GENERAL PRINCIPLES

Joint Account (2000)

What is a joint account? (2%)
SUGGESTED ANSWER:
A joint account is a transaction of merchants where
other merchants agree to contribute the amount of
capital agreed upon, and participating in the
favorable or unfavorable results thereof in the
proportion they may determine.
Joint Account vs. Partnership (2000)
Distinguish joint account from partnership. (3%)
SUGGESTED ANSWER:
The following are the distinctions between joint
account and partnership:
(1) A partnership has a firm name while a joint
account has none and is conducted in the name of
the ostensible partner.
(2) While a partnership has juridical personality and
may sue or be sued under its firm name, a joint
account has no juridical personality and can sue or
be sued only in the name of the ostensible partner.
(3) While a partnership has a common fund, a joint
account has none.
(4) While in a partnership, all general partners have
the right of management, in a joint account, the
ostensible partner manages its business operations.
(5) While liquidations of a partnership may, by
agreement, be entrusted to a partner or partners, in
a joint account liquidation thereof can only be done
by the ostensible partner
Presumption:
Habitually
Engaging
in
Commerce (2009)
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 promotional text
messages to all the residents in the subdivision.
Cecilios family members did as instructed, 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%)
SUGGESTED ANSWER:
Yes. Even if the grocery store has yet to be
established, Cecilio already habitually engaged
in commerce, when per his instruction the
members of his family contacted more than 80%
the residents of the subdivision where they
reside. According to Article 3 of the Code of
Commerce, legal presumption of habitually
engaging in commerce shall exist from the
moment the person who intends to engage
therein
announces
through
circulars,
newspapers, handbills, posters exhibited to the
public, or in any other manner whatsoever
anestablishment which has for its object some
commercial operation. Text messages may
qualify to be equivalent to electronic documents.

LETTERS OF CREDIT

Letters of Credit; Nature (2012)

b. Explain the nature of Letters of Credit as a
financial devise. (5%)
SUGGESTED ANSWER:

(b) A letter of credit is a financial device

developed by merchants as a convenient and
relatively safe mode of dealing with sales of
goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants
to have control of the goods before paying.
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
presentment
simultaneously with the tender of documents
required by the letter of credit. The buyer and the
seller agree on what documents are to be
presented for 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 shipping 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. Under
this arrangement, the seller gets paid only if he
delivers the documents of title over the goods,
while the buyer acquires the said documents
and control over the goods only after
reimbursing the bank. (Bank of America NT & SA
v. CA, et al., G.R. No. 105395, December 10, 1993)
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 letters of credit. (Transfield
Philippines, Inc. v. Luzon Hydro Corporation, of
al., G.R. No. 146717, November 22, 2004)
(Note: In respect of Question (a), it is
recommended that examinees be given full credit
for whatever answer they gave because the matter
involved in Question (a) is outside the scope of
the 2012 Bar Examination in Mercantile Law. Both
the Supreme Court Rules of Procedure on
Corporate Rehabilitation (2008) and the Financial
Rehabilitation and Insolvency Act (FRIA) of 2010
(RA 10142) are not included in the 2012 Syllabus
for the Bar Examination in Mercantile Law.
Neither is the matter referred to in any of the
topics under Letters of Credits and the Corporation
Code in the aforementioned Syllabus. In any case,
our suggested answers to both Questions (a) and
(b) are herein set out.
Letters of Credit; Three Distinct Contract
Relationships (2002)
Explain the three (3) distinct but intertwined contract
relationships that are indispensable in a letter of
credit transaction.
SUGGESTED ANSWER:

The three (3) distinct but intertwined contract

relationships that are indispensable in a letter of
credit transaction are:
1. Between the applicant/buyer/importer
and the beneficiary/seller/exporter
The applicant/buyer/importer is the one
who procures the letter of credit and
obliges himself to reimburse the
issuing bank upon receipt of the
documents
of
title,
while
the
beneficiary/seller/exporter is the one
who in compliance with the contract of
sale ships the goods to the buyer and
delivers the documents of title and draft
to the issuing bank to recover payment
for the goods. Their relationship is
governed by the contract of sale.
2. Between the issuing bank and the
beneficiary/seller/exporter

The
issuing bank is the one that issues the
letter of credit and undertakes to pay
the seller upon receipt of the draft and
proper documents of title and to
surrender the documents to the buyer
upon reimbursement. Their relationship
is governed by the terms of the letter of
credit issued by the bank.
3. Between the issuing bank and the
applicant/buyer/importer

Their
relationship is governed by the terms of
the application and agreement for the
issuance of the letter of credit by the
bank.
Letter of Credit; Independence Principle (2010)
The Supreme Court has held that fraud is an
exception to the independence principle
governing letters of credit. Explain this principle and
give an example of how fraud can be an exception.
(3%)
SUGGESTED ANSWER:
The independence principle posits that the
obligations of the parties to a letter of credit are
independent of the obligations of the parties to
theunderlying transaction. Thus, the beneficiary
of the letter of credit, which is able to comply
with the documentary requirements under the
letter of credit, must be paid by the issuing or
confirming bank, notwithstanding the existence
of a dispute between the parties to the
underlying transaction, say a contract of sale of
goods where the buyer is not satisfied with the
quality of the goods delivered by the seller. The
Supreme Court in Transfield Philippines, Inc. v.
Luzon Hydro Corporation, 443 SCRA 307 (2004)
for the first time declared that fraud is an
exception to the independence principle. For
instance, if the beneficiary fraudulently presents
to the issuing or confirming bank documents
that contain material facts that, to his
knowledge, are untrue, then payment under the
letter of credit may be prevented through a court
injunction.
Letters of Credit; Liability of a Notifying Bank
(2003)
a) What liability, if any is incurred by an advising or
notifying bank in a letter of credit transaction?
SUGGESTED ANSWER:

b) Bravo Bank received from Cisco Bank by

registered mail an irrevocable letter of credit issued
by Delta Bank for the account of Y Company in the
amount of US$10,000,000 to cover the sale of
canned fruit juices. The beneficiary of the letter of
credit was X Corporation which later on partially
availed itself of the letter of credit by submitting to
Bravo Bank all documents relative to the shipment of
the cans of fruit juices. Bravo Bank paid X
Corporation for its partial availment. Later, however,
it refused further availment because of suspicions of
fraud being practiced upon it and, instead , sued X
Corporation to recover what it had paid the latter.
How would you rule if you were the judge to decide
the controversy? (6%)
SUGGESTED ANSWER:

Letter of Credit; Liabilities of a Confirming and

Notifying Bank (2008)
X Corporation entered into a contract with PT
Construction Corp. for the latter to construct and
build a sugar mill with six (6) months. They agreed
that in case of delay, PT Construction Corp. will pay
X Corporation P100,000 for every day of delay. To
ensure payment of the agreed amount of damages,
PT Construction Corp. secured from Atlantic Bank a
confirmed and irrevocable letter of credit which was
accepted by X Corporation in due time. One week
before the expiration of the six (6) month period, PT
Construction Corp. requested for an extension of
time to deliver claiming that the delay was due to the
fault of X Corporation. A controversy as to the cause
of the delay which involved the workmanship of the
building ensued. The controversy remained
unresolved. Despite the controversy, X Corporation
presented a claim against Atlantic Bank by
executing a draft against the letter of credit.
(A) Can Atlantic Bank refuse payment due to the
unresolved controversy? Explain. (3%)
SUGGESTED ANSWER:
No, Atlantic Bank cannot refuse payment to the
unresolved controversy between the two
companies. The Bank is solidarily liable to pay
based on the terms and conditions of the Letter
of Credit. In FEATI Bank v. Court of Appeals,
G.R. No.94209, 30 April 1991, the Court held that
an irrevocable letter of credit is independent of
the contract between the buyer-applicant and the
seller-beneficiary.
(B) Can X Corporation claim directly from PT
Construction Corp.? Explain. (3%)
SUGGESTED ANSWER:

Yes, X Corporation can claim directly from PT

Construction Corp. The irrevocable letter of
credit was merely a security arrangement that
did not replace the main contract between the
two companies. In FEATI Bank c. CA, G.R. No.
94209, 30 April 1991, opening a letter of credit
does not involve a specific appropriation of
money in favor of the beneficiary. It only
signifies that the beneficiary may draw funds up
to the designated amount. It does not mean that
a particular sum of money has been specifically
reserved of held in trust.
Letters of Credit; Mortgagor as Issuing Bank
(2005)
Ricardo mortgaged his fishpond to AC Bank to
secure a P1 Million loan. In a separate transaction,
he opened a letter of credit with the same bank for
$500,000.00 in favor of HS Bank, a foreign bank, to
purchase outboard motors. Likewise, Ricardo
executed a Surety Agreement in favor of AC Bank.
The outboard motors arrived and were delivered to
Ricardo, but he was not able to pay the purchase
price thereof.
a) Can AC Bank take possession of the outboard
motors? Why?
SUGGESTED ANSWER:
a) No, for AC Bank has no legal standing, much
less a lien, on the outboard motors. Insofar as
AC Bank is concerned, it has privity with the
person of Ricardo under the Surety Agreement,
and a lien on the fishpond based on the real
estate mortgage constituted therein.
b) Can AC Bank also foreclose the mortgage over
the fishpond? Explain. (5%)
SUGGESTED ANSWER:
b) Yes, but only to enforce payment of the
principal loan of P1million secured by the real
estate mortgage on the fishpond.
Letters of Credit; Standby Letter of Credit (2015)
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 notwithstanding the fact that X
Company was not in default. Can ABC Bank refuse
to honor the certificate of default? Explain. (3%)
SUGGESTED ANSWER:
No. Under the doctrine of independence in
a letter of credit, the obligation of the issung
bank to pay the beneficiary is distinct and
independent from the main and originating
contract underlying the letter of credit. Such
obligation to pay does not depend on the
fulfilment or non-fulfilment of the originating
contract. It arises upon tender of the stipulated
document under the letter of credit. In the
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. (Insular Bank of Asia and America

v. Intermediate Appellate Court 167 SCRA 450

[1988])
ALTERNATIVE ANSWER:
Under the fraud exception principle, the
beneficiary may be enjoined from collecting on
the letter of credit in case of fraudulent abuse of
credit. The issuance of a certificate of default
despite the fact that X company is not in default
constitutes fraudulent abuse of credit (Transfield
Philippines v. Luzon Hydro Corporation, 443
SCRA 307[2004]).
Letters of Credit; Applicability of Uniform
Customs & Practice Credits of the Intl Chamber
of Commerce (2015)
B. Is the Uniform Customs and Practice for
Documentary Credits of the International Chamber
of Commerce applicable to commercial letters of
credit issued by a domestic bank even if not
expressly mentioned in such letters of credit? What
is the basis for your answer? (3%)
SUGGESTED ANSWER:
Yes, the Supreme Court has held that in the
observance of the Uniform Customs and
Practice in the Philippines is justified by Article 2
of the Code of Commerce which enunciates that
in the absence of any particular provision in the
Code Commerce, commercial transactions shall
be governed by generally-observed usages and
customs (Bank of the Philippine Islands v. De
Rent Fabric Industries, Inc. 35 SCRA 253[1970]).

TRUST RECEIPTS LAW

Trust Receipts (2007)
C contracted D to renovate his commercial building.
D ordered construction materials from E and
received delivery thereof. The following day, C went
to F Bank to apply for loan to pay for the construction
materials. As security for the loan, C was made to
execute a trust receipt. One year later, after C failed
to pay the balance of the loan, F Bank charged him
with violation of the Trust Receipts Law. (5%)
(A) What is a Trust Receipt?
SUGGESTED ANSWER:
A Trust Receipt is a written or printed document
signed by the entrustee in favor of the entruster
containing terms and conditions substantially
complying with the provision of the Trust
Receipts Law, whereby the bank as entruster
releases the goods to the possession of the
entrustee but retains ownership thereof while
the entrustee may sell the goods and apply the
proceeds for the full payment of his liability to
the bank (Section 3(j), Trust Receipts Law).
(B) Will the case against C prosper? Reason briefly.
SUGGESTED ANSWER:
No, the case against C will not prosper, Since C
received the Construction material from E Before
the trust receipt transaction was a simple loan,
with the trust receipt merely as a collateral or
security for the loan. This is inconsistent with a
trust receipt transaction where the title to the
goods remains with the bank and the goods are
released to the entrustee before the loan is
granted
(Consolidated
Bank
and
Trust
Corporation v. Court of Appeals, 356 SCRA 671
[2001].
Trust Receipts; Obligations o an Entrustee
(2012)
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 Treasurer,
respectively, of CCC Car, Inc. signed the 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. Sales of the vehicles were slow, and it
rook a month to dispose of the ten (10) units. CCC
Car, Inc. wanted to be in business and to save on
various documentations required by the bank;
decided that instead of turning 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 justified?
Explain your answer. (5%)
SUGGESTED ANSWERS:
(a) No. It is the obligation of CCC Car, Inc., as
entrustee, to receive the proceeds of the sale of
the Mercedes Benz S class vehicles in trust for
BBB Bank, as entruster, and turn over the same
to BBB Bank to the extent of the amount owing
to the latter or as appears in the trust receipt
(Sec. 9(2), Trust Receipts Law).
Trust Receipt; Security for a Loan (2008)

Tom Cruz obtained a loan of P1 Million from XYZ

Bank to finance his purchase of 5,000 bags of
fertilizer. He executed a trust receipt in favor of XYZ
Bank over the 5,000 bags of fertilizer. Tom Cruz
withdrew the 5,000 bags from the warehouse to be
transported to Lucena City where his store was
located. On the way, armed robbers took from Tom
Cruz the 5,000 bags of fertilizer. Tom Cruz now
claims that his obligation to pay the loan to XYZ
Bank is extinguished because the loss was not due
to his fault. Is Tom Cruz correct? Explain. (4%)
SUGGESTED ANSWER:
No, Tom Cruzs obligation to pay the loan
covered by the trust receipts to XYZ
A Trust receipt is merely a collateral
agreement which serves as security for a loan,
with the Bank appearing as the owner of the
goods. The Bank cannot dispose of the goods in
any manner it chooses, because it is not the true
owner thereof (Rosario Textile Miss v. Home
Bankers, G.R. No. 137232, 29 June 2005, citing
Sia v. People, G.R. No. 30896, 28 April 1983,
Abad v. CA, G.R. No. 42735, 22 January 1990,
and PNB v. Pineda, G.R. No. 46658, 13 May 1991).
The loss of the goods covered by the trust
receipts cannot extinguish the principal
obligation of the borrower to pay the bank
(Landl& Company [Phil.] v. Metropolitan Bank,
G.R. 159622, 30 July 2004).
Trust Receipts vs. Simple Loan (2013)
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 earlier.
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
without 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 contemplating
the filing of estafa pursuant to the provisions of Pres.
Decree No. 115 (Trust Receipts Law) to force
Delano to tum in at least the proceeds of the sale of
the iron pellets.
Would you, as bank counsel and as an
officer of the court, advise the bank to proceed with
its contemplated action? (8%)
SUGGESTED 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, where the execution of
trust receipt agreement was made after the
goods covered byit had been purchased by
and delivered to the entrustee and the latter
as a consequence acquired ownership to the
goods, the transaction does not involve a
trust receipt but a simple loan even though
the parties denominated the transaction as
one of trust receipt (Colinares vs. Court of
Appeals, 339 SCRA 609, 2000; Consolidated
Bank and Trust Corporation v. CA, 356
SCRA 671, 2001).

Trust Receipts; Liability for Estafa (2015)

A. Maine Den, Inc. opened an irrevocable letter of
credit with Fair Bank, in connection with Maine Den,
Inc.' s importation of spare parts for its textile mills.
The imported parts were released to Maine Den, Inc.
after it executed a trust receipt in favor 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%)
SUGGESTED ANSWER:
The dismissal for the complaint of estafa is
justified. Under recent jurisprudence, the
Supreme Court held that transactions referred to
in relation to trusts 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 entrustee for resale or for
the manufacture of items to be sold, the
agreement is not a trust receipt but a simple
loan , notwithstanding the label. In the case, the
object of the trust receipt, spare parts for textile
mills, were for the use of the entrustee and never
intended for sale. As such, the transaction is a
simple loan. (Ng v. People of the Philippines, 619
SCRA 291[2010];Land Bank v. Perez, 672 SCRA
117[2012] and Hur Ting Yang v. People of the
Philippines, 703 SCRA 606[2013]).
Trusts Receipts; Defenses Against Criminal
Liability (2003)
PB & Co., Inc., a manufacturer of steel and steel
products, imported certain raw materials for use by it
in the manufacture of its products. The importation
was effected through a trust receipt arrangement
with AB Banking corporation. When it applied for the
issuance by AB Banking Corporation of a letter of
credit, PB & Co., Inc., did not make any
representation to the bank that it would be selling
what it had imported. It failed to pay the bank. When
demand was made upon it to account for the
importation, to return the articles, or to turn-over the
proceeds of the sale thereof to the bank, PB & Co.,
Inc., also failed. The bank sued PB & Co.s
President who was the signatory of the trust receipt
for estafa. The President put up the defense that he
could not be made liable because there was no
deceit resulting in the violation of the trust receipt.
He also submitted that there was no violation of the
trust receipt because the raw materials were not
sold but used by the corporation in the manufacture
of its products. Would those defenses be
sustainable? Why? (6%)
SUGGESTED ANSWER:

Trust Receipts; Res Perit Domino (2015)

B. Does the rule "res perit domino" apply in trust
receipt transactions? Explain. (2%)
SUGGESTED ANSWER:

No. this is because the loss of 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
extinguish the entrustees obligation to the
entruster for the value thereof.
Also, while the entruster is made to appear
as owner of the goods covered by the trust
receipt, such ownership is only a legal fiction to
enhance the entrusters security interest over
the goods (Section 10 of PD 115, Rosario Textile
Mills Corp. v. Home Bankers Savings and Trust
Company, 462 SCRA 88[2005]).