q & a mercantile law-2009bar

8/8/2019 q & a Mercantile Law-2009bar

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Question & Answer in Mercantile LawCulled from the Recent & S ignificant Decisions of the Supreme Court

2009 Bar Examinations

Atty. Mark P. Piad

(LLB, A.B. Pol. Sci.)Associate, ALOBBA PORRAS & ASSOCIATES

-o0o-

1. X delivered stocks of vegetable oil to Y sometime on March 1993. Aspayment therefor, Y issued a personal check in the amount of Php 348,805.50. However, when the check was encashed, it was dishonored by thedrawee bank. Y then assured X that he would replace the bounced checkwith a cashiers check from the Bank of the Philippine Islands (BPI).

Thereafter, BPI cashiers check no. 14428 in the amount of Php 348, 805.50was issued, drawn against the account of Y. The following day, X returnedto drawee bank to encash the check but it was dishonored, the bank theninformed X that Ys account was closed on that date.

X then filed a complaint for collection of sum of money against BPI.In its answer, BPI claimed that it issued the check by mistake in good faith;that its dishonor was due to lack of consideration; and that Xs remedy wasto sue Y who purchased the check.

a. Is X a holder in due course despite BPIs contention that there waslack of consideration?

b. Is BPI liable to X for the amount of the cashiers check?c. What is the nature of a cashiers check?

SUGGESTED ANSWER:

a. YES. X is a holder in due course.Sec. 52. (NIL)a holder in due course is a holder who has taken theinstrument under the following conditions:

a. That it is complete and regular upon its face;b. That he became the holder of it before it was overdue and

without notice that it had been previously dishonored;c. That he took it in good faith and for value;d. That at the time it was negotiated to him, he had no notice of

any infirmity in the instrument or defect in the title of theperson negotiating it.

Value in general terms may be some right, interest, profitor benefit to the party who makes the contract or someforbearance, detriment, loan, responsibility, etc., on the otherside. Here, there is no dispute that X received Ys cashiers checkas payment for the formers vegetable oil. The fact that it was Ywho purchased the cashiers check from BPI will not affect Xsstatus as a holder for value since the check was delivered to himas payment for the vegetable oil he sold to Y. (Bank of the


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Philippine Islands vs. Gregorio C. Roxas, G.R. No. 157833, October15, 2007 [Sandoval-Gutierrez, J.]).

b. YES. BPI is liable for the amount of the cashiers check.A cashiers check is really the banks own check and may be treatedas a promissory note with the bank as a maker. The check becomesthe primary obligation of the bank which issues it and constitutes awritten promise to pay upon demand. (BPI vs. Roxas)

c. It is a well known and accepted practice in the business sector that acashiers check is deemed as cash. This is because the mere issuanceof a cashiers check is considered acceptance thereof. (BPI vs. Roxas).

2. Can a foreign corporation not doing business in the Philippines file anadministrative complaint for alleged violation of intellectual propertyrights?

SUGGESTED ANSWER:

YES. A foreign corporation has the legal capacity to sue for theprotection of its trademarks, albeit it is not doing business in the Philippines.Sec. 160 in relation to Sec. 3 of R.A. 8293, provides:

SEC. 160. Any foreign national or juridical person who meets therequirements of Sec. 3 of this Act and does not engage in business in thePhilippines may bring a civil or administrative action hereunder foropposition, cancellation, infringement, unfair competition, or false designationof origin and false description, whether or not it is licensed to do business inthe Philippines under existing laws.

SEC. 3. Any person who is domiciled or has a real and effectiveindustrial establishment in a country which is a party to any convention,treaty or agreement relating to intellectual property rights or the repression ofunfair competition, to which the Philippines is also a party, or extends

reciprocal rights to nationals of the Philippines by law, shall be entitled tobenefits to the extent necessary to give effect to any provision of suchconvention, treaty or reciprocal law, in addition to the rights to which anyowner of an intellectual property right is otherwise entitled by this Act.(Sehwani, Incorporated and/or Benitas Frites, Inc., vs. In-N-Out Burger, Inc., G.R.No. 171053, October 15, 2007 [Ynares-Santiago, J.]).

x x x

Stated differently, in the case of Philip Morris, Inc. vs. Fortune Tobacco

Corporation, 493 SCRA 333 [2006]), to wit:

Foreign corporations may not successfully sue on the basis alone oftheir respective certificates of registration of trademarks, for as a condition toavailment of the rights and privileges vis--vis their trademarks in thiscountry, they ought to show proof that, on top of Philippine registration, their


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country grants substantially similar rights and privileges to Filipino citizenspursuant to Section 21-A of R.A. 166 (now Sec. 3, R.A. 8293).

3. What are pre-need plans?SUGGESTED ANSWER:

Are contracts which provide for the performance of future services ofthe payment of future monetary considerations at the time of actual need, forwhich planholders pay in cash or installment at stated prices, with or withoutinterest or insurance coverage and includes life, pension, education, interment,and other plans which the Commission may from time to time approve. (Sec.3.9. R.A. 8799)

4. What is the so-called Must-Carry Rule?SUGGESTED ANSWER:

The Must-Carry Rule favors both broadcasting organizations and thepublic. It prevents cable television companies from excluding broadcastingorganization especially in those places not reached by signal. Also, the ruleprevents cable television companies from depriving viewers in far-flung areasthe enjoyment of programs available to city viewers.

This mandatory coverage provision under Section 6.2 of saidMemorandum Circular, requires all cable television system operators,operating in a community within the Grade A or B contours to must-carry the television signals of the authorized television broadcast stations, x xx as the circular was issued to give consumers and the public a wider access tomore sources of news, information, entertainment and otherprograms/contents.

The carriage of ABS-CBNs signals by virtue of the must-carry rule inMemorandum Circular No. 04-08-88 is under the direction and control of thegovernment though the NTC which is vested with exclusive jurisdiction tosupervise, regulate and control telecommunications and broadcastservices/facilities in the Philippines. The imposition of the must-carry rule iswithin the NTCs power to promulgate rules and regulations, as public safetyand interest may require, to encourage a larger and more effective use ofcommunications, radio and television broadcasting facilities, and to maintaineffective competition among private entities in these activities whenever theCommission finds it reasonably feasible. (ABS-CBN Broadcasting Corporation vs.Philippine Multi-Media System, Inc., G.R. Nos. 175769-70, January 19, 2009[Ynares-Santiago, J.]).

5. What is the relationship between the banking institution and its depositor?What is the standard of diligence required of the bank?

SUGGESTED ANSWER:


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The contract between the bank and its depositor is governed by theprovisions of the Civil Code on simple loan. Article 1980 of the Civil Codeexpressly provides that x x x savings x x x deposits of money in banks andsimilar institutions shall be governed by the provisions concerning simpleloan. There is a debtor-creditor relationship between the bank and its

depositor. The bank is the debtor and the depositor is the creditor. Thedepositor lends the bank money and the bank agrees to pay the depositor ondemand. The savings deposit agreement between the bank and the depositoris the contract that determines the rights and obligations of the parties.

The law imposes on banks high standards in view of the fiduciarynature of banking. Section 2 of Republic Act No. 8791 (RA 8791), whichtook effect on 13 June 2000, declares that the State recognizes the fiduciarynature of banking that requires high standards of integrity and performance.This new provision in the general banking law, introduced in 2000, is astatutory affirmation of Supreme Court decisions, starting with the 1990 caseof Simex International vs. Court of Appeals, holding that the bank is underobligation to treat the accounts of its depositors with meticulous care, alwayshaving in mind the fiduciary nature of their relationship.

This fiduciary relationship means that the banks obligation to observehigh standards of integrity and performance is deemed written into everydeposit agreement between a bank and its depositor. The fiduciary nature ofbanking requires banks to assume a degree of diligence higher than that of agood father of a family. Article 1172 of the Civil Code states that the degree ofdiligence required of an obligor is that prescribed by law or contract, and

absent such stipulation then the diligence of a good father of a family. Section2 of RA 8791 prescribes the statutory diligence required from banks thatbanks must observe high standards of integrity and performance inservicing their depositors. (Central Bank of the Philippines vs. Citytrust BankingCorporation, G.R. No. 141835, February 4, 2009 [Carpio-Morales, J.]).

6. Geronimo, the president of Gateway Corporation executed a deed ofsuretyship for Gateway in favor of Asianbank Corporation. Gatewaydefaulted in the payment of its obligations, thereafter Asianbank filed withthe RTC Makati a complaint for sum of money against the Corporation and

Geronimo. Court ruled in favor of Plaintiff bank, thus defendants appealedto the CA. Pending appeal, the Corporation filed a petition for voluntaryinsolvency with RTC Imus, Cavite and was subsequently declared by saidCourt insolvent. Gateway and Geronimo thus prayed that the assaileddecision of the Makati RTC be set aside, as the insolvency court acquired jurisdiction over the properties of Gateway by virtue of Section 60 of Act1956, without prejudice to Asianbank pursing its claim in the insolvencyproceedings.

Is the contention of Gateway Corporation and Geronimo tenable?

SUGGESTED ANSWER:

The contention, as formulated, is in a qualified sense meritorious.

Upon the filing of the petition for insolvency, pending civil actionsagainst the property of the petitioner are not ipso facto stayed, but the insolvent


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may apply with the court in which the actions are pending for a stay of theactions against the insolvents property. If the court grants such application,pending civil actions against the petitioners property shall be stayed;otherwise, they shall continue. Once an order of insolvency neverthelessissues, all civil proceedings against the petitioners property are, by statutory

command, automatically stayed. (See, Sec. 18 in relation to Sec. 60, InsolvencyLaw)

Applying the aforequoted provisions, it can rightfully be said that theissuance of the insolvency order had the effect of automatically staying thecivil action for sum of money filed by Asianbank against Gateway.

However, Geronimos contention is untenable.

A surety undertakes directly for the payment and is so responsible at

once if the principal debtor makes default. A creditors right to proceedagainst the surety exists independently of his right to proceed against theprincipal. Since, generally, it is not necessary for the creditor to proceedagainst a principal in order to hold the surety liable, where, by the terms of thecontract, the obligation of the surety is the same as that of the principal, thenas soon as the principal is in default, the surety is likewise in default, and maybe sued immediately and before any proceedings are had against theprincipal. (Gateway Electronics Corporation and Geronimo B. Delos Reyes, Jr. vs.Asianbank Corporation, G.R. No. 172041, December 18, 2008 [Velasco, Jr., J.];Palmares vs. Court of Appeals).

7. When the payee of the check is not intended to be the true recipient of itsproceeds, is it payable to order or bearer?

SUGGESTED ANSWER:

As a rule, when the payee is fictitious or not intended to be the truerecipient of the proceeds, the check is considered as a BEARER instrument.

8. What is the FICTITIOUS-PAYEE RULE? Who is liable under it? Is there anyexception?

SUGGESTED ANSWER:

When a person making the check so payable did not intent for thespecified payee to have any part in the transaction, the payee is considered asfictitious payee. (Mueller & Martin vs. Liberty Insurance Bank). Fictitious-payee

rule extends protection even to non-bank transferee of the checks.

The rule protects the depositary bank and assigns the loss to the drawerof the check who was in a better position to prevent the loss in the first place.(Getty Petroleum Corp. vs. American Express Travel Related Services Company, Inc.)

However, there is a commercial bad faith exception to the fictitious-

payee rule. A showing of commercial bad faith on the part of the draweebank, or any transferee of the check for that matter, will work to strip it of its


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defense. The exception will cause it to bear the loss. Commercial bad faith ispresent if the transferee of the checks acts dishonestly, and is a party to thefraudulent scheme. (Philippine National Bank vs. Erlando T. Rodriguez, et al, G.R.No. 170325, September 26, 2008 [Reyes, R.T., J.])

9. If a bank pays out on a forged check, is it liable to reimburse the drawerfrom whose account the funds were paid out?

SUGGESTED ANSWER:

NO.

General rule remains that the drawee who has paid upon the forgedsignature bears the loss. The exception to this rule arises only when

negligence can be traced on the part of the drawer whose signature wasforged, and the need arises to weigh the comparative negligence between thedrawer and the drawee to determine who should bear the burden of loss. x x x

The general rule is to the effect that a forged signature is whollyinoperative, and payment made through or under such signature is ineffectualor does not discharge the instrument. If payment is made, the drawee cannotcharge it to the drawers account. The traditional justification for the result isthat the drawee is in a superior position to detect a forgery because he has themakers signature and is expected to know and compare it. The rule has a

healthy cautionary effect on banks by encouraging care in the comparison ofthe signatures against those on the signature cards they have on file.Moreover, the very opportunity of the drawee to insure and to distribute thecost among its customers who use checks makes the drawee an ideal party tospread the risk to insurance. (Samsung Construction Company Philippines, Inc.vs. Far East Bank and Trust Company, G.R. No. 129015, August 13, 2004 [Tinga,J.]).

10.If a bank refuses to pay a check, can the payee-holder thereof sue the bank?SUGGESTED ANSWER:

No.

If a bank refuses to pay a check (notwithstanding sufficiency of funds),the payee-holder cannot sue the bankthe payee-holder should instead suethe drawer who might in turn sue the bank. (Villanueva vs. Nite, 496 SCRA 459[2006]).

11.What are the requisites before a Management Committee can be created anda Receiver are appointed by the Regional Trial Court?SUGGESTED ANSWER:

(a.) He Must show that the corporate property is in danger of beingwasted and destroyed;


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(b.) That the business of the corporation is being diverted from thepurpose for which it has been organized;

(c.) That there is a serious paralyzation of operations all to hisdetriment.

In the absence of a strong showing of an imminent danger ofdisposition, loss, wastage, or destruction of assets or other properties of acorporation and paralysis of its business operations, the mere apprehension offuture misconduct based upon prior mismanagement will not authorize theappointment of a Management Committee/Receiver. (Sy Chim vs. Siy Hi &Sons, Inc., 480 SCRA 465 [2006]).

12.What is the Concession Theory? Does it have any legal basis in PhilippineLaw?

SUGGESTED ANSWER:

It is a principle in the creation of corporations, under which acorporation is an artificial creature without any existence until it has receivedthe imprimatur of the State acting according to law, through SEC. The life ofthe Corporation is a concession made by the State.

Section 19 of Batas Pambansa Bilang 68, otherwise known as theCorporation Code of the Philippines provides for the Commencement of

corporate existence, thatA private corporation formed or organized underthis Code commences to have corporate existence and juridical personality and isdeemed incorporated from the date the Securities and Exchange Corporation issuesa certificate of incorporation under its official seal x x x.

13.Distinguish between the Trust Fund Doctrine from the Trust Fund Theory.SUGGESTED ANSWER:

Trust Fund Theory (Sec. 65, Corporation Code)this doctrine holds

that a subscriber or stockholder shall be considered a Trustee for his UNPAIDSUBSCRIPTION to the Corporation and to corporate creditors until fully paid.

Trust Fund Doctrine (Sec. 122, Corporation Code)Stockholders whoreceive corporate assets are deemed Trustees for such property or assets receivedby them under the instances as provided in the Corporation Code.

14.What is the extent of the power and function of a Rehabilitation Receiver?SUGGESTED ANSWER:

The rehabilitation receiver shall not take over the management andcontrol of the debtor but shall closely oversee and monitor the operations ofthe debtor during the pendency of the proceedings. x x x


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He shall be considered as an officer of the court. And shall be primarilytasked to study the best way to rehabilitate the debtor and to ensure that thevalue of the debtors property is reasonably maintained pending thedetermination of whether or not the debtor should be rehabilitated, as well asimplement the rehabilitation plan after its approval. (Section 12, A.M. No. 00-8-

10-SC, Rules of Procedure on Corporate Rehabilitation)

15.What is the effect of placing a bank under receivership?SUGGESTED ANSWER:

When a bank is placed under receivership, it would only not be able todo new business, that is, to grant new loans or accept new deposits but thereceiver is in fact obliged to collect debts owing to the bank, which debts form

part of the assets of the bank. (Aguilar vs. Manila Banking Corporation, 502SCRA 354 [2006]).

16.What is the nature and characteristic of a NOW account? Is it Negotiablewithin the ambit of the Negotiable Instruments Law?

SUGGESTED ANSWER:

Negotiable Orders of Withdrawals (NOW Accounts) is defined as

savings accounts from which funds may be withdrawn by means of negotiableorders of withdrawal. They shall be kept and maintained separately from theregular savings deposits subject to withdrawal through the presentation ofwithdrawal slips and passbooks. Only natural persons shall be eligible tomaintain NOW Accounts. The authority to offer NOW Accounts shall begranted only to thrift banks that meet the requirements laid down by theCentral Bank Regulations.

They are not negotiable within the provisions of the NegotiableInstruments Law because of certain limits and restrictions, to wit:

(a.) The order of withdrawal shall be payable only to a specificperson, natural or juridical, and not to bearer nor to the order ofa specified person;

(b.) Only the payee can encash this order of withdrawal with draweebank, or deposit it in his account with the drawee bank or withany other bank.

17.When may a corporation invest its funds in another corporation or businessor for any other purposes? (1996 Bar)

SUGGESTED ANSWER: (UP LAW CENTER)

A corporation my invest its funds in another corporation or business orfor any other purpose other than the primary purpose for which it wasorganized when the said investment is approved by a majority of the BODand such approval is ratified by the stockholders representing at least 2/3 of


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the outstanding capital stock. Written notice of the proposed investment andthe date, time and place of the stockholders meeting at which such proposalwill be taken up must be sent to each stockholder. (Sec. 42, Corporation Code)

18.What is meant by Serious Situation Test?SUGGESTED ANSWER:

It merely provides that receivers may be appointed whenever: (1)necessary in order to preserve the rights of the parties-litigants; and/or (2)protect the interest of the investing public and creditors. The situationscontemplated in there instances are serious in nature. There must exist a clear andimminent danger of losing the corporate assets if a receiver is not appointed. Absentsuch danger, such as where there are sufficient assets to sustain the

rehabilitation plan and both investors and creditors are amply protected, theneed for appointing a receiver does not exist. Simply put, the purpose of thelaw in directing the appointment of receivers is to protect the interests of thecorporate investors and creditors. (Pryce Corporation vs. Court of Appeals andChina Banking Corporation, G.R. No. 172302, February 4, 2008 [Sandoval-Gutierrez,J.], citing Rizal Banking Corporation vs. Intermediate Appellate Court)

19.What is the nature of a health care agreement? What is the effect of limitedliability to health care agreements?

SUGGESTED ANSWER:

A health care agreement is in the nature of a non-life insurance. It is anestablished rule in insurance contracts that when their terms containlimitations on liability, they should be construed strictly against the insurer.These are contracts of adhesion the terms of which must be interpreted andenforced stringently against the insurer which prepared the contract. Thisdoctrine is equally applicable to health care agreements. (Blue Cross HealthCare, Inc. vs. Noemi and Danilo Olivares, G.R. No. 169737, February 12, 2008[Corona, J.],citing Philamcare Health Systems, Inc. vs. CA)

20.REP Inc. is a corporation organized and existing under Philippine laws withits main office in the City of Mandaluyong. Sometime in 2004, REP Inc.filed a Petition for the Declaration of a State of Suspension of Paymentswith Approval of Proposed Rehabilitation Plan with RTC Malolos, Bulacan.Thereafter, court issued a Stay Order suspending the enforcement of allclaims whether for money or otherwise judicial or extrajudicial against REPInc. Creditors opposed the petition and subsequently the Stay Order waslifted.

Since REP Inc. did not appeal, AT Bank, one of its creditors initiatedforeclosure proceedings against REP Incs. properties. In anticipation of theforeclosure, REP filed a complaint for Annulment of Documents andDamages with Prayer for a Temporary Restraining Order and Injunction.Court granted the TRO enjoining AT Bank from proceeding with the extrajudicial foreclosure of mortgage on its properties. AT Bank fi led a Petition


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for Certiorari with the Court of Appeals alleging grave abuse of discretionon the part of the RTC issuing the TRO. CA ruled in favor of AT Bank andannulled the order of the RTC, stating that the Stay Order could not be anyclearer, that it was lifted by the trial court because of REP Inc.s insolvency,misrepresentations, and infeasible rehabil itation plan. The appellate court

further observed that the Order granting TRO in the Civil Case interferedwith and set aside the earlier Order of the RTC in the rehabilitation case,and such intervention thwarted the foreclosure of REP Inc.s assets.

REP Inc. through a Petition for Certiorari with the Supreme Court raised theissue that the CA gravely erred when it ordered the annulment of orders ofthe RTC, granting the issuance of a Writ of Preliminary Injunction and theTRO, on the ground that the Civil Case is entirely separate and distinct andinvolves a totally separate and distinct cause of action as against a petitionfor declaration of state of suspension of payments.

How would you rule on the matter?

SUGGESTED ANSWER:

There is no interference by one co-equal court with another when thecase filed in one involves corporate rehabilitation and suspension ofextrajudicial foreclosure in the other.

The rehabilitation case is distinct and dissimilar from the annulment offoreclosure case, in that the first case is a special proceeding while the second

is a civil action. However, for a civil action to prosper it must be grounded ona cause of action, and a petition for rehabilitation need not state a cause ofaction, hence, REP Incs. contention that the two cases have distinct causes ofaction is incorrect.

The rehabilitation case is a special proceeding which is summary andnon-adversarial in nature. The annulment of foreclosure case is an ordinarycivil action governed by the regular rules of procedure under the 1997 Rules ofCivil Procedure.

The purpose of the rehabilitation case is the suspension of paymentsbecause it foresees the impossibility of meeting its debts when theyrespectively fall due, and the approval of its proposed rehabilitation plan.The objective of the annulment of foreclosure case are, among others, to annulthe unilateral increase in the interest rate and to cancel the auction of themortgaged properties.

Indeed, the two cases are different with respect to their nature,purpose, and the reliefs sought such that the injunctive writ issued in theannulment of foreclosure case did not interfere with the rehabilitation case.

(Rombe Eximtrade (Phils.), et al vs. Asiatrust Development Bank, G.R. No. 164479,February 13, 2008, [Velasco, J.]).

21.What is the nature of a writ of possession in a foreclosure sale?SUGGESTED ANSWER:


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As to the nature of a petition for a writ of possession, it is well to state

that the proceeding in a petition for a writ of possession is ex parte andsummary in nature. x x x It is not strictly speaking a judicial process ascontemplated in Article 433 of the Civil Code. It is a judicial proceeding for the

enforcement of one's right of possession as purchaser in a foreclosure sale. . Itis not an ordinary suit filed in court, by which one party "sues another for theenforcement of a wrong or protection of a right, or the prevention or redress ofa wrong." (Spouses Lam vs. Metropolitan Bank and Trust Company, G.R. No.178881, February 18, 2008, [Nachura, J.]).

22.What is an Investment Contract? What is the test to determine it? Is itrequired to be registered with the Securities and Exchange Commissionprior to its sale or offer for sale or distribution to the public?

SUGGESTED ANSWER:

It is a contract, transaction or scheme (collectively contract) wherebya person invests his money in a common enterprise and is led to expect profitsprimarily from the efforts of others. (R.A. 8799)

The HOWEY TEST is the test established to determine whether atransaction falls within the scope of an investment contract. It requires that aperson:

a. Makes an investment of money;b. In a common enterprise;c. With the expectation of profits;d. To be derived primarily from the efforts of others.

x x x

We therefore rule that the business operation or the scheme ofpetitioner constitutes an investment contract that is a security under R.A. No.8799. Thus, it must be registered with public respondent SEC before its sale or

offer for sale or distribution to the public. As petitioner failed to register thesame, its offering to the public was rightfully enjoined by public respondentSEC. The CDO was proper even without a finding of fraud. As an investmentcontract that is security under R.A. No. 8799, it must be registered with publicrespondent SEC, otherwise the SEC cannot protect the investing public fromfraudulent securities. The strict regulation of securities is founded on thepremise that the capital markets depend on the investing publics level ofconfidence in the system.

(Power Homes Unlimited Corporation vs. Securities and Exchange

Commission, G.R. No. 164182, February 26, 2008, [Puno, C.J.], citing US cases ofSEC vs. W.J.Howey Co., and SEC vs. Glenn W. Turner Enterprises, Inc., et al)

23.Can Phividec Industrial Authority (PIA) temporarily operate as a seaportcargo-handler upon agreement with the Philippine Ports Authority (PPA)sansa franchise or a license from Congress or PPA?


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SUGGESTED ANSWER:

Yes.

PPA was created for the purpose of, among others, promoting thegrowth of regional port bodies. In furtherance of this objective, PPA isempowered, after consultation with relevant government agencies, to makeport regulations particularly to make rules or regulation for the planning,development, construction, maintenance, control, supervision andmanagement of any port or port district in the country. With this mandate,the decision to bid out cargo-handling services is within the province anddiscretion of PPA which necessarily required prior study and evaluation. Thistask is left to the judgment of PPA and cannot be set aside absent grave abuseof discretion on its part. As long as the standards are set in determining the

contractor and such standards are reasonable and related to the purpose forwhich they are used, courts should not inquire into the wisdom of PPAschoice. x x x

[F]ranchises from Congress are not required before each and everypublic utility may operate because the law has granted certain administrativeagencies the power to grant licenses for or to authorize the operation of certainpublic utilities. (Oroport Cargoholding Services, Inc. vs. Phivdec IndustrialAuthority, G.R. No. 166785, July 28, 2008, [Quisumbing, J.])

24.What are the remedies available to a financially distressed corporation?Explain.

SUGGESTED ANSWER:

Under the Rules of Procedure on Corporate Recovery, there are twodistinct remedies, namely:

1. Suspension of Payments, under Section 3-1, Rule III;2. Rehabilitation Proceedings, under Section 4-1, Rule IV.A debtor or petitioning corporation may have sufficient assets to pay

for all its obligations but foresees the impossibility of paying them when theyrespectively fall due, necessitating a suspension of payments for at least oneyear.

Despite declaration of solvency, the petitioning corporation may still befound to be subsequently unable to pay its obligations for a period longer thanone year and be considered by SEC as technically insolvent.

If during the pendency of the proceedings, the petitioner has become oris shown to be insolvent, whether actually or technically, the SEC may, insteadof terminating the proceedings for suspension of payments, treat the petitionas one for rehabilitation of the debtor.

Hence, the Rules of Procedure on Corporate Recovery does notpreclude a solvent corporation or debtor from filing a petition for


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rehabilitation instead of just a petition for suspension of payments becausesuch temporary inability to pay its obligations out of its assets may extendbeyond the period of one year, or a solvent corporation may become actuallyinsolvent in the interim.

The requirements and procedures in a petition for suspension ofpayments and petition for rehabilitation are indeed entirely different anddistinct from one another; nonetheless, the petitioning corporation whichseeks temporary relief and assistance in the payment of its obligations fallingdue, but may still have sufficient assets to cover the same, may already file atthe first instance a petition for rehabilitation. (Court of Appeals ruling inUnion Bank of the Philippines vs. ASB Development Corporation, G.R. No. 172895,July 30, 2008, [Chico-Nazario,J.])

25.Company X procured an open-policy marine insurance from Y Insurance,a foreign corporation. The insurance was for a transshipment of certainwooden work tools and workbenches purchased for consignee Z. Thecargo, packed inside one container van was shipped from Hamburg,Germany en route to Manila, Philippines. The ship arrived and dockedwhere cargo was received by Aboitiz Shipping Corporation, thereafter itissued a bill of lading containing a notation grounded outside warehouse.It was then shipped to Cebu City and was released to Z. Two days after itsrelease, Aboitiz received a call from Z informing it that the cargo sustainedwater damage. Z then informed the Philippine office of Y Insurance forinsurance claims. Y Insurance got an official weather report from PAGASA,

it would appear that heavy rains caused water damage to the shipment,noticeably the shipment was placed outside the warehouse of Aboitiz basedon the bill of lading containing an notation grounded outside thewarehouse. Aboitiz refused to settle the claim, Y Insurance paid theamount of Php 280, 176.92 to consignee Z, and a subrogation receipt wasthereafter signed.

Case for collection of actual damages with interest and attorneys fees wasfiled with RTC. Aboitiz disavowed any liability and asserted that the claimhad no factual and legal bases, and that complaint had no cause of action,

plaintiff Y Insurance had no personality to sue, cause of action was barred,suit was premature there being no claim made upon Aboitiz. RTC rendereddecision against Y Insurance and case was elevated to CA, which reversedRTC decision. Case was then elevated to SC.

a. Is Respondent Y Insurance the real party-in-interest that possessesthe right of subrogation to claim reimbursement from Aboitiz?

b. Is this right to subrogation an absolute right?SUGGESTED ANSWER:

a. YES.A foreign corporation not licensed to do business in the Philippines is

not absolutely incapacitated from filing a suit in local courts. Only when thatforeign corporation is transacting or doing business in the country will alicense be necessary before it can institute suits. It may, however, bring suits


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on isolated business transactions, which is not prohibited under Philippinelaw. Thus, this Court has held that a foreign insurance company may sue inthe Philippine courts upon the marine insurance policies issues by it abroad tocover international-bound cargoes shipped by a Philippine carrier, even if ithas no license to do business in this country. It is the act of engaging in

business without the prescribed license, and not the lack of license per se,which bars a foreign corporation from access to our courts.

Thus, the payment by the insurer to the assured operates as anequitable assignment of all remedies the assured may have against the thirdparty who caused the damage. Subrogation is not dependent upon, nor doesit grow out of, any privity of contract or upon written assignment of claim. Itaccrues simply upon payment of the insurance by the insurer. (Aboitiz ShippingCorporation vs. Insurance Company of North America, G.R. No. 168402, August6,2008, [Reyes, R.T.,J.])

b. NO.This Right of Subrogation has its limitations, to wit:

a. Both the insurer and the consignee are bound by the contractualstipulations under the bill of lading;

b. The insurer can be subrogated only to the rights as the insured mayhave against the wrongdoer.

26.What are the tests to determine whether a dispute constitutes an intra-corporate controversy? How would jurisdiction be determined?

SUGGESTED ANSWER:

a. Relationship Test; andb. Nature of the Controversy Test.

Jurisdiction should be determined by considering not only the status or

relationship of the parties, but also of the nature of the question undercontroversy. This two-tier test was adopted in the case of Speed Distribution,Inc. vs. Court of Appeals:

To determine whether a case involves an intra-corporate controversy,and is to be heard and decided by the branches of the RTC specificallydesignated by the Court to try and decide such cases, two elements mustconcur:

(a)the status or relationship of the parties (relationship test);and

(b)the nature of the question that is subject of the controversy(nature of the controversy test).

The first element requires that the controversy must arise out of intra-corporate partnership relations between any or all of the parties and thecorporation, partnership, or association of which they are stockholders,


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SUGGESTED ANSWER:

Article 777 of the Civil Code declares that he successional rights aretransferred from the moment of death of the decedent. Accordingly, upon the

decedents death, the heirs acquired legal right to his estate (which includeshis shareholdings with the corporation), and they are, prior to the estatespartition, deemed to be co-owners thereof. This status as co-owners, however,does not immediately and necessarily make them stockholders of thecorporation. Unless and until there is compliance with Section 63 of theCorporation Code on the manner of transferring shares, the heirs do notbecome registered stockholders of the corporation. Section 63 provides:

x x x No transfer, however, shall be valid, except as between theparties, until the transfer is recorded in the books of the corporation so as to

show the names of the parties to the transaction, the date of the transfer, thenumber of the certificate or certificates, and the number of shares transferred.x x x

Simply stated, the transfer of title by means of succession, thougheffective and valid between the parties involves (i.e., between the decedentsestate and his heirs), does not bind the corporation and third parties. Thetransfer must be registered in the books of the corporation to make thetransferee-heirs a stockholder entitled to recognition as such by both thecorporation and by third parties.

It is noted, that in relation with the above statement, that in Abejo vs.Dela Cruz and TCL Sales Corporation vs. Court of Appeals, it did not require theregistration of the transfer before considering the transferee a stockholder ofthe corporation. A marked difference, however, exists between these casesand the present one.

In Abjeo and TCL Sales, the transferee held definite and uncontestedtitles to a specific number of shares of the corporation; after the transfereehas established prima facie ownership over the shares of stocks in question,registration became a mere formality in confirming their status asstockholders. In the present case, each of the decedents heirs holds only anundivided interest in the shares. This interest, at this point, is still inchoateand subject to the outcome of a settlement proceeding; the right of the heirs tospecific, distributive shares of inheritance will not be determined until all thedebts of the estate of the decedent are paid. In short, the heirs are onlyentitled to what remains after payment of the decedents debts; whether therewill be residue remains to be seen. Justice Jurado aptly puts it as follows:

No succession shall be declared unless and until a liquidation of theassets and debts left by the decedent shall have been made and all his

creditors are fully paid. Until a final liquidation is made and all the debts arepaid, the right of the heirs to inherit remains inchoate. This is so becauseunder our rules of procedure, liquidation is necessary in order to determinewhether or not the decedent has left any liquid assets which may betransmitted to the heirs.


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An heir must, therefore, hurdle two obstacles before he can beconsidered a stockholder of the corporation with respect to the shareholdingsoriginally belonging to the decedent. First, he must prove that there areshareholdings that will be left to him and his co-heirs, and this can bedetermined only in a settlement of the decedents estate. Second, he must

register the transfer of the share allotted to him to make it binding against thecorporation. He cannot demand that this be done unless and until he hasestablished his specific allotment (and prima facie ownership) of the shares.Without the settlement of the decedents estate, there can be no definitepartition and distribution of the estate to the heirs. Without the partition anddistribution, there can be no registration of the transfer. And without theregistration, we cannot consider the transferee-heir a stockholder who mayinvoke the existence of an intra-corporate relationship as premise for an intra-corporate controversy within the jurisdiction of a special commercial court.(Reyes vs. Zenith Insurance Corp., G.R. No. 165744, August 11, 2008, [Brion, J.])

30.Sometime on June 1998, Samuel Tagoe, a foreigner, purchased from a Jewelry Store several pieces of jewelry valued at Php 258, 000.00. Inpayment of the same, he offered a Foreign Draft issued in favor of UnitedOverseas Bank (Malaysia)-UOB, addressed to Land Bank of the Philippines(LBP), payable to the Jewelry Store for Php 380, 000.00. Subsequently saiddraft was cleared and the collecting bank, Far East Bank was credited withthe amount. Three (3) weeks thereafter, LBP informed Far East that theamount in the Foreign Draft had been materially altered from Php 300.00 toPhp 380, 000.00 and it was returning the same. Far East Bank then refundedthe amount and debited the same from the account of the Jewelry Store,however, there is a deficiency of Php 211, 946.64, thus Far East Bankdemanded for the payment thereof, and when the same went futile, theyfiled a case for sum of money against the Jewelry Store. RTC ruled in favorof Far East Bank, however, on appeal, the CA reversed the ruling that FarEast Bank could not charge the Jewelry Store on its secondary liability as anindorser. Bank appealed the ruling to the SC.

Is the petition for review on certiorari under rule 45, meritorious?

SUGGESTED ANSWER:

No.

Act No. 203, or the Negotiable Instruments Law (NIL), explicitlyprovides that the acceptor, by accepting the instrument, engages that he willpay it according to the tenor of his acceptance. This provision applies with equalforce in case the drawee pays a bill without having previously accepted it. Hisactual payment of the amount in the check implies not only his assent to theorder of the drawer and a recognition of his corresponding obligation to pay

the aforementioned sum, but also, his clear compliance with that obligation.Actual payment by the drawee is greater than his acceptance, which is merelya promise in writing to pay. The payment of a check includes its acceptance.

Unmistakable herein is the fact that the drawee bank cleared and paidthe subject foreign draft and forwarded the amount thereof to the collectingbank. The latter then credited to the Jewelry Stores account the payment it


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received. Following the plain language of the law, the drawee, by saidpayment, recognized and complied with its obligation to pay in accordancewith the tenor of his acceptance. The tenor of his acceptance is determined by theterms of the bill as it is when the drawee accepts. Stated simply, LBP wasliable on its payment of the check according to the tenor of the check at the

time of payment, which was the raised amount.

Because of that engagement, LBP could no longer repudiate thepayment it erroneously made to a due course holder. We note at his point thatGold Palace (Jewelry Store) was not a participant in the alteration of the draft,was not negligent, and was a holder in due courseit received the draftcomplete and regular on its face, before it became overdue and without noticeof any dishonor, in good faith and for value, and absent any knowledge of anyinfirmity in the instrument or defect in the title of the person negotiating it.Having relied on the drawee banks clearance and payment of the draft and

not being negligent, respondent Store is amply protected by the said Section62. Commercial policy favors the protection of anyone who, in due course,changes his position on the faith of the drawee banks clearance and paymentof a check or draft. (Far East Bank & Trust Company vs. Gold Palace JewelryCompany, G.R. No. 168274, August 20, 2008 [Nachura, J.])