal account and entered into
the books of Yashtag Holdings as “Advances to
Stockholders." Mr. Yokada pleads as a defense
that he cannot be made personally liable on the
claim of the group under the doctrines of “Sepa-
rate Juridical Personality" and "Limited Liabi-
lity."
a) What are the doctrines of “Separate Ju-
ridical Personality" and “Limited Liabil-
ity"? (2.5%)

b) Decide on the merits of Mr. Yokada's de-

fense against being made liable for
yashtag Holdings’ obligations. (2.5%)
 2018 BAR EXAMINATION 367

ANSWER:

a) The doctrine of separate juridical persona-

lity is a principle of law which ordains that
the corporation has a separate legal perso-
nality from the stockholders, directors and
officers composing it. The limited liability
rule, on the other hand, means that the
liability of a stockholder who is not a
director, officer or agent of the corporation,
is limited to his subscription to the capital
stock of the corporation.
NB. The following answer should also
be given credit because the question may
be construed as to whether this defense is
pertinent under the second question.
The limited liability rule, also known
as the real or the hyphotecary nature of
maritime law, simply means that that the
liability of the shipowner or Ship agent
arising from the transportation of goods
and passengers is limited to their interest
in the vessel which is hyphotecated for
such obligations or which stands as a
guaranty for their settlement. This rule
may be best explained by the doctrine: No
vessel, no liability. (Aboitiz Shipping
Corporation vs. General Accident Fire and
Life Assurance Corporation, 217 SCRA 359)

b) Yokada can not validaly invoke the

doctrine of separate juridical personality
and limited liability. Yokada acted in bad
faith in withrawing 300m for his personal
368 BAR Q & A IN COMMERCIAL LAW

account. Having acted in bad faith, he

becomes solidarily liable with the corpora-
tion. Further, having issued securities to
the public without prior approval of the
SEC is also another basis to hold him soli-
darily liable with the issuer corporation.
NB. An examinee who answers that
the limited liability rule is a maritime law
concept and has no bearing to the issue,
should also be given credit.

XIII.

YBC Bank extended a loan of PhP50 million to

Mr. Yamato secured by a real estate mortgage
(REM) on a large tract of land. The covering Trans-
fer Certificate of Title (TCT) of the property mort-
gaged did not indicate any incumbrance or lien on
it or lien on it, and the bank was able to obtain a
certified true copy of the TCT from the Register of
Deeds showing that the owner's copy submitted
to the bank was a genuine title. The loan agree-
ment provided an escalation clause which stated
that, at the anniversary date of the loan, YBC
bank was granted the option to increase the inter-
est rate whenever there would be an increase in
the Bangko Sentral ng Pilipinas' prevailing rates.
Three years later, Mr. Yamato received a formal
notice from YBC Bank raising the interest rate of
the loan based on the escalation clause provided
for in the Loan Agreement. Mr. Yamato refused to
pay based on the increased interest rate that was
affected without consent. The YBC insists on the
 2018 BAR EXAMINATION 369

binding effect of the escalation clause appearing

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

8) Can YBC bank unilaterally increase the

interest rates on the loan? (2.5%)

b) Is YBC Bank a mortgage buyer in good

faith? It is preferred over Mr. Yamsuan?
(2.5%)

ANSWER

a) YBC Bank can not unilaterally increase the

interest rates on the loan. A stipulation
allowing the bank to increase the interest
rate unilaterally is a sole potestative
condition which violates the principle of
mutuality of contract and as such is null
and void. (PNB vs. Padilla, G.R. No. 88880,
April 30, 1991)

b) YBC Bank is not a mortgagee buyer in

good faith. As a bank, it should have
exercised due diligence to determine who
the actual and true owner of the real
property is prior to the grant of the loan.
370 BAR Q & A IN COMMERCIAL LAW

Also, Yamsuan has a prior right to the

property being the first buyer.

XIV.

On June 21, 2008, Yale took out a life insur-

ance policy on her life in the amount of PhP10 mil-
lion and named her husband Yandy and daughter
as joint irrevocable beneficiaries. Before the policy
was issued and the premium s were paid, Yate
underwent a medical checkup with a physician
accredited by the insurer, and the only result
found was that she was suffering from high blood
pressure. Yate was previously diagnosed by a pri-
vate physician of having breast cancer which she
did not disclose to the insurer in her application,
nor to the insurer’s accredited physician because
by then, she was told that she was already cancer-
free after undergoing surgery which removed
both her breasts. She was later diagnosed with
psychotic tendency that graduated into extreme
despondency. She was found dead hanging in her
closet 36 months after the issuance of the policy.
The police authorities declared it to be a case of
suicide. The policy did not include suicide as an
excepted risk.
a) Can the insurer raise the issue of failure
to disclose that she had cancer as a
cause for denying the claim of the bene-
ficiaries? (2.5%)

b) Are the beneficiaries entitled to receive

the proceeds of the life insurance not-
 2018 BAR EXAMINATION 371

withstanding the fact that the cause of

death was suicide? (2.5%)

ANSWER:

a) The insurer can not raise the issue of con-

cealment because only material facts
known to the insured at the time of the is-
suance of the policy should be disclosed to
the insurer. (Section 28 of the IC) Yate's
previous cancer diagnosis is no longer a
material fact at the time she procured the
policy.

Alternative answer
The insurer may raise the issue of
concealment. Even though Yaloe had been
cured of cancer, her previous cancer diag-
nosis is still a material fact which should
have beeen disclosed. The test of materi-
ality is the probable inuence on the deci-
sion of the insure in making inquiries and
forming his estimates of the risk. Had he
known about the cancer, the insurer may
have asked for a higher premium.

b) Yes, the insurer is liable. The rule is that

the insurer in life insurance is liable in
case of suicide only when it is committed
after the policy has been in force for a
period of two years from the date of issue
or last reinstatement. The rule, however,
admits of an exception so that when
suicide is committed in the state of
insanity, it shall be compensable
372 BAR Q & A IN COMMERCIAL LAW

regardless of the date of commission.

(Section 180-A of the Insurance Code). In
the given facts, Yate was diagnosed with
psychotic tendency that graduated into
extreme despondency. Thus, even though
Yate committed 36 months from issuance
of the policy, the insurer is liable.

XV.

A distinctive-tasting pastillas is well known

throughout the country as having been developed
within the close knit women's group in Barangay
Ysmael which is located along a very busy na-
tional highway. Its popularity has encouraged the
setting up of several shops selling similar deli-
cacies, with the most famous product being the
pastillas of “Barangay San Ysmael.” Eventually,
the pastillas of Aling Yoling under the brand name
“Ysmaellas" began to attract national distinction.
Aling Yoling therefore registered it as copyright
with the National Library. Her neighbor, Aling
Yasmin, realizing the commercial value of the
brand, started using the term “Ysmaellas” for her
pastillas but used different colors. Aling Yasmin
registered the brand name “Ysmaellas" with the
Intellectual Property Office (IPO).
a) Can Aling Yoling successfully obtain
court relief to prohibit Aling Yasmin
from using the brand name “Ysmaellas"
in her products on the basis of her (Aling
Yoling’s) copyright? What is the differ-
ence between registration as a copyright
 2018 BAR EXAMINATION 373

and registration as a trade or brand

name? (2.5%)

b) Can Aling Yasmin seek injunctive relief

against Aling Yoling from using the
brand name “Ysmaellas," the latter rely-
ing on the doctrine of “prior use" as evi-
denced by her prior copyright registra-
tion? (2.5%)

<=) Can Aling Yoling seek the cancellation of

Aling Yasmin’s trademark registration of
the brand name “Ysmaellas," the latter
relying on the ground of “Well Known
Brand" clearly evidenced by her (Aling
Yoling’s) prior copyright registration, ac-
tual use of the brand, and several maga-
zine articles? (2.5%)

ANSWER

a) Aling Yoling can not successfully obtain

court relief to prohibit Aling Yasmin from
using the brand name “Ysmaellas" in her
product on the basis of Aling Yoling’s
copyright. The brand name “Ysmaellas" is
proper subject of trademark, not
copyright. They can not be interchanged.
The copyright on a trade name or mark
does not guarantee her the right to the
exclusive use of the same for the reason
that it is not a proper subject of said
intellectual right. (Kho vs. Court of
Appeals, G.R. No. 115758, March 19, 2002;
 BAR Q & A IN COMMERCIAL LAW

Juan vs. Juan, G.R. No. 221372, August 23,

2017).
The registration of a copyright is only
a proof of the recording of the copyright
but not a condition precedent for the
copyright to subsist and for copyright
infringement suit whereas registration of a
trademark is an indispensable requisite
for any trademark infringement suit.

Aling Yasmien can seek injunctive relief

against Aling Yoling from using the brand
name “Ysmaellas" because of the doctrine
of prior use. It is ownership of the trade-
mark that confers the right to register.
Registration does not confer ownership.
Since Aling Yasmin was the first one to
use the brand or trade name in commerce,
then she is considered the owner thereof.

The answer should not be changed in

view of the Zuneca doctrine that trade-
mark is acquired through registration
made in good faith and not by prior use.

Yes, Aling Yoling can not seek the

cancellation of Aling Yasmin’s trademark
registration of the brand narne “Ysmaellas"
on the ground of well-known brand
because the well-known mark rule only
applies to a mark which is well-known
internationally and in the Philippines
(Section 123 (E) of the Intellectual Property
Code). Nevertheless, she can seek the
cancellation of the trademark for being the
 2018 BAR EXAMINATION 375

prior user even though the mark is not

well-known.

XVI.

Yosha was able to put together a mechanical

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

6) Is Yosha's invention no longer pat-

entable by virtue of the fact that he had
sold several models to the public before
the formal application for registration of
patent was filled with the IPO?

b) IfYosha is able to properly register his

patent with the IPO, can he prevent
anyone who has possession of the earlier
models from using them? (2.5%)

ANSWER

H) Yosha's invention is still patentable

despite the fact he had sold several
models to the public before the formal
application for registration of the patent
was filed with the IPO. It is true that an
invention shall not be considered new if it
376 BAR Q & A IN COMMERCIAL LAW

forms part of a prior art and that prior art

shall consist of everything which has been
made available to the public anywhere in
the world, before the filing date or the
priority date of the application claiming
the invention. This, however, presupposes
that the one who has made available the
patentable invention to the public is a
person other than the applicant for patent.
Under the doctrine of non prejudical
disclosure, the disclosure of information
contained in the application during the 12
months preceding the filing date or prior-
ity date of the application shall not preju-
dice the applicant on the ground of lack of
novelty if such disclosure was made by
the inventor himself (Section 25, IPC).

b) Yosha can no longer prevent anyone who

has possession of the earlier models from
using them even if Yosha is able to
properly register the patent with the IPO.
One of the limitations of patent rights is
the use of the patented product which has
been put on the market in the Philippines
by the owner of the product insofar as
such use is perfonned after the product
has been so put on the said market
(Section 172 of the IP Code)

XVII.

Yvan was a slot machine operator supervisor

in a casino operated by the Philippine Amusement
 2018 BAR EXAMINATION 377

and Gaming Corporation (PAGCOR). On the basis

of an intelligence report, he was found, in conniv-
ance with some slot machine customers, to have
padded the credit meter readings of slot machines
in the casino where he was employed. After being
served with notice and opportunity to contest the
findings, he was found guilty of the charges and
orders dismissed by PAGCOR. After receiving his
copy of the order for dismissal, he claimed to have
sent to the Board of PAGCOR his motion for re-
consideration was unacted upon, he filed an ac-
tion with the Civil Service Commission (CSC) for
illegal dismissal. PAGCOR claimed that his action
has prescribed because it was files more than 15
days after his dismissal became final. Yvan
claimed that there was no final decision yet be-
cause the Board of PAGCOR has not yet acted on
his motion for reconsideration. He presented a
copy of his facsimile transmission addressed to
the Board of PAGCOR seeking reconsideration of
his dismissal, and the fact that there has been no
action taken. He claimed that based on the elec-
tronic Commerce Act of 2000, his facsimile trans-
mission should be considered like any genuine
and authentic paper pleading, PAGCOR denied
having received it and was able to prove that the
telephone number of PACGOR used in the facsim-
ile transmission was wrong. CSC denied his com-
plaint on account of prescription. He appealed
CSC’s dismissal in court.

a) Was CSC correct in dismissing the case?

(2.5%)
378 BAR Q & A IN COMMERCIAL LAW

b) Can Yvan's bank be ordered by the court

to disclose if there were unreasonable
increase in his bank deposit when the al-
leged acts were committed?

ANSWER:

a) CSC is correct in dismissing the case. The

E-commerce law does not cover or allow
e-filing or facsimile transmission as a
mode of filing of pleadings in admin-
istrative cases.
The Supreme Court has also ruled
that afacsimile transmission cannot be
considered as electronic evidence. It is not
the functional equivalent of an original
under the Best Evidence Rule and is not
admissible as electronic evidence. (MCC
Industrial Sales Corp. v. Ssangyong Corp.,
G.R. No. 170633, October 17, 2007).

b) No, Yvan’s bank can not be ordered by the

court to disclose if there were unreason-
able increases in his bank deposit when
the alleged acts were committed. The
inquiry into bank deposits allowable
under RA 1405 must be premised on the
fact that the money deposited in the
account is itself the subject of the action.
Otherwise, the inquiry will amount to an
impermissible encroachment into one's
right to privacy. (BSB Group vs. Go, G.R.
No. 168644, February 16, 2010 )
 2018 BAR EXAMINATION 379

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

A. Is the legal position of UB, in requiring

written permission from the depositor,
correct? (2.5%)

B. Does AMLC have the power to order a

banking institution to reveal matters re-
lating to bank accounts? (2.5%)
ANSWER

a) CSC is correct in dismissing the case. The

E-commerce law does not cover or allow
e-filing or facsimile transmission as a
mode of filing of pleadings in administra-
tive cases.
 BAR Q & A IN COMMERCIAL LAW

No, Yvan’s bank can not be ordered by the

court to disclose if there were
unreasonable increases in his bank
deposit when the alleged acts were
committed. The inquiry into bank
deposits allowable under RA 1405 must
be premised on the fact that the money
deposited in the account is itself the
subject of the action. Otherwise, the
inquiry will amount to an impermissible
encroachment into one‘s right to privacy.
(BSB Group vs. Go, G.R. No. 168644,
February 16,2010)
 2019 BAR EXAMINATION

PART I
Note: As stated in the instructions. Part 1 covers
problems sets labelled A.1. to A.10. All answers to
these questions should be written in Booklet 1.

A.1.

Define the following terms:

a) Trust Fund Doctrine (2%)
The trust fund doctrine provides that subscrip-
tions to the capital stock of a corporation constitute
a fund to which the creditors have a right to look for
the satisfaction of their claims. (Ong vs. Tiu, 401
SCRA 1 (2003)) The scope of the doctrine when the
corporation is insolvent encompasses not only the
capital stock, but also other property and assets
generally regarded in equity as a trust fund for the
payment of corporate debts. (Halley vs. Printwell,
Inc., G.R. No. 157549, May 30,2011)
b) Unfair Competition (2%)
Unfair competition is the passing off or attempt-
ing to pass off upon the public of the goods or busi-
ness of one person as the goods or business of an-
other with the end and probable effect of deceiving
the public. Passing off takes place where a person,
by imitative devices on the general appearance of

381
382 BAR Q & A IN COMMERCIAL LAW

the goods, misleads prospective purchasers into

buying his merchandise under the impression that
they are buying that of his competitors. (Republic
Gas Corporation vs. Petron Corporation, G.R. No.
194062, June 17,2013)

c) Insurable interest in property (2%)

Insurable interest in property or any interest
therein or any relation or liability in respect thereof
of such nature that a contemplated peril might indi-
rectly damnify the insured. It may consist of an ex-
isting interest, an inchoate interest founded on an
existing interest, or an expectancy coupled with an
existing interest in that out of which the expectancy
arises (Sections 13 and 14, IC)

d) Splitting of deposits (2%)

Splitting of deposits occurs whenever a deposit
account with an outstanding balance of more than
the statutory maximum amount of insured deposit
maintained under the name of natural or juridical
persons is broken down and transferred into two or
more accounts in the name/s of natural or juridical
persons or entities who have no beneficial owner-
ship on transferred deposits in their names within
120 days immediately preceding or during a bank
declared holiday or irmnediately preceding a closure
order by the BSP for the purpose of availing of the
maximum deposit insurance coverage. (Section 11,
PDIC Charter, as amended by Republic Act No. 9576)
 2019 BAR EXAMINATION 383

A.2.

In May 2018, ABC Corp. entered into a mer-

chandising contract which terms and conditions
were totally lopsided in favor of the counterparty,
XYZ, Inc. As a result, ABC Corp. suffered financial
losses.
A year after, or in May 2019, Mr. X became a
stockholder of ABC Corp. Learning about the cir-
cumstances surrounding the merchandising con-
tract, Mr. X filed a derivative suit against ABC
Corp.'s directors to claim damages on behalf of
ABC Corp. due to their mismanagement.

a) What is a derivative suit? (2%)

A derivative suit is an action led by the

stockholder in the name and on behalf of
the corporation to enforce a corporate right
or cause of action to set aside wrongful
acts committed by its directors and/or offi-
cers (Ang for and in behalf of Sunrise Mar-
keting vs. Ang, G.R. No. 201675, June 19,
2013; Florete vs. Florete, G.R. No. 174909,
January 20, 2016)

b) Was Mr. X's filing of a derivative suit

proper? Explain. (3%)

The ling of derivative suit is not proper.

One of the requisites of derivative suit is
that the person filing the suit must be a
stockholder of the corporation at the time
the acts or transactions subject of the ac-
tion occurred and the time the action was
384 BAR Q & A IN COMMERCIAL LAW

filed (Rule 8, Section 1, Interim Rules of

Procedure for Intramural-Corporate Contro-
versies). In the present case, the transac-
tion subject of the derivative suit occurred
when X was not yet a stockholder. In fact,
X only became a stockholder one year
thereafter.

A.3.

In June 2018, DEF Corp. sent notices to its

stockholders informing them of the corporation's
issuances of new shares of stock. The notice in-
cluded a reminder that, pursuant of DEF Corp's
Articles of Incorporation, any stockholder who
fails to exercise his or her pre-emptive right
within three (3) weeks from receipt of notice
would be considered to have waived the same.
Ms. Z, a stockholder of DEF Corp., failed to
exercise her pre-emptive right within the said pe-
riod. However, she claimed that she did not val-
idly waive her right to do so because a waiver
must be expressed in writing.
a) Explain the concept of pre-emptive right
under the Corporation Code. (2%)
Pre-emptive right is the right of the stock-
holders to subscribe to any and all issuance
or disposition of shares of any class by the
corporation in proportion to their sharehold-
ing in the corporation. This means that, ex-
cept in the cases provided by law, original
or primary shares of stock of the corpora-
 2019 BAR EXAMINATION 385

tion should first be offered to the stock-

holders for subscription or purchase before
they can be issued to, or acquired by, per-
sons who are not stockholders of the corpo-
ration. This rule is intended to prevent the
dilution of stockholder's equity stake in the
corporation. (Section 39, Corporation Code;
Section 38 of the Revised Corporation Code)

b) Is Ms. Z's contention correct? Explain.

(3%)

Z’s contention is not correct. Pre-emptive

right is not absolute. It may be waived ex-
pressly or impliedly. Failure of the stock-
holder to exercise his right within the pe-
riod set forth by the corporation amounts to
a waiver of pre-emptive right.

A.4.

In 2016, X Corp. obtained a loan worth

P50,000,000.00 from J Bank, which was secured by
a third-party mortgage executed by Y, Inc. in fa-
vor of X Corp. Since X Corp. was not able to settle
its loan obligation to J Bank when it fell due, and
despite numerous demands, J Bank foreclosed the
mortgaged properties. The properties were sold in
a foreclosure sale for P35,000,0000.00 thereby
leaving a P15,000,000.00 deficiency. For failure of
X Corp. to pay said deficiency, J Bank filed a com-
plaint for sum of money against X Corp., its Presi-
dent, Mr. P, and Y Inc.
386 BAR Q & A IN COMMERCIAL LAW

With respect to Mr. P, J Bank argued that he

should be held solidarily liable together with X
Corp. because he signed the loan document on
behalf of X Corp. in his capacity as President. On
the other hand, J Bank contended that Y, Inc.
should also be held solidarily liable because the
shareholdings of both corporations are identically
owned and their operations are controlled by the
same people, hence, Y Inc. is a mere alter ego of X
Corp.
a) Should Mr. P held liable? Explain. (2.5%)
Mr. P is not liable. The corporation being a
mere artificial person can only act thru its
representative. The corporate representa-
tive is not liable for any act taken on behalf
of the corporation unless he acted in bad
faith or with gross negligence in directing
the affairs of the corporation or made him-
self liable solidarily with the corporation. In
this case, P, as President signed the loan
document not for himself but on behalf of X
Corporation. Nothing in the facts indicated
that he bound himself liable with the corpo-
ration or he acted in bad faith or with gross
negligence.
lb) Should Y. Inc. be held liable? Explain.
(2.5%)

Y Inc. is not liable. Interlocking sharehold-

ers, directors and officers, per se, is not
enough reason to set aside the separate le-
gal personalities of X and Y.
 2019 BAR EXAMINATION 387

Piercing the corporate veil based on the alter

ego theory requires the concurrence of three ele-
ments, namely:
(1) Control, not mere majority or complete stock
control, but complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at
the time no separate mind, will or existence of
its own;
(2) Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act
in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must
have proximately caused the injury or unjust
loss complained of. (Development Bank of the
Philippines vs. Hydro Resources Contractors
Corporation, G.R. No. 167603, March 13, 2013)

Control then is not enough. The facts do not

show that the control over the corporation
was used to perpetuate fraud or violate a
positive legal duty in contravention of the J
Bank's right and that such control and
breach of duty as the proximate cause suf-
fered by the Bank.

A.5.
Mr. Y filed a case captioned as “Injunction
with Prayer for Status Quo Order, Temporary Re-
straining Order and Damages” against Z Company
388 BAR Q & A IN COMMERCIAL LAW

to prohibit the latter from selling shares which

Mr. Y. alleged that the subscription for the said
shares was already partly paid by him, but the
subject shares were nonetheless being offered for
sale by Z Company to the corporation's other
stockholders.

a) Is the case filed by Mr. Y against Z Com-

pany considered an intra-corporate dis-
pute? Explain. (2.5%)

The case is not considered an intra-

corporate dispute. To determine if a case
involves an intra-corporate controversy, the
Supreme Court has consistently applied
two tests: the relationship test and the na-
ture of the controversy test. Under the rela-
tionship test, an intra-corporate contro-
versy arises when the conict is “between
the corporation, partnership or association
and its stockholders, partners, members or
officers." The nature of the controversy test
examines the controversy in relation to the
“enforcement of the parties’ correlative
rights and obligations under the Corpora-
tion Code and the internal and intra-
corporate regulatory rules of the corpora-
tion. It is not yet certain that Mr. Y is a
stockholder of Z Company. Thus, the first
test is not present. And even assuming that
the parties are stockholders of the corpora-
tion and as such, satisfy the relationship
test, the dispute is not rooted in the exis-
tence of intra-corporate relationship. The
action for injunction to stop the sale of
 2019 BAR EXAMINATION 389

shares does not pertain to the enforcement

of the parties’ rights and obligation under
the Corporation Code.

b) Assuming that it was Z company which

instead filed a case against Mr. Y in order
to collect the unpaid balance of his stock
subscriptions, is the case considered an
intra-corporate dispute? Explain. (2.5%)
Yes, both relationship and nature of the
controversy tests are present. The dispute
is between the stockholder and the corpo-
ration. The issue of unpaid subscription
pertains to the enforcement of their rights
and obligations under the Corporation
Code.

A.6.

In January 2016, Mr. H was issued a life in-

surance policy by XYZ Insurance Co., wherein his
wife, Mrs. W, was designated as the sole benefici-
ary. Unbeknownst to XYZ Insurance Co., however,
Mr. H had been previously diagnosed with colon
cancer, the fact of which Mr. H had concealed dur-
ing the entire time his insurance policy was being
processed.
In January 2019, Mr. H unfortunately commit-
ted suicide. Due to her husband's death, Mrs. W,
as beneficiary, filed a claim with XYZ Insurance
Co. to recover the proceeds of the late Mr. H's life
insurance policy. However, XYZ Insurance Co. re-
sisted the claim, contending that: 1. The policy to
390 BAR Q & A IN COMMERCIAL LAW

void ab initio because Mr. H fraudulently con-

cealed or misrepresented his medical condition,
i.e., his colon cancer; and 2. As an insurer in a life
insurance policy, it cannot be held liable in case of
suicide.
Rule each of XYZ Insurance Co.’s contentions.
(5%)
The first contention is not tenable. Under the
incontestability clause, after a policy of life insur-
ance made payable upon the death of the insured
shall have been in force during the lifetime of the
insured for a period of two years from the issuance
of the policy or last reinstatement, the insurer must
make good on the policy even though the policy was
obtained through fraud, concealment or misrepre-
sentation (Section 48 IC, Manila Bankers vs. Aban,
G.R. No. 175666, July 29, 2013; Sun Life of Canada
vs. Sibya, G.R. No. 211212, June 08, 2016). Even if
Mr. H had concealed or misrepresented that he was
previously diagnosed with colon cancer, XYZ can no
longer rescind the policy since it had been in force
already for three years.
On the second contention, XYZ Insurance is li-
able despite the suicide of Mr. H. Under the Insur-
ance Code, the insurer is liable when suicide is
committed after the policy has been in force for a
period of two years from the date of issue or its last
reinstatement (Section 180-A, IC). In this case, Mr. H
committed suicide three years after issuance of the
policy. Thus, XY Z should be liable to the beneficiary
of Mr. H.
 2019 BAR EXAMINATION 391

A.7.

Ms. J offered to sell her car to Ms. K, an inter-

ested buyer. Consequently, Ms. J emailed Ms. K a
copy of the proposed Deed of Sale covering the
same. After agreeing to its terms, Ms. K printed
and then signed the emailed copy of the Deed of
Sale. She then faxed it to Ms. J who signed the
faxed copy.
Is the copy of the Deed of Sale faxed by Ms. K
to Ms. J considered an electronic document under
the Electronic Commerce Act? Explain. (2%)
The copy of the deed of sale faxed by Ms. K to
Ms. J is not an electronic document. The Supreme
Court has already ruled that a facsimile transmis-
sion cannot be considered as electronic evidence.
It is not the functional equivalent of an original
under the Best Evidence Rule and is not admissi-
ble as electronic evidence. (MCC lzzdustrial Sales
Corp. v. Ssangyong Corp, G.R. No. 170633, Octo-
ber 17, 2007).

A.8.

KLM Printers, Inc. operated a mall outlet lo-

cated at the ground oor of university building in
Quezon City. It possessed soft copies of certain
textbooks on file, and would print “book-alikes" of
these textbooks (or in other words, reproduced the
entire textbooks) upon order and for a fee. It
would even display samples of such “book-alikes”
in its stall for sale to the public.
392 BAR Q & A IN COMMERCIAL LAW

Upon learning of KLM Printers, Inc.'s activi-

ties, the authors of the textbooks filed a suit
against it for copyright infringement. In its de-
fense, KLM Printers, Inc. invoked the doctrine or
fair use, contending that the “book-alikes" are be-
ing used for educational purposes by those who
avail of them.
a) What is the doctrine of fair use? (2%)
Under this doctrine, the fair use of a copy-
righted work for (1) criticism, comment, (2) news re-
porting, (3) teaching including multiple copies for
classroom use, (4) scholarship, research, and similar
purposes is not an infringement of copyright.

b) Is KLM Printers, Inc.'s invocation of the

doctrine of fair use proper in this case?
Explain. (3%)

In determining whether the use made of a work

in any particular case is fair use, the factors to be
considered shall include: a) the purpose and charac-
ter of the use, including whether such use is of a
commercial nature or is for non-profit educational
purposes; b) The nature of the copyrighted work; c)
The amount and substantiality of the portion used in
relation to the copyrighted work as a whole; and d)
the effect of the use upon the potential market for or
value of the copyrighted work. (SECTION 185.1 of
the Intellectual Property Code)
Based on these factors, the invocation of the
doctrine of fair use is not proper. The reproduction of
the copies is commercial in nature, the entire book
is reproduced thereby violating the economic right
 2019 BAR EXAMINATION 393

of the author and the offer to the public of copies of

the book has an injurious effect upon the potential
market or value of the copyrighted work.

A.9.

X Pharmaceuticals, Inc. has been manufactur-

ing the antibiotic ointment Marvelopis, which is
covered by a patent expiring in the year 2020. In
January 2019, the company filed an application
for a new patent for Disilopis, which although
constituting the same substance as Marvelopis, is
no longer treated as an antibiotic but is targeted
and marketed for a new use, i.e., skin whitening.

a) What are the three (3) requisites of pat-

entability under the Intellectual Property
Code? (3%)

The requisites of patentability are novelty, in-

ventive step and industrial applicability.

a. Novelty. — An invention shall not be con-

sidered new if it fonns part of a prior art.

Prior art shall consist of:

- Everything which has been made available

to the public anywhere in the world, before
the filing date or the priority date of the ap-
plication claiming the invention; and
- The whole contents of a published applica-
tion for a patent, utility model, or industrial
design registration, filed or effective in the
Philippines, with a filing or priority date
394 BAR Q & A IN COMMERCIAL LAW

that is earlier than the filing or priority date

of the application.
b. Inventive Step. - An invention involves an
inventive step if, having regard to prior art, it is not
obvious to a person skilled in the art at the time of
the filing date or priority date of the application
claiming the invention.
c.Industrial Applicability. - An invention
that can be produced and used in any industry shall
be industrially applicable.

b) Should X Pharmaceuticals, Inc.'s patent

application for Disilopis be granted? Ex-
plain. (2%)
No, the patent application for Disilopis should
not be granted. The use of the existing patent al-
though for a different purpose will not satisfy the
elements of novelty and inventive step.
Furthermore, under the law, there is no inven-
tive step if the drug or medicine is just a result of a
discovery of any new property or new use for a
known substance. (Section 26.2, Intellectual Prop-
erty Code, as amended.)

A.10.

In 2005, W Hotels, Inc., a multinational corpo-

ration engaged in the hospitality business, applied
for and was able to register its trademark "W"
with the Intellectual Property Office of the Philip-
pines (IPO) in connection with its hotels found in
different parts of the world.
 2019 BAR EXAMINATION 395

In 2009, a Filipino corporation, RST Corp.,

filed before the IPO a Petition for cancellation of
W Hotels, Inc.'s “W” trademark on the ground of
non-use, claiming that W Hotels, Inc. failed to use
its mark in the Philippines because it is not oper-
ating any hotel in the country which bears the
“W" trademark.
In its defense, W Hotels, Inc. maintained that
ithas used its “W” trademark in the Philippine
commerce, pointing out that while it did not have
any hotel establishment in the Philippines, it
should still be considered as conducting its busi-
ness herein because its hotel reservation services,
albeit for its hotels abroad, are made accessible to
Philippine residents through its interactive web-
sites prominently displaying the “W” trademark.
W Hotels, Inc also presented proof of actual book-
ing transactions made by the Philippine residents
through such websites.
Is W Hotels, Inc.'s defense against the petition
for cancellation of trademark tenable? Explain.
(5%)

The defense of W Hotel is tenable. Having a ho-

tel establishment in the Philippines with the trade-
mark W is not the only way to prove actual use of
the trademark. In one case, the Supreme Court ruled
that the use of the mark in an interactive website
sufficiently showing an intent towards realizing a
within-State commercial activity or interaction is
considered actual use to keep the trademark regis-
tration in force. That W Hotel was able to present
proof of actual booking transactions made by the
396 BAR Q & A IN COMMERCIAL LAW

Philippine residents though such website proves

that the use of its “W" mark through its interactive
website is intended to produce a discernible com-
mercial effect or activity within the Philippines, or at
the very least, seeks to establish commercial inter-
action with local consumers. This is tantamount to
actual use of the trademark that will preclude can-
cellation of the trademark for non-use. (W Land
Holdings, Inc. v. Starwood Hotels and Resorts
Worldwide, Inc., G.R. No. 222366, December 4, 2017)

PART II

Note: As stated in the instructions, Part II covers

problem sets labelled B.11 to B.20. All answers to
these questions should be written in Booklet II.

B.11.

W Medical, Inc. operated a full-service hospi-

tal name WMed. Using its stockholders’ advan-
tages and a mortgage loan from Bank X, W Medi-
cal, Inc. commenced the construction of a new 11-
storey WMed Annex Building. Unfortunately, due
to financial constraints, only seven (7) oors were
constructed and the WMed Annex Building re-
mained unfinished.
Despite the non-completion of the WMed An-
nex Building, W Medical, Inc. continued its opera-
tions and earned modest revenues. While W Medi-
cal, Inc.'s assets are more that its liabilities and it
is able to turn a monthly profit, it could not pay its
loan installments to Bank X as they fall due.
 2019 BAR EXAMINATION 397

a) What is the concept of “insolvency” un-

der the Financial Rehabilitation and In-
solvency Act (FRIA)? May W Medical, Inc.
be considered "insolvent" under the
FRIA? Explain. (3%)

Insolvency shall refer to the financial condition

of a debtor that is generally unable to pay its or his
liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or
his assets (Section 4 (p) FRIA). Based on this defini-
tion of insolvency under FRIA, W Medical may be
considered insolvent even though its assets are
more than its liabilities as it can not pay its liabili-
ties as they fall due.

b) Assuming that W Medical, Inc. is consid-

ered "insolvent", may it file petition for
suspension of payments under the FRIA?
Explain. (2%)

No, W Medical Inc. can not file a petition for

suspension of payment. Such remedy is not avail-
able to juridical insolvent debtor but only to insol-
vent individual debtor. (Section 94, FRIA)

c) Assuming that W Medical, Inc. is consid-

ered “insolvent”, what are the legally rec-
ognized modes of rehabilitation it may
opt to avail of? (3%)
W Medical Inc., may avail itself of any of the le-
gally recognized modes of rehabilitation:
A. Court-supervised which can be voluntary or
involuntary
398 BAR Q & A IN COMMERCIAL LAW

B. Pre-negotiated Rehabilitation
C. Out of Court or Informal Restructuring
Agreement

d) If W Medical, Inc. files a petition for reha-

bilitation before the court, is it possible
for the rehabilitation proceedings to be
converted into one for liquidation? Ex-
plain. (2%)
Yes, the Court may convert the rehabilitation
into one of one liquidation if the debtor is insolvent
and there is no substantial likelihood that the debtor
can be rehabilitated (Section 25 (c) FRIA)

B.12.

EFG, Inc. is indebted to Bank Y in the amount

of P50,000,000,00. The loan was secured by a sure-
tyship agreement issued by Z Insurance Co.
Due to EFG, Inc.'s default, Bank Y filed a case
against Z Insurance Co. as surety. There is also a
pending criminal case for violation of the Bounc-
ing Checks Law against the President of EFG, Inc.,
Mr. P, who signed the check as signatory for the
company.
Unable to meet its obligations as they fell due
EFG, Inc. filed a petition for rehabilitation. Find-
ing the petition sufficient in form and substance,
the court issued a Commencement Order, which
was thereafter published.
 2019 BAR EXAMINATION 399

a) Should the case filed against Z Insurance

Co. be suspended in light of the Com-
mencement Order? Explain. (2.5%)

The case against Z Insurance Co should not be

suspended despite the commencement order. Under
FRIA, the stay order, which is included in the com-
mencement order, dces not cover claim against the
surety of the insolvent debtor (Section 18 (c) FRIA)
for the simple reason that it is not the one subject of
the petition for rehabilitation

b) Should the criminal case filed against Mr.

P be suspended in light of the Com-
mencement Order? Explain. (2.5%)

The criminal case against Mr. P is not sus-

pended by the commencement order. Under FRIA,
the suspension of claims in corporate rehabilitation
does not extend to criminal action against the dis-
tressed corporation or its directors and officers (Sec-
tion 18 (g)) This is because the prosecution of the
officers has no bearing on the pending rehabilitation
of the insolvent debtor. (Panlilio vs. Regional Trial
Court, G.R. No. 173846, February 2, 2011)

B.13.

Enumerate at least two (2) rights of a data

subject under the Data Privacy Act. (2%)
The rights of the data subject under the Data
Privacy Act are:
 BAR Q & A IN COMMERCIAL LAW

1. The right to be informed

a. on whether personal data pertaining to
him or her shall be, are being, or have
been processed, including the exis-
tence of automated decision-making
and profiling;
b. and notified about the following infor-
mation before the entry thereof into the
processing system of the personal in-
formation controller, or at the next
practical opportunity:
- Description of the personal data to
be entered into the system;
— Purposes for which they are being
or will be processed,
— Basis of processing, when process-
ing is not based on the consent of
data subject;
— Scope and method of the personal
data processing; Recipients or
classes of recipients to whom the
personal data are or may be dis-
closed;
— Methods utilized for automated
access, if the same is allowed by
the data subject, and the extent to
which such access is authorized,
including meaningful information
about the logic involved, as well
as the significance and the envis-
aged consequences of such proc-
essing for the data subject;
 2019 BAR EXAMINATION 401

- identity and contact details of the

personal data controller or its rep-
resentative;
- period for which the information
will be stored; and
— existence of their rights as data
subjects (Section 34a, IRR).
The right to access. This means reasonable
access upon demand to the following:
- Contents of his or her personal data
that were processed
— Sources from which personal data
were obtained
- Names and addresses of recipients of
the personal data
— Manner by which such data were proc-
essed
- Reasons for the disclosure of the per-
sonal data to recipients, if any
— Information on automated processes
where the data will, or is likely to, be
made as the sole basis for any decision
that significantly affects or will affect
the data subject
- Date when his or her personal data
concerning the data subject were last
accessed and modified
— The designation, name or identity, and
address of the personal infonnation
controller (Section 34c, IRR)
 BAR Q & A IN COMMERCIAL LAW

3. The right to object. The data subject shall

have the right to object to the processing of
his or her personal data, including process-
ing for direct marketing, automated proc-
essing or profiling.
Rule: When a data subject objects or with-
holds consent, the personal information
controller shall no longer process the per-
sonal data

Exceptions:
a. The personal data is needed pursuant
to a subpoena
b. The collection and processing are for
obvious purposes, including, when it is
necessary for the performance of or in
relation to a contract or service to
which the data subject is a party, or
when necessary or desirable in the
context of an employer-employee rela-
tionship between the collector and the
data subject; or
c. The information is being collected and
processed as a result of a legal obliga-
tion (Section 34b, IRR)
4. The right to erasure or blocking. The data
subject shall have the right to suspend,
withdraw or order the blocking, removal or
destruction of his or her personal data from
the personal infonnation controller's filing
system, upon proof of any of the following
grounds:
 2019 BAR EXAMINATION 403

- The personal data is incomplete, out-

dated, false, or unlawfully obtained
- The personal data is being used for
purpose not authorized by the data
subject
— The personal data is no longer neces-
sary for the purposes for which they
were collected
- The data subject withdraws consent or
objects to the processing, and there is
no other legal ground or overriding le-
gitimate interest for the processing
— The personal data concerns private in-
formation that is prejudicial to data
subject, unless justified by freedom of
speech, of expression, or of the press or
otherwise authorized
- The processing is unlawful
— The personal information controller or
personal information processor vio-
lated the rights of the data subject
(Section 34e, IRR)

The right to damages. The data subject

shall be indemnified for any damages sus-
tained due to such inaccurate, incomplete,
outdated, false, unlawfully obtained or un-
authorized use of personal data, taking into
account any violation of his or her rights
and freedoms as data subject (Section 34f,
IRR)
 BAR Q & A IN COMMERCIAL LAW

6. The right to file a complaint

a. The complainant must have first in-
formed, in writing, the personal infor-
mation controller or concemed entity of
the privacy violation or personal data
breach to allow for appropriate action
on the same; AND
b. the personal information controller or
concerned entity did not take timely or
appropriate action on the claimed pri-
vacy violation or personal data breach,
or there is no response from the per-
sonal information controller within fif-
teen (15) days from receipt of infonna-
tion from the complaint; AND
c. the complaint is filed within six (6)
months from the occurrence of the
claimed privacy violation or personal
data breach, or thirty (30) days from
the last communique with the personal
infonnation controller or concerned en-
tity, whichever is earlier.
7. The right to rectify. The data subject has
the right to dispute the inaccuracy or error
in the personal data and have the personal
information controller correct it immedi-
ately and accordingly, unless the request is
vexatious or otherwise unreasonable. If the
personal data has been corrected, the per-
sonal information controller shall ensure
the accessibility of both the new and the
retracted information and the simultaneous
receipt of the new and the retracted infor-
 2019 BAR EXAMINATION 405

mation by the intended recipients thereof:

Provided, That recipients or third parties
who have previously received such proc-
essed personal data shall be informed of its
inaccuracy and its rectification, upon rea-
sonable request of the data subject (Section
34d, IRR)

8. Right to data portability - this right gives

data subjects the mechanism to obtain
their personal data in an electronic or struc-
tured format from personal information con-
trollers if such personal data is being proc-
essed through electronic means, and en-
ables the further use of such personal data
by the data subjects (Section 36, IRR; Sec-
tion 18, DPA)

NB Any two of these rights should suffice

to get full credit.

B.14.

ABC Corp. is a company which shares are

listed in the Philippine Stock Exchange. In 2015,
25% of ABC Corp’s shareholdings were acquired
by XYZ, Inc., while 40% of the same were acquired
by RST, Inc., both of which are non-listed private
corporations. Meanwhile, the remaining 35% of
ABC Corp’s shareholdings are held by the public.
In 2018, or three years (3) after it acquired its
25% stake in ABC Corp., XYZ Inc. sought to obtain
an additional 12% shareholding in ABC Corp. by
purchasing some of the shares owned by RST, Inc.
406 BAR Q & A IN COMMERCIAL LAW

therein. The new acquisition will not, however,

result in XYZ, Inc. gaining majority control of ABC
Corp.’s Board.
Is XYZ, Inc. required to conduct a tender of-
fer? Explain. (3%)

XYZ is not required to conduct a tender offer.

While purchase of equity securities covering 35% of
the public company is subject to mandatory tender
offer, the equity securities should have been ac-
quired during a 12 month period (Rule 19.2). In this
case, the additional 12% equity stake to bring XYZ's
acquisition to 37% was acquired after 3 years from
the first purchase transaction. It is when the acqui-
sition would result in ownership of over fifty percent
(50%) of the total outstanding equity securities of a
public company, that the acquirer shall be required
to make a tender offer regardless of the time he ac-
quired the shares that brought his equity stake to
over 50% of the public company.

B.15.

Mr. P, the president of JKL, Inc. which shares

are listed in the Philippine Stock Exchange, was
notified that the corporation has just been
awarded a P5,000.000.0000.00 construction con-
tract by a reputable private company. Before this
information could be disclosed to the public, Mr. P
called his stockbroker to purchase 20,000 shares of
JKL, Inc. He also mentioned the transaction to his
brother, Mr. B. Mr. B, who was not involved at all
in the business of JKL, Inc., also brought 50,000
 2019 BAR EXAMINATION 407

shares of JKL, Inc. because of the tip disclosed to

him by Mr. P.

a) Is the information disclosed by Mr. P to

Mr. B considered as material nonpublic
information for purposes of insider trad-
ing? Explain. (2%)

Yes, the information that the corporation has

just been awarded a P5 billion construction contract
by a reputable private company is material non-
public information. It has not been generally dis-
closed to the public and would likely affect the mar-
ket price of the security after being disseminated to
the public or would be considered by a reasonable
person important under the circumstances in de-
tennining his course of action whether to buy, sell or
hold the security. (Section 27.2 of the SRC)

b) Should Mr. P and Mr. B be held liable for

insider trading? Explain. (3%)
P is liable for insider trading because he bought
shares of the company, thru his broker, while in the
possession of material non-public information.
B is also liable for insider trading. B became an
insider after having received by communication a
material non-public information from P, who as
President of JKL is an actual insider. (Sections 3.8
and 27 of SRC). B is liable because he bought the
shares of JKL while in the possession of material
non-public information.
408 BAR Q & A IN COMMERCIAL LAW

B.16.

Mayor J has two (2) bank accounts; 1. A Peso

savings account with Bank P; and 2. A U.S. Dollar
savings account with Bank D.
In 2018, Mayor J's former business partner,
Mr. K, filed a civil case for collection of sum of
money against him.
In the same year, a criminal case for Direct
Bribery under the Revised Penal Code was filed
against Mayor J. It was alleged in the information
that in exchange for the expeditious approval of
various permits and licenses, Mayor J received
kickbacks which amounts were deposited to his
bank accounts.
a) In the event Mayor J is held ultimately li-
able in the civil case filed by Mr. K, may
Mayor J's bank accounts in Bank P and
Bank D be subject to garnishment? Ex-
plain. (2.5%)
The peso savings account of Mayor J with Bank
P may be gamished. The prohibition against exami-
nation or inquiry into bank deposits under RA 1405
is not a bar to the garnishment of the deposit be-
cause the disclosure is only incidental to the execu-
tion process and there is nothing in the records of
Congress that would indicate that Phil Currency
back deposits are beyond the reach of judgment
creditor. (China Bank vs. Ortega, G.R. No. L-34964,
January 31, 1973)
 2019 BAR EXAMINATION 409

The dollar savings account with Bank D, how-

ever, can not be garnished. Except in case of written
consent of depositor or in case of court order for vio-
lation of the Anti-Money Laundering law, foreign
currency deposits are exempt from garnishment un-
der RA 6426. (GSIS vs. Court of Appeals, G.R.
189206, June 8,2011)

b) Assuming that the prosecution in the

criminal case sought from the court an
inquiry of Mayor J's bank accounts in
Bank P and Bank D, may a bank inquiry
order be issued? Explain. (2.5%)
Yes, the bank inquiry order may be issued be-
cause one of the exceptions to the rule prohibiting
disclosure of Philippine currency bank deposits is if
the money deposited is the subject matter of litiga-
tion. The foreign currency deposits, on the other
hand, are exempt from court order under RA 6426.

B.17.

Several public officials were charged before

the Sandiganbayan for violation of the Anti-Graft
and Corrupt Practices Act involving the anoma-
lous award of a multi-billion contract to Corpora-
tion Z. The Information alleged that each of the
accused received kickbakcs from Corporation Z in
exchange for the dispensation of certain bidding
requirements, and the said kickbacks were depos-
ited to the accused’s respective bank accounts in
the Philippines. Upon request of the Office of the
Ombudsman, the Compliance and Investigation
Staff of the Anti-Money Laundering Council
410 BAR Q & A IN COMMERCIAL LAW

(AMLC) conducted an intelligence database

search. The search revealed that there were remit-
tances to the bank accounts of the accused with
six (6) different banks.

a) May the AMLC examine the bank ac-

counts of the accused-public officials
even without seeking a prior court order?
Explain. (2.5%)
The AMLC can not examine the bank accounts
of the accused-public officials without seeking a
prior court order. Under the Anti-Money Laundering
law, the AMLC needs to obtain a bank inquiry order
from the Court of Appeals to inquire into funds and
deposits if there is probable cause they relate to
unlawful activity under AMLA. Bank inquiry order is
not necessary only if the predicate crime is any of
hijacking, kidnapping, terrorism, murder, arson and
violation of the Dangerous Drugs Law (Section 11 of
RA 9160, as amended). In the present case, the
predicate crime, graft and corrupt practice act, does
not fall within the exception.

b) May a court order be issued ex parte for

the freezing of the bank accounts of the
accused-public officials upon application
of the AMLC? If so, in what instance may
this be done and which court can issue
such order? Explain. (2.5%)

Yes, the AMLC may apply for a freeze order

with the Court of Appeals. It must establish the ex-
istence of probable cause that the funds and depos-
its it wants to freeze relate to any of the unlawful
 2019 BAR EXAMINATION 411

activities under AMLA (Section 11 of RA 9160, as

amended) (Subido Pagente Certeza, Mendoza and
Binay Law Ofces vs. Court of Appeals, G.R. No.
216914, December 6, Z016)

B.18.

Mrs. T maintained a checking account with

Bank U. While Mrs. T was abroad, she left her
checkbook inside her drawer, which she kept un-
der lock and key. However, Mrs. T's long-time sec-
retary, Ms. S, knew where the checkbook was
hidden. Ms. S then broke the lock on the office
drawer, took one of Mrs. T's blank checks, and
succeeded to encash P200,000.00 from Bank U by
imitating Mrs. T's signature. As soon as Mrs. T re-
turned from abroad and discovered the incident.
She immediately reported the matter to Bank U,
seeking that the transaction be reversed. How-
ever, the bank refused, contending that Mrs. T
should bear the loss arising from the forgery.

a) Is the imitation of Mrs. T's signature con-

sidered as a material alteration under the
Negotiable Instruments Law? Explain.
(2.5%).

No. Section 125 of the Negotiable Instruments

Law provides that there is material alteration of an
instrument in case of any alteration of date; the sum
payable; time or place of payment; number or rela-
tions of the parties; the medium or currency in
which payment is to be made; or which adds a place
of payment where no place of payment is specified;
or any other change or addition which alters the ef-
412 BAR Q & A m COMMERCIAL LAW

fect of the instrument in any respect is a material

alteration.
The imitation of Mrs. T’s signature is not con-
sidered as a material alteration under the Negotia-
ble Instruments Law but one of forgery.

a) Is bank U contention tenable? Explain.

(2.5%)

The contention of Bank U is not tenable. A

forged signature is wholly inoperative and no right
can be acquired under such forged signature (Sec-
tion 23 of the NIL). In case of forgery of the drawer’s
signature, as in the present case, the loss shall be
borne by the drawee bank. It should restore the ac-
count of the depositor corresponding to the amount
of the check deducted from its account. The drawee
bank is supposed to be familiar with the signature
of the drawer as its customer and shall be consid-
ered negligent for not detecting the forgery (San
Carlos Milling Co. vs. BPI, 59 Phil. 59)
Also, by accepting the instrument, the drawee-
acceptor is bound to have acknowledged the genu-
ineness of the drawer’s signature (Section 62 NIL)

B.19.

LMN, Inc. operates a beach resort in a se-

cluded island off the coast of Puerto Princesa City,
Palawan. It operates three (3) motorized boats to
ferry its guests from the city proper to the island
resort and vice versa. During one rainy morning,
the guests were informed that the ferry services
for that day were cancelled due to a storm fore-
 2019 BAR EXAMINATION 413

cast. In order to appease the apparent dismay of

most of the guests who will miss their ight back
to Manila, the boat captain of one of LMN, Inc.'s
motorized boats decided to push through with its
trip back to the city. Shortly after the boat sailed,
the storm hit and the winds and waves became
stronger, causing engine trouble to the boat. Un-
fortunately, the boat capsized and sank, resulting
in the death of one of the passengers, Mr. X.
This prompted Mr. X's heirs to file a complaint
for damages against LMN, Inc., which they alleged
to be a common carrier. In its defense, LMN, Inc.
maintained that it is not a common carrier be-
cause its boats are not available to the general
public but only ferry resort guests and employees.
a) May LMN, Inc. be considered a common
carrier? Explain. (3%)

LMN is a common carrier. Common carrier are

persons engaged in the business of transporting or
carrying passengers or goods or both, by land, air
and water, offering their services to the public, for
compensation. The test does not make a distinction
whether the carrying is done as the principal or as
an auxiliary activity or that the carriage was peri-
odic, occasional, episodic or unscheduled or has lim-
ited clientele. It is not necessary that the transporta-
tion services be offered to the General public. Offer-
ing the services even to a narrow segment of the
public suffices (Spouses Cruz vs. Sun Holidays, G.R.
No. 186312, June 29, 2010) Thus, the fact that the
transportation services are offered only to the
414 BAR Q & A IN COMMERCIAL LAW

guests of the beach resort is immaterial. Transporta-

tion is
a.n integral part of LMN's business.

b) Assuming LMN, Inc. is a common carrier,

may it be absolved from liability on the
ground of fortuitous event? Explain. (2%)
No. For such defense to be tenable, the force
majeure must have been the proximate and only
cause of the loss. And the carrier should have exer-
cised due diligence to prevent or minimize the loss,
before, during and after the occurrence of the inci-
dent (Spouses Cruz, 1'b1'd.). The carrier must likewise
not be guilty of delay. LMN can not validly invoke
force majeure because it was guilty of contributory
negligence in continuing with the ferry services de-
spite the storm.

B.2O.

F Corp., a corporation engaged in the export

of fertilizers, entered into a sale of its products
with Mr. P. In its relation, Bank C, F Corp’s bank,
received an irrevocable letter of credit, payable on
sight, issued by Bank I for the account of its client.
Mr. P, in the amount of P1,000,000.00 to cover the
purchase price of the sale. In the letter of credit,
Bank C was designated as the confirming bank.
After being presented the required documents
under the letter of credit, Bank C issued in favor of
F Corp. a cashier's check in the amount of
P1,000,000.00.
 2019 BAR EXAMINATION 415

Bank C then informed Bank I of the payment

made pursuant to the letter of credit. Thereafter,
Bank C transmitted the documents presented by F
Corp. to Bank I and sought to be reimbursed from
the amount it paid to F Corp.
Bank I, however, refused to reimburse Bank C
for the reason that it received an e-mail coming
from Mr. P that the latter will not make any pay-
ment to Bank I in relation to the letter of credit
because the products shipped to him by F Corp
were of substandard quality.

a) Is Bank I's refusal to reimburse Bank C

warranted? Explain. (3%)
Bank I's refusal to reimburse Bank C is
unwarranted. Under the doctrine of independence,
as long as the stipulated documents are presented,
the issu-ing bank has the obligation to pay even if
the buyer should later on refuse payment. The
obligation to pay on the part of the issuing bank does
not depend on the fulllment or non-fulfillment of
the main contract underlying the letter of credit but
simply upon submission of the stipulated documents. To
allow Bank I to refuse to honor the Letter of Credit
simply because it could not collect first from Mr.
P, the buyer, is to countenance a breach of the
Independ-ence Principle. (The Hongkong &
Shanghai Banking Corporation, Limited vs. National
Steel Corporation and C‘1'tytrust Banking Corporation (Now
Bank of the Philippine Islands), G.R. No. 183486, 2016)
416 BAR Q & A IN COMMERCIAL LAW

b) Assuming that the documents submitted

by F Corp. were proven to be actually
forged but were nonetheless accepted by
Bank C as sufficient, may Bank I refuse
Bank C's claim for reimbursement? Ex-
plain. (2%)
Yes, Bank I may refuse Bank C's claim for reim-
bursement if the documents submitted by F Corp.
were proven to be actually forged but were nonethe-
less accepted by Bank C as sufficient.
Under the fraud exception principle, the benefi-
ciary of the letter of credit should not be entitled to
payment if the following elements are present: a)
there is fraud on the part of the beneficiary, b) the
fraud constitutes fraudulent abuse of the independ-
ent purpose of the letter of credit and not only fraud
under the main agreement, c) irreparable injury
might follow if beneficiary is paid. The forged docu-
ments qualify as fraud sufficient to prevent payment
to F Corporation by Bank C and the right to reim-
bursement by Bank C from Bank I. (Transeld Phil-
ippines vs. Luzon Hydro Corporation, 443 SCRA 307)
 2020 BAR EXAMINATION

A.1.

A university refused an award-winning

journalist's request for a copy of a senatorial
candidate’s transcript of grades on the ground
that it would violate Republic Act No. 10173, or
the Data Privacy Act of 2012. The journalist,
however, argued that the candidate’s whole life
should be subject to scrutiny by the voting public.
Is the university's position legally tenable?
Explain briey.
The university's position is not legally tenable.
It is true that the senatorial candidate's transcript of
grades relates to education. As such, it may be
considered sensitive personal information (Section 3
(1) of the Data Privacy Act). However, personal
infonnation processed for journalistic purposes is a
matter outside the application of the Data Privacy
Act (Section 4 (d))

A.2.

A professor teaching Intellectual property

Law distributed photocopies taken from a book
written by another expert to a class of 15 law
students. Excerpts shown in the photocopies were
meant to be for discussion and criticism in one of
the class sessions.

417
418 BAR Q & A IN COMMERCIAL LAW

Is this a violation of the law on Copyright?

Explain briey.

There is no violation of the law on copyright.

The fair use of a copyrighted work for criticism,
comment and teaching, including multiple copies for
classroom use, is a limitation on copyright. (Section
185, Intellectual Property Code). Fair use is a
privilege to use the copyrighted material in a
reasonable manner without the consent of the
copyright owner.

Alternative answer.
There is a violation of the law on copyright.
There are four factors to determine if there was fair
use of a copyrighted work: a) the purpose and
character of the use, including whether such use is
of a commercial nature or is for non-profit
educational purposes; b) the nature of the
copyrighted work; c) the amount and substantiality
of the portion used in relation to the copyrighted
work as a whole; and d) the effect of the use upon
the potential market for or value of the copyrighted
work. In this case, photocopying 15 copies of
excerpts of the book, while meant for teaching
purposes, is not compatible with fair use. Not only is
the number of reproduced copies substantial, such
number will have a negative impact on the book's
market or value.
 2020 BAR EXAMINATION 419

A.3.

Twenty-five months after a life insurance

policy had been issued, the insured committed
suicide.
Upon investigation, the insurance company
discovered that the insured had been living with
an undiagnosed Major Depressive Order for the
past before the suicide. Under the Diagnostic and
Statistical Manual Disorders Fifth Edition (DSM-5),
a guidebook used by many professionals to
diagnose various mental health conditions, Major
Depressive Disorder is recognized as a mental
disorder.
Would the beneficiaries of the insured's life
insurance policy still be entitled to receive its
proceeds? Explain briey.

Yes, the beneficiaries of the insured’s life

insurance policy are entitled to its proceeds. Under
the Insurance Code, the insurer in a life insurance
contract shall be liable in case of suicide when it is
committed after the policy has been in force for
period of two years from date of issue or last
reinstatement, unless the policy provides for a
shorter period. If the suicide is committed in the
state of insanity, it shall be compensable regardless
of the date of commission (Section 248).
The insurer is not liable only if the suicide is an
excepted risk.
In this case, not only is the policy in force for a
period of two years from the date of the commission
420 BAR Q & A IN COMMERCIAL LAW

of suicide, the suicide was also committed in the

state of insanity. There is likewise no showing that
suicide is an excepted risk. Thus, the insurer is
liable.

A.4.

A single parent started a plant-based/vegan

meal delivery service during the COVID-19
pandemic using only the resources available in
the kitchen and in a nearby market.
After just six months, the single parent
needed to expand by hiring cooks, kitchen staff,
and finance and administrative personnel. A bank
told the single parent that it was ready to fund the
small business but the parent needed to be
registered with the proper government regulatory
agencies.
Friends advised the single parent that
registering as a single proprietorship would make
their personal assets vulnerable in case the
business takes a downturn.
The single parent now comes to you for legal
advice, wanting to have the limited liability of a
corporation but is unwilling to take in partners in
the business that would stifle their culinary
creativity.
Under the Revised Corporation Code, is it
legally possible for the single parent to register as
a corporation with only the single parent as
stockholder? Explain briefly.
 2020 BAR EXAMINATION 421

The Revised Corporation Code eliminated the

minimum number of incorporators for corporations.
(Section 10) It also allows natural persons, trust and
estate to organize a corporation with a single
stockholder (Section 116). The law makes no
distinction as to the civil status of natural persons
who can organize a one person corporation. Thus, a
single parent may register as a corporation with
only himself/herself as stockholder.

A.5.

Two years since it began to operate, a

corporation has amassed assets valued at over
PHP60,000,000.00. It also has 250 shareholders,
each holding at least 150 shares. Under the Revised
Corporation Code, is the corporation required to
have an independent director? Explain briey.

Under the Revised Corporation Code (Section

23), corporations vested with public interest are
required to have independent directors in their
Boards. Corporations vested with public interest
include public companies as described under the
Securities Regulation Code.
A public company is any corporation with class
of equity securities listed for trading on an
Exchange OR with assets in excess of Fifty Million
Pesos (Php50,000,000.00) and has two hundred (200)
or more stockholders, at least 200 of which hold at
least one hundred (100) shares each. (Section 23,
RCC) Based on the facts provided, the corporation
has assets of more than Php5O million with 250
shareholders, each one holding more than 100
shares each. Thus, being a public company, the
422 BAR Q & A IN COMMERCIAL LAW

corporation is required to have independent

directors.

A.6.

A white hat hacker, a software engineer, a

gamer, an ophthalmologist, and a computer
engineer got together sometime in 2019 to
develop a software that can identify a person
using a photo of their eyes taken by a '10-
megapixel camera. By early January 2020, they
decided that they needed more equipment and
capital, and that they had to protect their
intellectual property rights.
A wealthy entrepreneur offered to give them
the funds they needed. They negotiated that the
funds would be treated as an investment rather
than a debt liability. Thus, the entrepreneur
would recover through dividends rather than
through amortized payments. At the same time,
they did not want the wealthy entrepreneur to be
involved with creative decisions in their business
projects. To accommodate their desired
arrangements, a new corporation was registered
with the Securities and Exchange Commission. In
this corporation, the wealthy entrepreneur held
preferred, non-voting shares, while the others
held common, voting shares.
By the middle of 2020, it became clear that the
software was going to be highly profitable. Unlike
other facial recognition software, theirs would be
able to identify a person even with low-resolution
cameras found in most smartphones. It could also
identify persons even if they wore facemasks.
 2020 BAR EXAMINATION 423

Mindful of its profitability, a Chinese

corporation offered to buy all the assets of the
corporation for USD10,000,000,000.00. Everyone
wanted to close the deal except the wealthy
entrepreneur, who insisted that they should not
sell all corporate assets, but instead enter into
software licensing arrangements, as these would
be more profitable.
Under the Revised Corporation Code, are the
white hat hacker, software engineer, garner,
ophthalmologist, and computer engineer required
to allow the wealthy entrepreneur, who holds
preferred shares, to vote on whether they can sell
all the corporate assets? Explain briey.
Yes, the wealthy entrepreneur who holds non-
voting preferred shares may vote whether or not to
sell all the assets of the corporation. While preferred
shares may be denied the right to vote, holders of
non-voting preferred shares are, nevertheless,
vested the right to vote in case of, among others,
sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property (Section 6, (c) RCC).
Sale of all or substantially all of corporate assets
also requires not only the vote of at least majority of
the entire board but also the approval of the
stockholders representing at least 2/3s of the
outstanding capital stock (Section 39, RCC)
 2022 COMMERCIAL LAW
Bar Questions and Suggested Answers

1) Samson Manufacturing, Inc. insured its own

goods with Delilah Insurance for Php 2,000,000.00.
The same goods were insured by Alibaba Shipping
Co. with Assured Corp. for the same amount pursuant
to its contract of carriage with Samson Manufacturing,
Inc. Both policies warranted that no other insurance
exists, and in case another insurance does exist,
such would not void either policy, but in no case
should the claim exceed the total amount of Php
2,000,000.00 at the time of loss.
Is this a case of double insurance? Explain briey.
(5 points)

SUGGESTED ANSWER:
This is not a case of double insurance. A double
insurance exists where the same person is insured
by several insurers separately in respect to the
same subject and interest? The requisites in order
for double insurance to arise are as follows: 1) The
person insured is the same; 2) Two or more insurers
insuring separately; 3) There is identity of subject
matter; 4) There is identity of interest insured; and 5)
There is identity of the risk or peril insured against.
In the present case, while it is true that the two
insurance policies were both issued over the same
subject matter, i.e. goods belonging to Samson
Manufacturing, and both covered the same peril

‘Section 95 of the IC

424
 2022 BAR EXAMINATION 425

insured against, it is, however, beyond cavil that the

said policies were issued to two different persons or
entities. The interest of Samson Manufacturing over
the property subject matter of both insurance contracts
is also different and distinct from that of Alibaba
Shipping Corporation. The policy issued by Delilah
Insurance was in consideration of the legal and/or
equitable interest of Samson Manufacturing over its
own goods. On the other hand, what was issued by
Assured Corporation to Alibaba Shipping was over
the latter's insurable interest over the safety of the
goods, which may become the basis of the latter's
liability in case of loss or damage to the property?
2) [This item has two questions.] Muviel obtained a
life insurance policy from X Insurance Corp. Muviel
underwent a medical examination and was certied
as qualied to be insured. Unknovxm to X Insurance
Corp., Muviel had a mild stroke some years earlier.
The insurance policy expressly provided that any
misrepresentation in the questionnaire lled up by
Muviel for the issuance of the policy would render
the policy null, void and of no effect.
(a) If Muviel dies within the two-year period
from the time of issuance of the policy, will the
beneciaries of Muviel be entitled to claim the
proceeds of the life insurance policy? Explain briey.
SUGGESTED ANSWER:

In Tan v. Court of Appeals, the Supreme Court

ruled that the so-called “incontestability clause"

“Malayan Insurance v. Philippine First Insurance Co., G.R. No. 184300,

July 11, 2012.
426 BAR Q & A IN COMMERCIAL LAW

precludes the insurer from raising the defenses of

false representations or concealment of material facts
insofar as health and previous diseases are concemed
if the insurance has been in force for at least two (2)
years during the insured's lifetime. The phrase “during
the lifetime" found in Section 48 of the Insurance Law
simply means that the policy is no longer considered
in force after the insured has died. The key phrase in
the second paragraph of Section 48 is “for a period
of two years". Considering that the insured died
before the two-year period has lapsed, the insurer is
not, therefore, barred from proving that the policy is
void ab 1'.r21't1'o by reason of the insured’s fraudulent
concealment or misrepresentations
It is true that in the cases of Manila Bankers
Life Insurance Corporation v. Abanf’ and Sun Life of
Canada V. Szlbyas it was held that after the two-year
period lapsed, or when the insured dies within the
period, the insurer must make good on the policy, even
though the policy was obtained by fraud, concealment,
or misrepresentation. The ruling though in these
two cases that the incontestability clause applies if
the insured died within two years from issuance of
the policy is not doctrinal but only an obiter dictum.
In Aban, more than two years had lapsed from
the issuance of the policy, thus, the incontestability
clause had lapsed. However, the Supreme Court
also said that if the insured died within the two-year
period from the issuance of the policy (not after two

“Emilio Tan, Juanito Tan, Alberto Tan, and Arturo Tan v. Court of Appeals
and Philippine American Life Insurance Company, G.R. No. 48049, June 29, 1989.
“G.R. No. 175666.
5G.R. No. 211212, June 8, 2016.
 2022 BAR EXAMINATION 427

[2] years), the insurer can no longer rescind the

policy on account of misrepresentation and/or
concealment. It may be said that this part of the
decision is only an objter dictum because two (2)
years had lapsed anyway, and the incontestability
clause already applied.
Ir1 Sun Life of Canada v. Sibya, the insured applied
for life insurance. He disclosed in his application
that he sought advice for kidney problem but failed
to disclose that he was conned for renal failure.
Three months from issuance of the policy, he died of
gunshot wounds. The Supreme Court held that there
was no concealment given the information that he
disclosed and that he further authorized the insurer
to conduct investigation on his medical background.
There being no concealment or misrepresentation,
the insurer would have no reason to rescind the
policy anyway and the incontestability clause will
find not application.
NB. It is recommended that an answer based on
the ruling in Sibya v. Sun Life should also be given
full credit.
(b) Should Muviel die after the two-year period, will
your answer be the same? Explain briey.

SUGGESTED ANSWER:

My answer would be different. Under the

incontestability clause, after a policy of life insurance
made payable upon the death of the insured shall
have been in force during the lifetime of the insured
for a period of two (2) years from the issuance of the
428 BAR Q 8: A IN COMMERCIAL LAW

policy or last reinstatement, the insurer must make good

on the policy even though the policy was obtained
through fraud, concealment, or misrepresentations
(5 points)

3) [Thisitem has two questions.] Kotse Corp. is an

entity that provides pre-arranged transportation
services for a fee using an online-enabled platfonn
technology that connects passengers with drivers
using their own vehicles.
(a) Is Kotse Corp. a common carrier? Explain
briey.
Kotse Corporation is a transportation network
company (TNC), one which uses online enabled
platform technology to connect passengers with
drivers using their own vehicles.

SUGGESTED ANSWER:

Kotse Corporation is not a common carrier

because it does not provide transportation service.
It is only a transportation provider. It merely links
the customers with the third party drivers and is not
a party to the transportation contract.

House Bill 1260 of the 18”‘ Congress citing ,

Crisostomo v. Court of Appeals (G.R. No. 138334,

August 25, 2003), applied by analogy TNC with a
travel agency which merely arranges the booking of
a person but the actual act of transporting the
customer is done by an airline.

“Section 48 Insurance Code; Manila Bankers v. Aban, G.R. No. 175666,

July 29, 2013; SunLife of Canada v. Sibya, G.R. No. 211212, June 8,2016.
 2022 BAR EXAMINATION 429

Given the nature of its services, Kotse Corporation

is also akin to a freight forwarder. It only arranges
the means of transportation for the passengers and
as such, should not be treated as common carrier. It
should be held liable for damage though if there is
negligence in vetting and choosing the vehicle owners
whom Kotse accredited as part of its system.
(b) Are the drivers engaged i.n common carrier
service? Explain briey. (5 points)

SUGGESTED AN SVVER:

Drivers engaged by TNC, l.i.ke Kotse Corporation,

are considered common carriers. (DOTR DO. No.
2018-12, dated June 11,2018. )

ALTERNATIVE ANSWER:
No, the TNC drivers can go” ofine " if desired
and can decide to accept or reject a ride request
according to their personal travel itinerary as
opposed to common carriers which engage in a
continuous offer.
NB.

In Land Transportation Franchise Regulatory

Board (LTFRB) and the Department of Transportation
v. Hon. Carlos Valenzuela, as Presiding Judge of the
RTC of Mandaluyong, Branch 213, G.R. No. 242860,
March 11, 2019 ), the Supreme Court stated that
TNC, like Angkas, practically functions as a booking
agent or at the very least, acts as a third-party liaison
for its accredited bikers, while the accountability of
430 BAR O 8: A IN COMMERCIAL LAW

the TNVS as a common carrier attaches from the time

the TNVS is on line and offers it services to the
riding public. Based on this Supreme Court resolution,
it seems that it is the TNVS and not the TNC, that is
considered a common carrier, and therefore engaged
in public service.
It should, however, be pointed out that that the
issue is that case is the legality and propriety of the
writ of preliminary injunction issued by the RTC of
Mandaluyong restraining the LTFRB and and DOTR
from interfering in the operations of DBDOYC, the
petitioner.
In this case, DBDOYC, a private domestic corporation,
operates Angkas, an on-line and on-demand
motorcycle-hailing mobile application that pairs
drivers of motorcycles with potential passengers without,
however, obtaining a certicate of TNC accreditation
from the LTFRB. It accredited Angkas drivers and
allowed them to operate their transportation services
to the public despite their absence of Certicate of
Public Convenience. It filed a petition for declaratory
relief with the RTC of Mandaluyong to determine
the legality of certain issuances of DOTR that affect
its operations, with prayer for injunctive relief. In
essence, the petitioner argued that it is not a public
transportation provider since Angkas is a mere tool
that connects the passengers and the motorcycle
driver and LTFRB and DOTR have no jurisdiction
over them. The court granted the application of
DBDOYC and ruled that DBDOYC has the right to
enter into an independent contract with its Angkas
riders as application provider and petitioner’s business
is not yet subject to any regulation nor prohibited by
 2022 BAR EXAMINATION 431

existing laws. The Supreme Court set aside the

preliminary injunction and ordered the RTC to
conduct further proceedings to resolve the main
petition with dispatch.
As of this writing, the RTC of Mandaluyong is
yet to render a resolution on the petition.
4) At around 4:00 p.m. of December 25, 2020,
Christmas Day, Queenie and her child, Paeng, boarded
a jeepney being operated by Emil and driven by
Amor. Queenie was made to sit on an empty beer
case at the edge of the rear entrance/exit of the
jeepney with her sleeping child on her lap. When
they reached an uphill incline on the road, the
jeepney slid backwards. Queenie pushed both her
feet against the step board to prevent herself and
her child from being thrown out of the exit, but
because the step board was wet, her left foot
slipped and was crushed between the step board
and the coconut tree which halted the jeepney's
backward motion. As a result, Queenie's leg was
badly injured and had to be amputated.
Queenie then sued Emil and Amor for breach of
contract of carriage. Emil and Amor countered that
the injuries Queenie sustained were due to her own
fault since Amor had instructed everyone not to
panic, but Queenie nevertheless tried to disembark
which caused her foot to be crushed.
If you were the judge, would you hold Emil and
Amor solidarily liable? Explain briey. (5 points)
432 BAR Q 8: A IN COMMERCIAL LAW

SUGGESTED ANSVVER:

I will not hold Emil and Amor solidarily liable.

Only Emil, the vehicle operator is liable. The facts of
the question are on all fours with the case of Jose
Sanjco V. Werlierlina Colzpano, G.R. No. 177116, February
27, 2013 in which the Supreme Court ruled that if the
cause of action is based on a breach of a contract of
carriage, the liability of the owner/operator is direct
as the contract is between him and the passenger.
The driver cannot be made liable as he is not a party
to the contract of carriage. The obligation to carry
the passenger safely to his destination was with the
operator and the elements of a contract of ca.rriage
exist between the operator and the passenger.
Thus, a complaint for breach of a contract of carriage
is dismissible as against the employee who was
driving the bus because the parties to the contract
of carriage are only the passenger, the bus owner,
and the operator.7
The driver, however, may be sued based on
quasi-delict and/or criminally if his negligence can
be established.

5) FLIP Co. is engaged in a nationalized activity

requiring at least 60% Filipino ownership. Its outstanding
capital stock consists of 1,000,000 shares broken
down into 400,000 non-voting preferred shares and
600,000 voting common shares out of which 20,000
are treasury shares.

7Jose Sanico and Vicente Castro v. Werherlina P. Colipano, G.R. No.

209969, September 27, 2017.
 2022 BAR EXAMINATION 433

How many shares of the corporation must be

owned by Filipinos? Explain briey. (5 points)

SUGGESTED ANSVVER:

In the case of Jose Roy III v. Teresita Herbosa,

the Supreme Court claried that the term "capital”
in Section 11, Article XII of the 1987 Constitution refers
to shares Wit]: voting rights, as Well as with full
benecial ownerslup. This is precisely because the
right to vote in the election of directors, coupled with
full beneficial ownership of stocks, translates to
effective control of a corporation. It is not necessary
that the Filipinos own 60% of each type of shares.
Thus, for purposes of detennining compliance
with the constitutional or statutory ownership, the
required percentage of Filipino ov\mership shall be
applied to BOTH (a) the total number of outstanding
shares of stock entitled to vote in the election of
directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote."8
Applying the ruling, the Filipinos should own
60% of the voting common shares and 60% of the
outstanding capital stock (the 400,000 common shares
and 400,000 non-voting preferred shares). Treasury
shares, while issued shares, do not fonn part of the
outstanding capital stock."

“Jose M. Roy 111 v. Teresita Herbosa, et a1., G.R. No. 207246, April 18, 2017.
“SEC-OGC Opinion No. 16-16 June 27, 2016
434 BAR Q & A IN COMMERCIAL LAW

6) Yoongi, a director of BTS Corp. PH, bought

substantial shares of its major supplier, Hybe, I.nc.
When Hybe, Inc.’s contracts were taken up by the BTS
Corp. PH Board, Yoongi not only voted for their approval
but inuenced other directors to do so. Later, the Hybe,
Inc. contracts turned out to be disadvantageous to
BTS Corp. PH and caused it substantial losses.

Discuss the action/s that may be pursued

against Yoongi under the Revised Corporation Code.
Explain briey. (5 poi.nts)

SUGGESTED ANSWER:

BTS may le an action against Yoongi to make

him civilly liable for the damages suffered by the
corporation arising from the disadvantageous contract
which he caused to be approved by the board of
directors. By buying substantial shares in its major
supplier, Yoongi violated his duciary duty as director
of the corporation. Not only did he act in bad faith in
conducting the affairs of the corporation but he
acquired a personal or pecuniary interest in conict
with his duty as director or trustee or officer that
resulted in damage to the corporation;‘°
Gross negligence or bad faith in directing the
affairs of the corporation; and acquiring any personal
or pecuniary interest in conict with his duty as
director or trustee or officer resulting in damage to
the corporation are among the instances where
personal liability may attach to a director.“

‘°Section 30, RCC.

“Pioneer Insurance Surety Corporation vs. Moming Star Travel 8: Tours
InC., G.R. NO. 198436, July 8, 2015.; Carag VS. NLRC, G.R. NO. 147590, April 2,
 2022 BAR EXAMINATION 435

7) ['I'his item has two questions.] LOKO Co., using a

fraudulent scheme, was able to sell its shares to
investors. The sale proceeds were then secretly diverted
by LOKO Co. to its wholly ovmed subsidiaries.
Later, LOKO Co. became insolvent and was placed
under receivership. On behalf of the investor-
stockholders, the receiver demanded the inspection
of the books and records of LOKO Co.'s subsidiaries.
(a) Can LOKO Co.'s stockholders exercise,
through the receiver, their right of inspection of the
books and records of LOKO Co.'s subsidiaries?
Explain briey.

SUGGESTED ANSWER:

Yes, it is settled that the right of inspection

extends to books and records of the corporation's
wholly-ov\med subsidiary which are in the corporation's
possession and control as it is more in accord with
equity, good faith and fair dealing to construe the
statutory right of a stockholder to cover such books
and records.“
(b) Is this a case of intra-corporate dispute?
Explain briey.

2007; Atrium Management vs. Court of Appeals, et al., GR No, 109491,

February 28, 2001; John F. McLeod vs. National Labor Relations Commission
First Division, et al., G.R. No. 146667, January 23, 2007. Philex Gold Philippines
vs. Philex Bulawan Supervisors Union, G.R. No.149758, April 25, 2005.
“John Gokongwei, Jr. vs. Securities and Exchange Commission, et al.,
G.R. No. L-45911, April 11, 1979.
436 BAR Q 8: A IN COMMERCIAL LAW

SUGGESTED ANSWER:

Yes, petition for inspection of corporate records

and devices or schemes employed by or any act of
the board of directors amounting to fraud or
misrepresentation which may be detrimental to the
interest of the stockholders of the corporation, as in
the foregoing case, are considered intra-corporate
disputes under the Rules of Procedure Goveming
Intra-Corporate Controversies issued by the Supreme
Court (A.M. No. O1-2-04-SC, March 31, 2001)
(5 points)

8) EXIT Corp., no longer wanting to continue with

its business, transferred to Entra, Inc. under an
Asset Purchase Agreement all its properties and
assets including goodwill. A creditor of EXIT Corp.
demanded from Entra, Inc. the payment of EXIT
Corp.'s debt for the reason that the transaction
amounted to a merger and, therefore, the surviving
corporation, Entra, Inc., must assume the debts of
the absorbed corporation, EXIT Corp.
Is the creditor's demand tenable? Explain briey.
(5 points)

SUGGESTED ANSWER:

The creditor's demand is not tenable. The

transaction did not amount to a merger which would
have made Entra liable for the obligations of Exit
Corporation. The Supreme Court ruled in Bank of
Commerce v. Radio P121'11pp1'ne Network, Inc.“ that

‘3G.R. No. 195615, April Z1, 2014.

 2022 BAR EXAMINATION 437

there can be no merger if the requirements and

procedure for merger were not observed and no
certificate of merger was issued by the SEC.

ALTERNATIVE ANSWER:
Based on the question, the emphasis appears to
be whether or not the sale transaction amounts to a
merger. However, given that the sale of all the assets
includes the goodwill, the examinee may interpret
the question as one that calls for the application of
the business enterprise transfer rule which would
make the buyer corporation liable for the obligations
of the seller corporation.
Under the Nell Doctrine, so called because it
was rst pronounced by the Supreme Court in the
1965 ruling in Nell vs. Pacic Farms, 1:20.“, the
general rule is that where one corporation sells or
otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and
liabilities of the transferor.
The exceptions to the Nell doctrine are as follows:

a) When the buyer expressly or impliedly

assumes the liabilities of the seller;
b) If the sale amounts to a merger or
consolidation;
c) If the sale is entered into fraudulently or
made in bad faith; and

“G.R. No. L-20850. November 29, 1965.

438 BAR Q & A IN COMMERCIAL LAW

d) If the buyer is merelycontinuation of the

a
personality of the seller or the so called business-
enterprise transfer rule.“
The legal basis of the last in the four (4)
exceptions to the Nell Doctrine, where the
purchasing corporation is merely a continuation of
the selling corporation, is challenging to detennine.
In other words, in this last exception, the
transferee purchases not only the assets of the
transferor but also its business. As a result of the
sale, the transferor is merely left with its juridical
existence, devoid of its industry and eaming capacity.
Fittingly, the proper provision of law that is
contemplated by this exception would be Section 39
of the RCC.
The purpose of the business-enterprise transfer
is to protect the creditors of the business by
allowing them a remedy against the new owner of
the assets and business enterprise. Otherwise,
creditors would be left "holding the bag," because
they may not be able to recover from the transferor
who has "disappeared with the loot," or against the
transferee who can claim that he is a purchaser in
good faith and for value
9) [This item has two questions.] Zui Cheneris Corp.
is a pharmaceutical company operating in the
Philippines since 1999. One of its products is a drug
cal1edcarbamazepineundertheb1'andname“CI-lEl\TAPS",
which is an anti-convulsant used to control all types
of seizure disorders of varied causes like epilepsy.

152017 Bar Exam.

 2022 BAR EXAMINATION 439

Nutty Pharma, also a pharmaceutical company

in the Philippines, sells citicoline under the mark
“CHENAPSE", which is indicated for the treatment
of cerebrovascular disease or stroke. “CI-IENAPSE"
was registered as a trademark by Nutty Pharma
with the Intellectual Property Office of the Philippines
(IPO) on September 24, 2017.
On November 29, 2017, Nutty Pharma led with
the Regional Trial Court (RTC) a Complaint against
Zui Cheneris for Injunction, ‘Trademark Infringement,
Damages and Destruction with Prayer for Temporary
Restraining Order and/or Preliminary Injunction,
alleging that Zui Cheneris’ “CI-lENAPS" is confusingly
similar to its registered trademark “CI-IENAPSE"
and the resulting likelihood of confusion is dangerous
because the marks cover medical drugs intended for
different types of illnesses.
Zui Cheneris, in its Answer, countered that:
(i) it has been selling carbarnazepine under the brand
name “CHENAPS" since 2004; (ii) it was impossible
for Nutty Pharma not to have known the existence of
“CI-IENAPS" before the latter's registration of
“CHENAPSE” because Nutty Pharma had promoted
its products in the same publications where Zui
Cheneris had advertised “CHENAPS"; (iii) despite
its knowledge of prior use by Zui Cheneris of
“CI-IENAPS", Nutty Pharma had fraudulently appropriated
the "CI-IENAPSE" mark by registering the same
with the IPO; and, (iv) as the prior user, Zui Cheneris is
the ovmer of “CHENAPS" and the continued use by
Nutty Pharma of “CHENAPSE" will cause it grave
440 BAR O 8: A IN COMMERCIAL LAW

and irreparable damage. Thus, Zui Cheneris prayed

for the cancellation of the trademark registration of
Nutty Pharma's "CI-IENAPSE
(a) As the RTC judge, will you enjoin Zui
Cheneris from further using the mark "CHENAPS"?
Explain briey.

SUGGESTED AN SVVER:

No. The facts are identical to the case of Zuneca

Pharmaceutical v. Natrapharm, lnc., G.R. No. 211850,
September 8, 2020 where the Supreme Court
abandoned its previous rulings that trademark is
acquired through prior use and instead held that
trademarks are acquired solely through registration;
provided that the registration is done in good faith.
Accordingly, the registrant in good faith defeats the
rights of the prior user in good faith. Since Nutty
Pharma registered the trademark CHENAPS with
the Intellectual Property Office first, then it acquired
ownership over the trademark and a better right
against Zui Generis despite the latter's prior use of
the identical trademark CHENAPSE. The facts of the
case did not indicate that Nutty Pharma had prior
knowledge of Zui Generis prior use of the trademark
which would have made its registration contrary to
the provisions of the Intellectual Property Code.
(b) Is Zui Cheneris’ prayer for cancellation of
Nutty Phanna's trademark registration tenable? Explain
briey.
 2022 BAR EXAMINATION 441

SUGGESTED ANSWER:

No, because Zui Cheneris is a prior user in good

faith. The Intellectual Property Code contemplates
that a prior user in good faith may continue to use
its mark even after the registration of the mark by
the rst to file registrant in good faith. 16
(5 points)

10) Bank teller Loris submitted a Suspicious

Transaction Report (S'I'R) on Marychelle, a politically
exposed person (PEP), who, when asked about her
deposit of Php 2,000,000.00 in cash, winked and
replied tab". The Anti-Money Laundering Council
“.S27:zeto
did not find probable cause which could support the
belief that Marychelle had committed an unlawful
activity or was otherwise involved in money
laundering. Marychelle now wants to sue the bank
and Loris for allegedly discriminating against her.
Discuss whether or not Loris and the bank are
liable. (5 points)

SUGGESTED AN SVVER:

Loris and the Bank are not liable. Under the safe
harbor provision of the Anti-Money Laundering law,
as arnended, no aclrninistrative, criminal, or civil
proceedings shall lie against any person for having
made a covered transaction or suspicious transaction
report in the regular performance of his duties and
in good faith, whether or not such reporting results
in any criminal prosecution under the AMLA or any

“Zuneca Pharmaceuticals v. Natrapharm, ibid

442 BAR Q 8: A IN COMMERCIAL LAW

other Philippine law." The facts of the case indicate

that the Bank and Lori are only performing their
duty under the AMLA to report to the AMLC what is
clearly a suspicious transaction.

11) Kau Corp. had suffered tremendous losses as a

result of the COVID-19 pandemic and the resulting
economic slump. From a calculation of its assets
and liabilities, Kauff Corp. was technically insolvent
but management believed that it had the chance to
survive if its rights to mineral properties could be
exploited. Kau Corp. has the rights to several
parcels of land containing nickel deposits. Nickel
prices had gone up in the world market and nickel
was in short supply.
The creditors of Kauff Corp. are set to le suits for
collection with application for writs of attachment.
As the counsel for Kauff Corp., what legal action
would you take to avert the suits and stave off
insolvency and liquidation? Explain briey. (5 points)

SUGGESTED ANSWER:

As counsel for Kauff Corporation, I will le a

petition for rehabilitation with the Regional Trial
Court of the city where the principal ofce of the
corporation is located and allege that there is a
substantial likelihood that the Kauff can be rehabilitated.
I will attach to the petition a viable and economically
feasible rehabilitation plan.

"Section 9(c), R.A. No. 9160.

 2022 BAR EXAMINATION 443

Petition for rehabilitation is available as a

remedy to juridical insolvent debtor. Insolvent shall
refer to the nancial condition of a debtor that is
generally unable to pay its or his liabilities as they
fall due in the ordinary course of business or has
liabilities that are greater than its or his assets.“
Technical insolvency means that the debtor has
more assets than liabilities but generally unable to
pay its or his liabilities as they fall due. Actual
insolvency means that the debtor's assets are less
than liabilities.
Once the rehabilitation court finds the petition
to be sufficient in form and substance, it shall,
within five days from filing of the petition, issue a
commencement order, which shall include a stay or
suspension order. The stay order, among others,
shall The Stay or Suspension Order shall:
(a) suspend all actions or proceedings, in court
or otherwise, for the enforcement of claims against
the debtor;
(b) as well as all actions to enforce any
judgment, attachment or other provisional remedies
against the debtor;19
12) In a Facebook livestream, an author offered his
books online for sale by asking interested viewers to
type in "Mine" in the chatbox. A set of his books was
sold to a social media inuencer who later tumed

“Section 4(p), R.A. No. 10142.

“Section 16.
444 BAR Q 8: A IN COMMERCIAL LAW

out to be a “joy reserver." A “joy reserver" refers to

an online buyer who enthusiastically shows interest
in an item, but will not actually buy it. The author made
a screenshot of the social media inuencer's “Mine”
message as proof of the acceptance of the offer.
Does the screenshot of the message prove
the perfection of the sale contract? Explain briey.
(5 points)

SUGGESTED ANSWER:

Subject to authentication, the screenshot of the

message proves the perfection of the sale contract.
Except as otherwise agreed by the parties, an offer ,
the acceptance of the offer and such other elements
required under existing laws for the formation of
contracts may be expressed in, and demonstrated
and proved by means of electronic data messages or
electronic documents ( Section 16 of RA 8792 )
Screenshot of a Facebook message is considered an
electronic data message since it pertains to an
information sent, received or stored by electronic
and optical means.
ALTERNATIVE ANSVVER:
The screenshot did not prove the perfection of
the sale contract. It is true that except as otherwise
agreed by the parties, an offer , the acceptance of
the offer and such other elements required under
existing laws for the formation of contracts may be
expressed in, and demonstrated and proved by
 2022 BAR EXAMINATION 445

means of electronic data messages or electronic

docmnents (Section 16 of RA 8792 and that Facebook
posts are admissible in evidence, the E-Commerce
law did not in any way vary the requirements of
existing laws on the formalities required in the
execution of documents for their validity. Based on
the facts of the question, the elements of a valid sale
contact, such as consent, object and consideration
(price of the books), were not all established.

8308