2005 BAR EXAMS QUESTIONS IN MERCANTILE LAW

(1.) What is a negotiable instrument? Give the characteristics of a negotiable instrument. (2%)

(2.) Distinguish a negotiable document from a negotiable instrument. (2%)

(3.) State and explain whether the following are negotiable instruments under the Negotiable
Instruments Law:

(i) Postal Money Order;

(ii) A certificate of time deposit which states This is to certify that bearer has deposited in this
bank the sum of FOUR THOUSAND PESOS (P4,000.00) only, repayable to the depositor 200
days after date.

(iii) Letters of credit;

(iv) Warehouse receipts;

(v) Treasury warrants payable from a specific fund. (5%)

II

(1.) Dagul has a business arrangement with Facundo. The latter would lend money to another,
through Dagul, whose name would appear in the promissory note as the lender. Dagul would
then immediately indorse the note to Facundo.

Is Dagul an accommodation party? Explain. (2%)

(2.) a) What is a crossed check?

What are the effects of crossing a check? Explain.

b) Distinguish an irregular indorser from a general indorser. (3%)

(3.) Brad was in desperate need of money to pay his debt to Pete, a loan shark. Pete threatened to
take Brads life if he failed to pay. Brad and Pete went to see Seorita Isobel, Brads rich cousin,
and asked her if she could sign a promissory note in his favor in the amount of P10,000.00 to pay
Pete. Fearing that Pete would kill Brad, Seorita Isobel acceded to the request. She affixed her
signature on a piece of paper with the assurance of Brad that he will just fill it up later. Brad then
filled up the blank paper, making a promissory note for the amount of P100,000.00. He then
indorsed and delivered the same to Pete, who accepted the note as payment of the debt.
What defense or defenses can Seorita Isobel set up against Pete? Explain. (3%)

III

(1.) Under what conditions may a stock corporation acquire its own shares? (2%)

(2.) Janice rendered some consultancy work for XYZ Corporation. Her compensation included
shares of stock therein.

Can XYZ Corporation issue shares of stock to pay for the services of Janice as its consultant?

Discuss your answer. (2%)

IV

Divine Corporation is engaged in the manufacture of garments for export. In the course of its
business, it was able to obtain loans from individuals and financing institutions. However, due to
the drop in the demand for garments in the international market, Divine Corporation could not
meet its obligations. It decided to sell all its equipment such as sewing machines, perma-press
machines, high speed sewers, cutting tables, ironing tables, etc., as well as its supplies and
materials to Top Grade Fashion Corporation, its competitor.

a) How would you classify the transaction?

b) Can Divine Corporation sell the aforesaid items to its competitor, Top Grade Fashion
Corporation?

What are the requirements to validly sell the items? Explain.

c) How would you protect the interests of the creditors of Divine Corporation?

d) In case Divine Corporation violated the law, what remedies are available to Top Grade
Fashion Corporation against Divine Corporation? (5%)

(1.) a) Under what circumstances may a corporation declare dividends? (2%)

b) Distinguish dividend from profit; cash dividend from stock dividend. (2%)

c) From what funds are cash and stock dividends sourced? Explain why. (2%)

(2.) A Korean national joined a corporation which is engaged in the furniture manufacturing
business. He was elected to the Board of Directors. To complement its furniture manufacturing
business, the corporation also engaged in the logging business.
With the additional logging activity, can the Korean national still be a member of the Board of
Directors? Explain. (3%)

VI

Jojo deposited several cartons of goods with SN Warehouse Corporation. The corresponding
warehouse receipt was issued to the order of Jojo. He endorsed the warehouse receipt to EJ who
paid the value of the goods deposited. Before EJ could withdraw the goods, Melchor informed
SN Warehouse Corporation that the goods belonged to him and were taken by Jojo without his
consent. Melchor wants to get the goods, but EJ also wants to withdraw the same.

a) Who has a better right to the goods? Why?

b) If SN Warehouse Corporation is uncertain as to who is entitled to the property, what is the

proper recourse of the corporation? Explain. (5%)

VII

(1.) Briefly discuss the doctrine of corporate opportunity. (2%)

(2.) Malyn, Schiera and Jaz are the directors of Patio Investments, a close corporation formed to
run the Patio Caf, an al fresco coffee shop in Makati City. In 2000, Patio Caf began
experiencing financial reverses, consequently, some of the checks it issued to its beverage
distributors and employees bounced. In October 2003, Schiera informed Malyn that she found a
location for a second caf in Taguig City. Malyn objected because of the dire financial condition
of the corporation. Sometime in April 2004, Malyn learned about Fort Patio Caf located in
Taguig City and that its development was undertaken by a new corporation known as Fort Patio,
Inc., where both Schiera and Jaz are directors. Malyn also found that Schiera and Jaz, on behalf
of Patio Investments, had obtained a loan of P500,000.00, from PBCom Bank, for the purpose of
opening Fort Patio Caf. This loan was secured by the assets of Patio Investments and personally
guaranteed by Schiera and Jaz. Malyn then filed a corporate derivative action before the
Regional Trial Court of Makati City against Schiera and Jaz, alleging that the two directors had
breached their fiduciary duties by misappropriating money and assets of Patio Investments in the
operation of Fort Patio Caf.

a) Did Schiera and Jaz violate the principle of corporate opportunity? Explain.

b) Was it proper for Malyn to file a derivative suit with a prayer for injunctive relief? Explain.

c) Assuming that a derivative suit is proper, may the action continue if the corporation is
dissolved during the pendency of the suit? Explain. (5%)

VIII

Aaron, a well-known architect, is suffering from financial reverses. He has four creditors with a
total claim of P26 Million. Despite his intention to pay these obligations, his current assets are
insufficient to cover all of them. His creditors are about to sue him. Consequently, he was
constrained to file a petition for insolvency.

a) Since Aaron was merely forced by circumstances to petition the court to declare him insolvent,
can the judge properly treat the petition as one for involuntary insolvency? Explain.

b) If Aaron is declared an insolvent by the court, what would be the effect, if any, of such
declaration on his creditors? Explain.

c) Assuming that Aaron has guarantors for his debts, are the guarantors released from their
obligations once Aaron is discharged from his debts? Explain.

d) What remedies are available to the guarantors in case they are made to pay the creditors?
Explain. (5%)

IX

(1.) What are the effects of an irrevocable designation of a beneficiary under the Insurance Code?
Explain. (2%)

(2.) Jacob obtained a life insurance policy for P1 Million designating irrevocably Diwata, a
friend, as his beneficiary. Jacob, however, changed his mind and wants Yob and Jojo, his other
friends, to be included as beneficiaries considering that the proceeds of the policy are sufficient
for the three friends.

Can Jacob still add Yob and Jojo as his beneficiaries? Explain. (2%)

(1.) M/V Pearly Shells, a passenger and cargo vessel, was insured for P40,000,000.00 against
constructive total loss. Due to a typhoon, it sank near Palawan. Luckily, there were no
casualties, only injured passengers. The shipowner sent a notice of abandonment of his interest
over the vessel to the insurance company which then hired professionals to afloat the vessel for
P900,000.00. When re-floated, the vessel needed repairs estimated at P2,000,000.00. The
insurance company refused to pay the claim of the shipowner, stating that there was no
constructive total loss.

a) Was there constructive total loss to entitle the shipowner to recover from the insurance
company? Explain.

b) Was it proper for the shipowner to send a notice of abandonment to the insurance company?
Explain. (5%)

(2.) a) When does double insurance exist? (2%)

b) What is the nature of the liability of the several insurers in double insurance? Explain. (2%)
 XI

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?

b) Can AC Bank also foreclose the mortgage over the fishpond? Explain. (5%)

XII

Hi Yielding Corporation filed a complaint against five of its officers for violation of Section 31
of the Corporation Code. The corporation claimed that the said officers were guilty of advancing
their personal interests to the prejudice of the corporation, and that they were grossly negligent in
handling its affairs. Aside from documents and contracts, the corporation also submitted in
evidence records of the officers U.S. Dollar deposits in several banks overseas Boston Bank,
Bank of Switzerland, and Bank of New York. For their part, the officers filed a criminal
complaint against the directors of Hi Yielding Corporation for violation of Republic Act No.
6426, otherwise known as the Foreign Currency Deposit Act of the Philippines. The officers
alleged that their bank deposits were illegally disclosed for want of a court order, and that such
deposits were not even the subject of the case against them.

a) Will the complaint filed against the directors of Hi Yielding Corporation prosper? Explain.

b) Was there a violation of the Secrecy of Bank Deposits Law (Republic Act No. 1405)? Explain.
(5%)

XIII

(1.) Discuss the kabit system in land transportation and its legal consequences. (2%)

(2.) Procopio purchased an Isuzu passenger jeepney from Enteng, a holder of a certificate of
public convenience for the operation of public utility vehicle plying the Calamba-Los Baos
route. While Procopio continued offering the jeepney for public transport services, he did not
have the registration of the vehicle transferred in his name. Neither did he secure for himself a
certificate of public convenience for its operation. Thus, per the records of the Land
Transportation Franchising and Regulatory Board, Enteng remained its registered owner and
operator. One day, while the jeepney was traveling southbound, it collided with a ten-wheeler
truck owned by Emmanuel. The driver of the truck admitted responsibility for the accident,
explaining that the truck lost its brakes.
Procopio sued Emmanuel for damages, but the latter moved to dismiss the case on the ground
that Procopio is not the real party in interest since he is not the registered owner of the jeepney.
Resolve the motion with reasons. (3%)

(3.) Baldo is a driver of Yellow Cab Company under the boundary system. While cruising along
the South Expressway, Baldos cab figured in a collision, killing his passenger, Pietro. The heirs
of Pietro sued Yellow Cab Company for damages, but the latter refused to pay the heirs, insisting
that it is not liable because Baldo is not its employee.

Resolve with reasons. (2%)

XIV

(1.) On a clear weather, M/V Sundo, carrying insured cargo, left the port of Manila bound for
Cebu. While at sea, the vessel encountered a strong typhoon forcing the captain to steer the
vessel to the nearest island where it stayed for seven days. The vessel ran out of provisions for its
passengers. Consequently, the vessel proceeded to Leyte to replenish its supplies.

a) Assuming that the cargo was damaged because of such deviation, who between the insurance
company and the owner of the cargo bears the loss? Explain.

b) Under what circumstances can a vessel properly proceed to a port other than its port of
destination? Explain. (4%)

(2.) Star Shipping Lines accepted 100 cartons of sardines from Master to be delivered to 555
Company in Manila. Only 88 cartons were delivered, however, these were in bad condition. 555
Company claimed from Star Shipping Lines the value of the missing goods, as well as the
damaged goods. Star Shipping Lines refused because the former failed to present a bill of lading.

Resolve with reasons the claim of 555 Company. (4%)

XV

(1.) S Development Corporation sued Shangrila Corporation for using the S logo and the
tradename Shangrila. The former claims that it was the first to register the logo and the
tradename in the Philippines and that it had been using the same in its restaurant business.
Shangrila Corporation counters that it is an affiliate of an international organization which has
been using such logo and tradename Shangrila for over 20 years. However, Shangrila
Corporation registered the tradename and logo in the Philippines only after the suit was filed.

a) Which of the two corporations has a better right to use the logo and the tradename? Explain.

b) How does the international affiliation of Shangrila Corporation affect the outcome of the
dispute? Explain. (5%)
(2.) Cezar works in a car manufacturing company owned by Joab. Cezar is quite innovative and
loves to tinker with things. With the materials and parts of the car, he was able to invent a gas-
saving device that will enable cars to consume less gas. Francis, a co-worker, saw how Cezar
created the device and likewise, came up with a similar gadget, also using scrap materials and
spare parts of the company. Thereafter, Francis filed an application for registration of his device
with the Bureau of Patents. Eighteen months later, Cezar filed his application for the registration
of his device with the Bureau of Patents.

a) Is the gas-saving device patentable? Explain. b) Assuming that it is patentable, who is entitled
to the patent?

What, if any, is the remedy of the losing party?

c) Supposing Joab got wind of the inventions of his employees and also laid claim to the patents,
asserting that Cezar and Francis were using his materials and company time in making the
devices, will his claim prevail over those of his employees? Explain. (5%)