2008 Bar Questions: Mercantile Law

I.

X Corporation entered into a contract with PT Construction Corp. for the latter to construct and build a sugar mill within 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 Corporation 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%)

b) Can X Corporation claim directly from PT Construction Corporation? Explain. (3%)

(See discussion here.)

II.

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 5000 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%)

(See discussion here.)

III.

a) As a rule under the Negotiable Instruments Law, a subsequent party may hold a prior party liable but not vice versa. Give two (2) instances where a prior party may hold a subsequent party liable. (2%)

b) How does the “shelter principle” embodied in the Negotiable Instruments Law operate to give the rights of a holder-in-due course to a holder who does not have the status of a holder-in-due course? Briefly explain. (2%)

(See discussion here.)

IV.

AB Corporation drew a check for payment to XY Bank. The check was given to an officer of AB Corporation who was instructed to deliver it to XY Bank. Instead, the officer, intending to defraud the Corporation, filled up the check by making himself as the payee and delivered it to XY bank for deposit to his personal account. XY Bank debited AB Corporation’s account. AB Corporation came to know of the officer’s fraudulent act after he absconded. AB Corporation asked XY Bank to credit its amount. XY Bank refused.

a) If you were the judge, what issues would you consider relevant to resolve the case? Explain. (3%)

b) How would you decide the case? (2%)

(See discussion here.)

V.

Pancho drew a check to Bong and Gerard jointly. Bong indorsed the check and also forged Gerard’s indorsement. The payor bank paid the check and charged Pancho’s account for the amount of the check. Gerard received nothing from the payment.

a) Pancho asked the payor bank to credit his account. Should the bank comply? Explain fully. (3%)

b) Based on the facts, was Pancho as drawer discharged on the instrument? Why? (2%)

(See discussion here.)

VI.

On January 1, 2000, Antonio Rivera secured a life insurance form SOS Insurance Corp. for P1 Million with Gemma Rivera, his adopted daughter, as the beneficiary. Antonio Rivera died on March 4, 2005 and in the police investigation, it was ascertained that Gemma Rivera participated as an accessory in the killing of Antonio Rivera. Can SOS Insurance Corp. avoid liability by setting up as a defense the participation of Gemma Rivera in the killing of Antonio Rivera? Discuss with reasons. (4%)

(See discussion here.)

VII.

Terrazas de Patio Verde, a condominium building, has a value of P50 Million. The owner insured the building against fire with three (3) insurance companies for the following amounts:

Northern Insurance Corporation – P20 Million
Southern Insurance Corporation – P30 Million
Eastern Insurance Corporation – P50 Million

a) Is the owner’s taking of insurance for the building with three (3) insurers valid? Discuss. (3%)

b) The building was totally razed by fire. If the owner decides to claim from Eastern Insurance Corp. only P50 Million, will the claim prosper? Explain. (2%)

(See discussion here.)

VIII.

City Railways, Inc. (CRI) provides train service, for a fee, to commuters from Manila to Calamba, Laguna. Commuters are required to purchase tickets and then proceed to designated loading and unloading facilities to board the train. Ricardo Santos purchased a ticket for Calamba and entered the station. While waiting, he had an altercation with the security guard of CRI leading to a fistfight. Ricardo Santos fell on the railway just as a train was entering the station. Ricardo Santos was run over by the train. He died.

In the action for damages filed by the heirs of Ricardo Santos, CRI interposed lack of cause of action, contending that the mishap occurred before Ricardo Santos boarded the train and that it was not guilty of negligence. Decide. (5%)

(See discussion here.)

IX.

On October 30, 2007, M/V Pacific, a Philippine registered vessel owned by Cebu Shipping Company (CSC), sank on her voyage from Hong Kong to Manila. Empire Assurance Company (Empire) is the insurer of the lost cargoes loaded on board the vessel which were consigned to Debenhams Company. After it indemnified Debenhams, Empire as subrogee filed an action for damages against CSC.

a) Assume that the vessel was seaworthy. Before departing, the vessel was advised by the Japanese Meteorological Center that it was safe to travel to its destination. But while at sea, the vessel received a report of a typhoon moving within its general path. To avoid the typhoon, the vessel changed its course. However, it was still at the fringe of the typhoon when it was repeatedly hit by huge waves, foundered and eventually sank. The captain and the crew were saved except three (3) who perished. Is CSC liable to Empire? What principle of maritime law is applicable? Explain. (3%)

b) Assume that the vessel was not seaworthy as in fact its hull had leaked, causing flooding in the vessel. Will your answer be the same? Explain. (2%)

c) Assume the facts in question (b). Can the heirs of the three (3) crew members who perished recover from CSC? Explain fully. (3%)

(See discussion here.)

X.

Nelson owned and controlled Sonnel Construction Company. Acting for the company, Nelson contracted the construction of a building. Without first installing a protective net atop the sidewalks adjoining the construction site, the company proceeded with the construction work. One day a heavy piece of lumber fell from the building. It smashed a taxicab which at that time had gone offroad and onto the sidewalk in order to avoid the traffic. The taxicab passenger died as a result.

a) Assume that the company had no more account and property in its name. As counsel for the heirs of the victim, whom will you sue for damages, and what theory will you adopt? (3%)

b) If you were the counsel for Sonnel Construction, how would you defend your client? What would be your theory? (2%)

c) Could the heirs hold the taxicab owners and driver liable? Explain. (2%)

(See discussion here.)

XI.

a) Since February 8, 1935, the legislature has not passed even a single law creating a private corporation. What provision of the Constitution precludes the passage of such a law? (3%)

b) May the composition of the Board of Directors of the National Power Corporation (NPC) be validly reduced to three (3)? Explain your answer fully. (2%)

(See discussion here.)

XII.

Pedro owns 70% of the subscribed capital stock of a company which owns an office building. Paolo and Juan own the remaining stock equally between them. Paolo owns a security agency, a janitorial company and a catering business. In behalf of the office building company, Paoplo engaged his companies to render their services to the office building. Are the service contracts valid? Explain. (4%)

(See discussion here.)

XIII.

Grand Gas Corporation, a publicly listed company, discovered after extensive drilling a rich deposit of natural gas along the coast of Antique. For five (5) months, the company did not disclose the discovery so that is could quietly and cheaply acquire neighboring land and secure mining rights to the land. Between the discovery and its disclosure of the information to the Securities and Exchange Commission, all the directors and key officers of the company bought shares in the company at very low prices. After the disclosure, the price of the shares went up. The directors and officers sold their shares at huge profits.

a) What provision of the Securities Regulation Code (SRC) did they violate? Explain. (4%)

b) Assuming that the employees of the establishment handling the printing work of Grand Gas Corporation saw the exploration reports which were mistakenly sent to their establishment together with other materials to be printed. They too bought shares in the company at low prices and later sold them at huge profits. Will they be liable for violation of the SRC? Why? (3%)

(See discussion here.)

XIV.

Ace Cruz subscribe to 100,000 shares of stock of JP Development Corporation, which has a par value of P1 per share. He paid P25,000 and promised to pay the balance before December 31, 2008. JP Development Corporation declared a cash dividend on October 15, 2008, payable on December 1, 2008.

a) For how many shares is Ace Cruz entitled to be paid cash dividends? Explain. (2%)

b) On December 1, 2008, can Ace Cruz compel JP Development Corporation to issue to him the stock certificate corresponding to the P25,000 paid by him? (2%)

(See discussion here.)

XV.

Eloise, an accomplished writer, was hired by Petong to write a bi-monthly newspaper column for Diario de Manila, a newly-established newspaper of which Petong was the editor-in-chief. Eloise was to be paid P1,000 for each column that was published. In the course of two months, Eloise submitted three columns which, after some slight editing, were printed in the newspaper. However, Diario de Manila proved unprofitable and closed only after two months. Due to the minimal amounts involved, Eloise chose not to pursue any claim for payment from the newspaper, which was owned by New Media Enterprises.

Three years later, Eloise was planning to publish an anthology of her works, and wanted to include the three columns that appeared in the Diario de Manila in her anthology. She asks for your legal advice:

a) Does Eloise have to secure authorization from New Media Enterprises to be able to publish her Diario de Manila columns in her own anthology? Explain fully. (4%)

b) Assume that the New Media Enterprises plans to publish Eloise’s columns in its own anthology entitled, “The Best of Diario de Manila”. Eloise wants to prevent the publication of her columns in that anthology since she was never paid by the newspaper. Name one irrefutable legal argument Eloise could cite to enjoin New Media Enterprises from including her columns in its anthology. (2%)

(See discussion here.)

XVI.

In 1999, Mocha Warm, an American musician, had hit rap single called Warm Warm Honey which he himself composed and performed. The single was produced by a California record company, Galactic Records. Many noticed that some passages from Warm Warm Honey sounded eerily similar to parts of Under Hassle, a 1978 hit song by the British rock bank Majesty. A copyright infringement suit was filed in the United States against Mocha Warm by Majesty. It was later settled out of court, with Majesty receiving attribution as co-author of Warm Warm Honey as well as a share in the royalties.

By 2002, Mocha Warm was nearing bankruptcy and he sold his economic rights over Warm Warm Honey to Galactic Records for $10,000.
In 2008, Planet Films, a Filipino movie producing company, commissioned DJ Chef Jean, a Filipino musician, to produce an original re-mix of Warm Warm Hoeny for use of its latest films, Astig!. DJ Chef Jean remixed Warm Warm Honey with a salsa beat, and interspersed as well a recital of a poetic stanza by John Blake, a 17th century Scottish poet. DJ Chef Jean died shortly after submitting the remixed Warm Warm Honey to Planet Films.

Prior to the release of Astig!, Mocha Warm learns of the remixed Warm Warm Honey and demands that he be publiclyidentified as the author of the remixed song in all the CD covers and publicity releases of Planet Films.

a) Who are the parties or entities entitled to be credited as author of the remixed Warm Warm Honey? Reason out your answers. (3%)

b) Who are the particular parties or entities who exercise copyright over the remixed Warm Warm Honey? Explain. (3%)

(See discussion here.)

XVII.

On January 1, 2008, Al obtained a loan of P10,000 from Bob to be paid on January 30, 2008, secured by a chattel mortgage on a Toyota motor car. On February 1, 2008, Al obtained another loan of P10,000 from Bob to be paid on February 15, 2008. He secured this by executing a chattel mortgage on a Honda motorcycle. On the due date of the first loan Al failed to pay. Bob foreclosed the chattel mortgage but the car was bidded for P6,000 only. Al also failed to pay the second loan due on February 15, 2008. Bob filed an action for collection of money. Al filed a motion to dismiss claiming that Bob should first foreclose the mortgage on the Honda motorcycle before he can file the action for sum of money. Decide with reasons. (4%)

(See discussion here.)

XVIII.

a) Can a distressed corporation file a petition for corporate rehabilitation after the dismissal of its earlier petition for insolvency? Why? (2%)

b) Can the corporation file a petition for rehabilitation first, and after it is dismissed file a petition for insolvency? Why? (2%)

c) Explain the phrase “equality is equity” in corporate rehabilitation proceedings. (2%)

(See discussion here.)

XIX.

Industry Bank, which has a net worth of P1 Billion, extended a loan to Celestial Properties Inc. amounting to P270 Million. The loan was secured by a mortgage over a vast commercial lot in the Fort Bonifacio Global City, appraised at P350 Million. After audit, the Bangko Sentral ng Pilipinas gave notice that the loan to Celestial Properties exceeded the single borrower’s limit at 25% of the bank’s net worth under a recent BSP Circular. In light of other previous similar violations of the credit limit requirement, the BSP advised Industry Bank to reduce the amount of the loan to Celestial Properties under pain of severe sanctions. When Industry Bank informed Celestial Properties that it intended to reduce the loan by P50 Million, Celestial Properties countered that the bank should first release a part of the collateral worth P50 Million. Industry Bank rejected the counter-proposal, and referred the matter to you as counsel. How would you advise Industry Bank to proceed, with its best interest in mind? (5%)

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