2007 bar questions and suggested answers (MERCANTILE LAW)

Mercantile Law

I.
(10%)

R issued a check for P1M which he used to pay S for killing his political enemy.
Reason briefly in (a), (b) and (c).

a. Can the check be considered a negotiable instrument?
Yes, the check can be considered a negotiable instrument. In ascertaining the character of the instrument, the primordial and only consideration is its compliance with Section 1 of the Negotiable Instruments Law. Since the problem states that a check has been issues, we presume that it has all the other terms mandated under Section 1, and if it was issued payable to order or bearer, then it is a negotiable instrument.

b. Does S have a cause of action against R in case of dishonor by the drawee bank?
No, S does not have a cause of action against R in case of dishonor by the drawee bank. There is still an underlying contractual relationship between S and R, evidenced by the check, and needs a valid consideration to support it. Under Section 28 of the Negotiable Instruments Law, such illegality of consideration is a defense against immediate parties but not against a holder in due course (i.e., personal defense). The consideration for the issuance of the check, as between S and R, is void involving as it does the killing of the political enemy of R.

c. If S negotiated the check to T, who accepted it in good faith and for value, may R be held secondarily liable by T?
R may be held secondarily liable by T. T enjoys the presumption being a holder in due course because every holder is deemed prima facie to be a holder in due course. (Section 59, Negotiable Instruments Law), especially since he took the check in good faith and for value. Section 57 of the Negotiable Instruments Law states , “A holder in due course holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.”

II.
(10%)

Alex deposited goods for which Billy, warehouseman, issued a negotiable warehouse receipt wherein the goods were deliverable to Alex or order. Alex negotiated the receipt to Caloy. Thereafter, Dario, a creditor secured judgment against Alex and served notice of levy over the goods on the warehouseman.

a. To whom should the warehouseman deliver the goods upon demand?
The warehouseman should deliver the goods to Caloy. The goods cannot be attached by garnishment or otherwise, or levied upon, unless the receipt be first surrendered to the warehouseman, or its negotiation is enjoined. (Section 25, Warehouse Receipts Law)

b. Would you answer be the same if the warehouseman issued a non-negotiable warehouse receipt? Reason briefly.
No. The non-negotiable warehouse receipt does not confer upon the transferee the direct obligation of the warehouseman to hold possession of the goods for him. (Section 42, Warehouse Receipts Law). In such case, the law provides that when a non-negotiable warehouse receipt is transferred to Caloy, he only gets such title to the goods as Alex had and also a right to notify the warehouseman to hold the goods for Caloy’s account. Prior to such notice, Caloy’s claim can be defeated by a levy of execution upon the goods by a creditor of Alex.

III.
(5%)

Diana and Piolo are famous personalities in showbusiness who kept their love affair secret. They use a special instant messaging service which allows them to see one another's typing on their own screen as each letter key is pressed. When Greg, the controller of the service facility, found out their identities, he kept a copy of all the messages Diana and Piolo sent each other and published them. Is Greg liable for copyright infringement? Reason briefly.

Yes, Greg is guilty of copyright infringement. The instant messages of Diana and Piolo are deemed to constitute “letters” (Section 172.1[d], Intellectual Property Code) which are “protected by the sole fact of their creation irrespective of their mode or form of expression, as well as their content, quality, and purpose.” (Section 172.2[d], Intellectual Property Code). For copyright to exist, it must be found in a tangible medium, usually in written form, which is fulfilled by the instant messages. Under the Electronic Commerce Act, whenever the law requires certain contracts or acts to be in writing to be valid and enforceable, then such requirement is deemed fulfilled when they are in the form of an electronic document. The instant messages are deemed to be in writing under the Electronic Commerce Act for they are in digital form or constitute electronic documents.

IV.
(10%)

Alfredo took out a policy to insure his commercial building against fire. The broker for the insurance company agreed to give a 15-day credit within which to pay the insurance premium. Upon delivery of the policy on May 15, 2006, Alfredo issued a postdated check payable on May 30, 2006. On May 28, 2006, a fire broke out and destroyed the building owned by Alfredo.Reason briefly in (a), (b) and (c).

a. May Alfredo recover on the insurance policy?
Yes, Alfredo can recover on the insurance policy. Although Section 77 of the Insurance Code provides that in fire insurance, payment of premium is necessary for validity of the policy (also known as “cash and carry” provision), nonetheless, the rule has been modified by the decisions of the Supreme Court after the promulgation of the Insurance Code. Thus, in UCPB General Insurance v. Masagana Telemart, G.R. No. 137172, April 4, 2001, it was held that the insured should be allowed to recover on losses sustained even when premium was paid after the fact of loss, provided payment was received by the insurer during the credit period given to the insured. (See also South Sea Surety v. Court of Appeals, G.R. No. 102253, June 2, 1995; American Home Assurance v. Chua, G.R. No. 130421, June 28, 1999) where the Supreme Court ruled that is the check payment for premium was received by the insurer prior to the loss or within the credit period, the insured was allowed to recover.

b. Would your answer in (a) be the same if it was found that the proximate cause of the fire was an explosion and that fire was but the immediate cause of loss and there is no excepted peril under the policy?
Yes, recovering under an insurance contract is allowed if the cause of the loss was either the proximate or the immediate cause as long as an expected peril was not the proximate cause of the loss. (Section 86, Insurance Code of the Philippines.) The fire being the immediate cause for the loss of the commercial building, would warrant recovery under the policy.

c. If the fire was found to have been caused by Alfredo's own negligence, can he still recover on the policy?
Yes, he can still recover. The doctrine of contributory negligence does not in any way apply to rights under a contract of insurance, unless it is a case of willful act. (Section 87, Insurance Code of the Philippines)

V.
(5%)

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 a loan to pay 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 on the loan, F Bank charged him with violation of the Trust Receipts Law.

a. What is a Trust Receipt?
A trust receipt is a security transaction intended to aid financing importers or dealers in merchandise by allowing them to obtain delivery of the goods under certain covenants. (Section 4, Trust Receipts Law). It is a document executed between the entrustor and the entrustee, under which the goods are released to the latter who binds himself to hold the goods in trust, or to sell or dispose of the goods with the obligations to turn over the proceeds to the entrustor to the extent of the entrustee’s obligation to him, or if unsold, to return the goods.

b. Will the case against C prosper? Reason briefly.
No. It is not covered by the Trust Receipts Law. In Consolidated Bank v. Court of Appeals, G.R. No. 114286, April 19, 2001, where debtor received goods subject of trust receipt before trust receipt itself was entered into, it was held that the transaction in question was a simple loan. Colinares v. Court of Appeals, G.R. No. 90828, September 5, 2000 held that the Trust Receipts Law does not seek to enforce payment of loan, rather it punishes dishonesty and abuse of confidence in handling of money or goods to the prejudice of another regardless of whether the latter is the owner.

VI.
(5%)

Discuss the trust fund doctrine
The Trust Fund Doctrine refers to the principle that the capital stock, property and other assets of the corporation are regarded as equity in trust for payment of corporate creditors. “This doctrine is the underlying principle in the procedure for the distribution of capital assets, embodied in Corporation Code, which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings, and (3) dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire its own shares and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefore are complied with.” (Ong Yong v. Tiu, G.R. No. 144476, April 8, 2003)

VII.
(10%)

In a stockholder's meeting, S dissented from the corporate act converting preferred voting shares to non-voting shares. Thereafter, S submitted his certificates of stock for notation that his shares are dissenting. The next day, S transferred his shares to T to whom new certificates were issued. Now, T demands from the corporation the payment of the value of his shares.

a. What is the meaning of a stockholder's appraisal right?
It is the right of a stockholder to withdraw from the corporation and demand in writing, payment of the fair value of his shares after registering his dissent from certain specified corporate acts involving fundamental changes in corporate structures provided that the corporation has sufficient unrestricted retained earnings. (Section 81, Commercial Code of the Philippines)

b. Can T exercise the right of appraisal? Reason briefly.
No. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder shall cease and the transferee shall have all the rights of a regular stockholder. (Section 86, Corporation Code). T cannot exercise the right of appraisal because the certificates containing the notation of S’s dissent have been canceled. Upon such cancellation, S’s rights as a dissenting stockholder have ceased. In such a case, a new certificate without notation will be issued to T, who will be treated as a regular stockholder.

VIII.
(10%)

Due to growing financial difficulties, Z Bank was unable to finish construction of its 21-storey building on a prime lot located in Makati City. Inevitably, the Bangko Sentral ordered the closure of Z Bank and consequently placed it under receivership. In a bid to save the bank's property investment, the President of Z Bank entered into a financing agreement with a group of investors for the completion of the construction of the 21-storey building in exchange for a ten year lease and the exclusive option to purchase the building.

a. Is the act of the President valid? Why or why not?
Alternative Answer:
No, the act of the President is not valid. Receivership is equivalent to an injunction to restrain the bank officers from intermeddling with the property of the bank in any way. (Villanueva v. CA, G.R. No. 114870, May 26, 1995). More importantly, under the New Central Bank Act, when a bank had been placed under receivership by the Bangko Sentral ng Pilipinas, and especially in this case where it has been ordered to be closed, the conservator, or in this case the receiver, effectively replaces the Board of Directors in exercising corporate powers.

Alternative Answer:
Under the Corporation Law, the acts of the President do not fall within his apparent authority, and do not bind the corporation without prior authority of the Board of Directors, which under Section 23 of the Corporation Code is the sole repository of corporate powers.

b. Will a suit to enforce the exclusive right of the investors to purchase the property prosper? Reason briefly.
The suit will not prosper. The appointment of a receiver operates to suspend the authority of the bank and its directors and officers over its property and effects, such authority being reposed in the receiver. The receivership is equivalent to an injunction to restrain the bank officers from intermeddling with the property of the bank in any way. (Abacus Real Estate Development Center, Inc. v. The Manila Banking Corporation, G.R. No. 162279, April 6, 2005, citing Villanueva v. Court of Appeals, G.R. No. 114870, May 26, 1995).

IX.
(5%)

On December 4, 2003, RED Corporation executed a real estate mortgage in favor of BLUE Bank. RED Corporation defaulted in the payment of its loan. Consequently, on June 4, 2004, BLUE Bank extrajudicially foreclosed the property. Being the highest bidder in the auction sale conducted, the Bank was issued a Certificate of Sale which was registered on August 4, 2004. Does RED Corporation still have the right to redeem the property as of September 14, 2007? Reason briefly.

No. RED corporation has only one (1) year from the auction sale to redeem the property. (Section 6, Act No. 3135; Section 47, General Banking Law of 2000). Instead, RED Corporation allowed three (3) years to lapse. RED Corporation should be deemed to have waived its right to redeem the property.

X.
(5%)

Name at least five (5) predicate crimes to money laundering.
The predicate crimes to money laundering are:
1. Kidnapping for ransom;
2. Violations of the Dangerous Drug Act;
3. Violations of the Anti-Graft and Corrupt Practices Act;
4. Plunder
5. Robbery and Extortion;
6. Jueteng and Masiao;
7. Piracy on the high seas;
8. Qualified Theft;
9. Swindling;
10. Smuggling;
11. Violations of the Electronic Commerce Act of 2000;
12. Hijacking, destructive arson, murder, and the other acts of terrorists against non-combatant persons and similar targets;
13. Fraudulent practices punished by the Securities Regulation Code of 2000; and
14. Felonies or offenses of a similar nature that are punishable under the penal laws of other countries.

XI.
(10%)

Two vessels figured in a collision along the Straits of Guimaras resulting in considerable loss of cargo. The damaged vessels were safely conducted to the Port of Iloilo. Passenger A failed to file a maritime protest. B. a non-passenger but a shipper who suffered damage to his cargo, likewise did not file a maritime protest at all.

a. What is a maritime protest?
A “maritime protest” is a written confirmation that must be formally lodged before a competent authority, by the captain or master of the innocent vessel, which has figured in a collision or shipwreck, within 25 hours upon arrival at the nearest port, failure of which bars recovery for loss or damage, no matter how meritorious the claim may be. (Article 835, Code of Commerce)

b. Can A and B successfully maintain an action to recover losses and damages arising from the collision? Reason briefly.
A, being a passenger, cannot maintain the action to recover losses without a prior protest. B can recover because the lack of protest will not prejudice such actions to recover damage caused to persons or cargo whose owners were not on board the vessel at the time of collision. (Article 836, Code of Commerce).

XII.
(5%)

Seeking to streamline its operations and to bail out its losing ventures, the stockholders of X Corporation unanimously adopted a proposal to sell substantially all of the machineries and equipment used in and out its manufacturing business and to sink the proceeds of the sale for the expansion of its cargo transport services.

a. Would the transaction be covered by the provisions of the Bulk Sales Law?
Alternative Answer:
Under a decision of the Court of Appeals (People v. Wong, G.R. No. 9776-R, March 26, 1954), it was held that the transaction can not be covered by the Bulk Sales Law, which only covers merchants who are engaged in the sale of goods and merchandise. A manufacturing concern is not considered to be a merchant business, more so when it is pursued as part of another service business, in this case the cargo transport services.

Alternative Answer:
When it comes to the sale of all or substantially all of the machineries and equipment, which under the Bulk Sales Law is separate type of “bulk sale” apart from the sale of goods or merchandise in the ordinary course of business, such transactions are still covered by the Bulk Sales Law.

b. How would X Corporation effect a valid sale?
Alternative Answer:
X Corporation must comply with Sections 3, 4 and 5 of the Bulk Sales Law, namely: (1) deliver sworn statement of the names and addresses of all the creditors to whom the vendor or mortgagor may be indebted together with the amount of indebtedness due or owing to each of the said creditors; (2) apply the purchase or mortgage money to the pro-rata payment of bona fide claims of the creditors and (3) make full detailed history of the stock of goods, wares , merchandise, provisions or materials, in bulk, and notify every creditor at least ten (10) days before transferring possession.

Alternative Answer:
Important corporate acts or contracts must be pursued under the direction of the Board of Directors is embodied in Section 23 of the Corporation Code. Even the sale of all or substantially all of its assets requires the prior approval of the board of directors and the ratification of stockholders owning or representing at least two-thirds (2/3) of its outstanding capital stock (Section 40, Corporation Code of the Philippines)

Under the Bulk Sales Law, X Corporations should either: (a) get the waiver of all its creditors as required under the Bulk Sales Law; or (b) if such waiver cannot be obtained, comply with the requirements under the Bulk Sales Law to prepare and give copy of the sworn certification not only of the assets being disposed of, but also the proper listing of the existing creditors of X Corporation, and thereafter to apply the proceeds of the sale proportionately to all the listed creditors. Otherwise, the sale may be vulnerable to being challenged to be fraudulent and void under the Bulk Sales Law. (Islamic Directorate of the Philippines v. Court of Appeals, G.R. No. 117897, May 14, 1997).

XIII.
(10%)

a. What are the preferred claims that shall be satisfied first from the assets of an insolvent corporation?

After debtor’s assets have been liquidated, unless a composition has been agreed upon by the debtor’s creditors, debtor’s obligation shall be paid in the following order:
1. Article 2241 New Civil Code – Specific movable property.
2. Article 2242 – Specific immovable property
3. Preferred claims under Article 2244 – In the order named.
4. Article 2245 – New Civil Code – Common credits – shall be paid pro-rata.
N.B. A comprehensive answer for XIII (A) would impose an unreasonable memorization of the codal provisions.

b. How shall the remaining non-preferred creditors share in the estate of the insolvent corporation above?
The remaining credits do not enjoin any preference. Hence, these creditors shall be paid pro-rata. (Articles 2244 and 2251[2], Civil Code)

NOTHING FOLLOWS.