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2017 Mercantile Law Bar Questions and Suggested Answers

II. A.

Morgan, a lawyer, received a lot of diving and other water sports equipment as
payment of his professional fees by Dennis, his client in a child custody case. Dennis
owned a diving and water sports dealership in Anilao, Batangas. Morgan decided to
name Dennis as entrustee because he did not have any experience in selling such
specialized sports equipment. They executed a trust receipt agreement, with Morgan
as entruster and Dennis as entrustee.

Before the sports equipment could be sold, a strong typhoon hit Batangas. Anilao and
other parts of Batangas experienced power outage. Taking advantage of the total
darkness, unidentified thieves destroyed the padlocks of the establishment of Dennis,
and carted off the equipment inside.

Morgan demanded that Dennis pay the value of the stolen equipment, but the latter
refused on the ground that he also had suffered from the effects of the typhoon, and
insisted that the cause of the loss was fortuitous event or force majeure.

Is the justification of Dennis warranted? Explain your answer. (4%)

SUGGESTED ANSWER 1:

No. Section 10. Liability of entrustee for loss. The risk of loss shall be borne by the
entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt,
pending their disposition, irrespective of whether or not it was due to the fault or negligence
of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.

SUGGESTED ANSWER 2:

Yes, because there was no true Trust Receipt transaction. At once, ownership was
transferred to Morgan when he received the sports equipment as payment for his
professional fees. This is deemed to be a dacion en pago arrangement whereby ownership is
transferred to Morgan. Being the owner of the equipment, and in the absence of negligence
on the part of Dennis, Morgan shall solely bear the loss a result of fortuitous event.

II. B.

Safe Warehouse, Inc. (Safe) issued on various dates negotiable warehouse receipts to
Peter, Paul, and Mary covering certain goods deposited by the latter with the former.
Peter, Paul, and Mary then negotiated and endorsed the warehouse receipts to Cyrus,
Magnus, and Charles upon payment by the latter of valuable consideration for the
warehouse receipts. Cyrus, Magnus, and Charles were not aware of, nor were they
parties to any irregularity or infirmity affecting the title or the face of the warehouse
receipts.

On due dates of the warehouse receipts, Cyrus, Magnus, and Charles demanded that
Safe surrender the goods to them. Safe refused because its warehousemans claim
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must first be paid. Cyrus, Magnus, and Charles refused to pay, and insisted that such
claim was the liability of Peter, Paul, and Mary.

a. What is a warehousemans claim? (3%)

SUGGESTED ANSWER 1:

1. Charges for storage and Preservation of the goods (insurance and others may be
included as long as it is stipulated)
2. Money advanced, interest, insurance, transportation, labor, weighing, coopering and
other charges and expenses in relation to such goods
3. Charges and expenses for notice, and Advertisements of sale, and for sale of the
goods where default had been made in satisfying the warehousemans lien (WHR
Law, Sec. 27).

SUGGESTED ANSWER 2:

Warehousemans claim is composed of the unpaid storage charge and other fees. For
as long as the claim or lien is unpaid, the warehouseman can validly withhold delivery.

b. Is Safes refusal to surrender the goods to Cyrus, Magnus, and Charles legally
justified? Explain your answer. (3%)

SUGGESTED ANSWER 1:

The warehouseman, by issuing the warehouse receipt, acknowledges that the goods
are in possession, but he can refuse to deliver the goods to the holder of the warehouse
receipt covering the goods if the lien of the warehouseman is not satisfied.

SUGGESTED ANSWER 2:

Yes, the warehousemans lien is possessory in nature such that it follows the
property wherever it goes.

III. B.

Sid used to be the majority stockholder and President of Excellent Corporation

(Excellent). When Meridian Co., Inc. (Meridian), a local conglomerate, took over
control and ownership of Excellent, it brought along its team of officers. Sid thus
became a minority stockholder and a minority member of the Board of Directors.
Excellent, being the leading beverage manufacturer in the country, became the
monopoly when Meridians own beverage business was merged with Excellents,
thereby making Excellent virtually the only beverage manufacturer in the country.
Left out and ignored by the management, Sid became a fiscalizer of sorts, questioning
during the Board meetings the direction being pursued by Excellents officers.

Ultimately, Sid demanded the inspection of the books and other corporate records of
Excellent. The management refused to comply, saying that his right as a minority
stockholder has been much reduced.
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State under what conditions may Sid properly assert his right to inspect the books
and other corporate records of Excellent. Explain your answer. (3%)

SUGGESTED ANSWER:

The right to inspect is the right of a stockholder to inspect the books of the
corporation is subject to the following limitations:

1. The right must be exercised during reasonable hours on business days.

2. The person demanding the right has not improperly used any information obtained
through any previous examination of the books and records of the corporation.

3. The demand is made in good faith or for legitimate purpose germane to his interest as a
stockholder. (CC, Sec. 74)

Good purposes may be:

a) to investigate acts of management;
b) to investigate financial conditions; fix value of shares;
c) mailing list for proxies; or
d) information for litigation. (Villanueva)

4. It should follow the formalities that may be required in the by-laws.

5. The right does not extend to trade secrets.
6. It is subject to limitations under special laws, e.g. Secrecy of Bank Deposits and FCDA or
the Foreign Currency Deposits Act.

V. A.

Under the Nell Doctrine, so called because it was first pronounced by the Supreme
Court in the 1965 ruling in Nell v. Pacific Farms, Inc. (15 SCRA 415), the general rule is
that where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor.
State the exceptions to the Nell Doctrine. (4%)

SUGGESTED ANSWER 1:

1. Where the purchaser expressly or impliedly agrees to assume such debts;

2. Where the transaction amounts to a consolidation or merger of the corporations;
3. Where the purchasing corporation is merely a continuation of the selling
corporation; and
4. Where the transaction is entered into fraudulently to escape liability for such
debts. (Edward J. Nell Co. vs. Pacific Farms, Inc., G.R. No. L-20850, November 29, 1965)

SUGGESTED ANSWER 2:

1. Agreement where the transferee corporation expressly or impliedly agrees to

assume the transferors debts;
2. Merger and Consolidation
3. Transfer in Fraud of Creditors
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4. Business Enterprise Transfer Rule the transferee purchases not only the assets of
the transferor, but also its business. As a result of the sale, the transferor is merely
left with its juridical existence, devoid of its industry and earning capacity. Fittingly,
the proper provision of law that is contemplated by this exception would be Sec. 40
of the Corporation Code.

V. B.

Santorini Corporation (Santorini) was in dire straits. In order to firm up its financial
standing, it agreed to entertain the merger and takeover offer of Proficient
Corporation (Proficient), the leading company in their line of business. Erica, the
major stockholder of Santorini, strongly opposed the merger and takeover. The
matter of the merger and takeover by Proficient was included in the agenda of the
next meeting of Santorinis Board of Directors. However, owing to Ericas serious
illness that required her to seek urgent medical treatment and care in Singapore, she
failed to attend the meeting and was consequently unable to cast her vote. The Board
of Directors approved the merger and takeover. At the time of the meeting, Santorini
had been in the red for a number of years owing to its recurring business losses and
reverses.

Erica seeks your legal advice regarding her right as a stockholder opposed to the
corporate action. Explain your answer. (4%)

SUGGESTED ANSWER 1:

I will advise Erica to cast her vote dissenting on the plan of merger and
consolidation on the meeting for approval by the stockholders and exercise her right of
appraisal. The plan of merger and consolidation shall be approved by 2/3 of the
Outstanding Capital Stock or members for non-stock corporations.

In this case, the plan of merger has just been approved by the Board of Directors
concerned, hence at the meeting called for the approval by 2/3 vote by the stockholders,
Erica may dissent and exercise her right of appraisal.

Appraisal right refers to the right of the stockholder to demand payment of the fair
value of his shares, after dissenting from a proposed corporate action involving a
fundamental change in the charter or articles of incorporation in the cases provided by law.

Any stockholder of a corporation shall have the right to dissent and demand payment of
the fair value of his shares in case of merger or consolidation (CC, Sec. 81).

SUGGESTED ANSWER 2:

Under the law, in a separate meeting of the stockholders, an affirmative vote of two-
thirds (2/3) of the outstanding capital stock of each corporation shall be necessary for the
approval of the plan of merger. However, any dissenting stockholder may exercise his
appraisal right in accordance with the Code.

I will advise Erica that as a majority stockholder, her vote in the BOD meeting is not
required. Her recourse is to attend the stockholders meeting called for the purpose of
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approval of the plan of merger and dissent or vote against the proposed corporate action.
Further, she may exercise her appraisal right by making a written demand on the
corporation within 30 days after the date on which the vote was taken for the payment of
the fair value of her shares.

V. C.

Samito is the President and a Director of Lucky Bank (Lucky), a commercial bank
holding its main office in Makati. His brother, Othello, owned a big fishing business
based in Malabon. Othello applied for a loan of P50 million with Lucky. Othello
followed the ordinary banking procedures in all the stages of the processing of his
application. When required, he made the necessary arrangements to guarantee the
loan. Thus, in addition to the real estate mortgage, Othello executed a joint and
solidary suretyship, issued postdated checks, and submitted all other requirements
prescribed by Lucky.

When the loan application was about to be approved and the proceeds released, BG
Company, a keen competitor of Othello in the fishing industry, wrote to the Board of
Directors and the management of Lucky questioning the loan on the ground of
conflict of interest due to Samito and Othello being brothers, citing the legal
restriction against bank exposure of directors, officers, stockholders or their related
interests. (DOSRI).

a. What are the three restrictions imposed by law on DOSRI transactions? (4%)

SUGGESTED ANSWER:

In the case of Go v. Bangko Sentral ng Pilipinas, G.R. No. 178429, October 23, 2009, it
was held that the requirements are:

(1) Approval requirement which means that the DOSRI transaction must be
approved by at least majority of the directors excluding the director concerned.

(2) Reportorial requirement means that the transaction must be recorder in the
books of the bank and reported to the BSP.

(3) Ceiling requirement which means that the amount of the loan shall not exceed
the book valued of the paid-in contribution and the amount of the unencumbered deposits.
Three different offenses are committed by those who fail to observe the board approval,
reporting and ceiling requirements.

b. Is BG Companys opposition based on conflict of interest and violation of the

restrictions on DOSRI transactions legally and factually correct? Explain your answer.
(4%)

SUGGESTED ANSWER 1:

No. The transaction is not covered by the DOSRI Rules.

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Related Interest shall refer to any of the following: (1) Spouse or relative within the
first degree of consanguinity or affinity, or relative by legal adoption, of a director, officer or
stockholder of the bank;

The brother is not a relative within the first degree of consanguinity or affinity.
Hence, not covered by the DOSRI Rules.

SUGGESTED ANSWER 2:

Related interest in DOSRI extends only to the first degree relative by consanguinity
or affinity. As such, the DOSRI requirements are inapplicable in this case.

VIII. A.

Flora, a frequent traveler found a purse concealed between the cushions of a large
sofa inside the VIP lounge in NAIA while she was waiting for her flight to be called.
Inside the purse was very valuable diamond-studded necklace. She decided not to
turn over the purse to the airport management, and instead to keep it. On her return
from her travels, she had a dependable jeweler appraise the necklace, and the latter
told her that the necklace was easily worth at least P5 million in the open market. To
test the appraisal, she pawned the necklace for P2 million. She then deposited the
entire amount in her checking account with Metro Bank. Promptly, Metro Bank
reported the transaction to AMLC.

Given that her appropriation was theft, may Flora be successfully prosecuted for
money laundering? Explain.

SUGGESTED ANSWER:

No. Flora cannot be successfully prosecuted for money laundering because Theft is
not one of the predicate crimes under the AMLA. Also, it is not one of the unlawful activities
as enumerated under the law to qualify under one of the Suspicious Transactions (the
transaction is any way related to an unlawful activity or offense under this Act that is about
to be, is being or has been committed). To be successfully prosecuted for money laundering,
the crime should have been Qualified Theft.

VIII. B.

Prosperous Bank is a domestic bank with head office in Makati. It handles the
banking requirements of thousands of clients.

The AMLC initiated a discreet investigation of the financial transactions of Lorenzo, a

suspected drug trafficker based in Naga City. The Intelligence group of AMLC, in
coordination with the counterpart group from the PDEA and the NBI, gathered ample
evidence establishing Lorenzos unlawful drug activities. The AMLC had probable
cause that his deposits and investments in various banks, including Prosperous Bank,
were related to money laundering.
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Accordingly, the AMLC now transmits to Prosperous Bank a formal demand to allow
its agent to examine the banking transactions of Lorenzo, but Prosperous Bank
refuses the demand.

Is Prosperous Banks refusal justified? Explain.

SUGGESTED ANSWER 1:

No. AMLC may look into the bank deposits of Lorenzo without violation of the
Secrecy of Bank Deposits Law because the case falls under one of the exceptions recognized
by law and no bank inquiry order is necessary because the predicate crime is violation of
the dangerous drugs law.

SUGGESTED ANSWER 2:

No. As a general rule, all deposits of whatever nature with banks or banking
institutions are absolutely confidential in nature and may not be examined, inquired or
looked into by any person or government official, bureau or office. This is not without an
exception.

As one of the exceptions, the AMLC may also conduct inquiry into deposits, funds or
investments if there is a prima facie violation of the AMLA. For this purpose, the AMLC
needs a bank inquiry order except if what is involved is a predicate crime (hijacking,
kidnapping, terrorism, murder, arson and dangerous drugs act violation) in which case, a
court order is not necessary.

Here, Lorenzo is suspected to be engaged in unlawful drug activities. Hence, as a

predicate crime, a court order is not necessary.

IX. A.

Alfred issued a check for P1, 000.00 to Benjamin, his friend, as payment for an
electronic gadget, the check was drawn against Alfreds account with Good Bank.
Benjamin then indorsed the check specially in favor of Cesar. However, Cesar
misplaced the check. Dexter, a dormmate of Cesar found the check, altered its amount
to P91, 000.00 and forged Cesars indorsement by way of a blank indorsement in
favor of Feliz, a known jeweler. Felix then caused the deposit of the check in his
account with Solar Bank. As collecting bank, Solar Bank stamped all previous
indorsements guaranteed on the check. Seeing such stamp of the collecting bank,
Good Bank paid the amount of P91, 000.00 on the check.

May Good Bank claim reimbursement from Alfred? Explain.

SUGGESTED ANSWER 1:

Good Bank cannot claim reimbursement from Alfred since Alfred is not liable to pay
the value of the check under the given circumstances. There is a forgery on the indorsement
of C; hence, the rule is that parties subsequent to the forgery cannot enforce the instrument
against parties prior to the forgery.
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Because this is a case of forged indorsement, the collecting bank is ultimately liable
because of its warranties as an indorser. Hence, Good Bank may claim reimbursement from
Solar Bank instead.

SUGGESTED ANSWER 2:

No. Where a negotiable instrument is materially altered without the assent of all
parties liable thereto, it is avoided, except as against a party who has himself made,
authorized or assented to the alteration and subsequent indorsers.

But when the instrument has been materially altered and is in the hands of a holder
in due course not a party to the alteration, he may enforce payment thereof according to its
original tenor.

In this case, there is no showing that Alfred authorized or assented to the alteration.
At the most, he could only be liable for the original tenor of the check which is for P1,
000.00. The excess amount shall be borne by Good Bank subject to recourse against the
collecting bank and D. (Metrobank v. Cabilzo/Sec. 124, NIL)

IX. B.

In 2006, Donald, an American temporarily residing in Cebu City, issued to Rhodora a

check for $50, 000 drawn against Wells Fargo Bank with offices in San Francisco,
California. Rhodora negotiated the check and delivered it to Yaasmin, a Filipina
socialite who frequently travelled locally and internationally. Because of her frequent
travels, Yaasmin misplaced the check. It was only 11 years later on, in 2017, when she
found the check inside a diary kept in her vault in her Hollywood, California house.

Discuss and explain the rights of Yaasmin on the check.

SUGGESTED ANSWER 1:

Since the check was not presented for payment within a reasonable time from its
issuance, it becomes a stale check. Nonetheless, this does not discharge the drawer from his
obligation to the payee because Art 1249 NCC provides that a check does not produce the
effect of payment until it is encashed or due to the fault of the creditor its value was
impaired. The only exception is when the drawer has been prejudiced by the inaction of the
payee. In the absence of any showing of prejudice on the part of the drawer, Yaasmin may
still demand for the payment of the value of the check

SUGGESTED ANSWER 2:

A stale check is a check which has become worthless because it was not presented
for payment within reasonable time from issuance. Customs, usage and practice dictates
that a check outstanding for 6months is considered as stale check.

A check not presented for payment within a reasonable period of time does not
discharge the obligation of the drawer. Art. 1249 of the NCC provides that a check does not
produce the effect of payment until it is encashed or due to the fault of the creditor, its value
was impaired.
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Yaasmin could validly request for a replacement check from the drawer.

XI.

TRUE or FALSE. Explain briefly.

a) A conviction under the Trust Receipts Law shall bar prosecution for estafa
under the Revised Penal Code.

SUGGESTED ANSWER 1: True - In cases where the entrustee fails to surrender the
proceeds or the goods in case of non-sale to the entruster, the former may be held
criminally liable for estafa under Article 315, paragraph 1(b) of the Revised Penal
Code, in relation to Presidential Decree (P.D.) No. 115. Hence, a conviction under
Trust Receipts law shall bar a prosecution for estafa under the RPC.

b) The term capital in relation to public utilities under Sec. 11, Art. XII of the
1987 Constitution refers to the total outstanding capital stock comprising boh
common and non-voting preferred shares.

SUGGESTED ANSWER: False - in the case of Roy v. Herbosa, the 60% Filipino
ownership shall be reflected in the outstanding capital stock comprising of both
common and preferred (voting and non-voting shares). 60% Filipino ownership of
shares shall also be reflected in the total voting shares (common shares and voting
preferred shares).

c) Forgery is a real defense but may only be raised against a holder not in due
course.

SUGGESTED ANSWER: False