Bar Q & A, Corporation Law, Mercantile Law

Bar Exam 2010 Questions and Suggested Answers in MERCANTILE LAW by the UP Law Center

MERCANTILE LAW

Briefly describe the following types of banks: (2% each)

  1. universal bank

SUGGESTED ANSWER:

A universal bank is a commercial bank with two additional powers, namely: (1) the power of an investment house and (2) the power to invest in non-allied enterprises (Section 23, Rep. Act No. 8791, “The General Banking Law of 2000”).

  1. commercial bank

SUGGESTED ANSWER

A commercial bank is a bank that can: (1) accept drafts; (2) issue letters of credit:13] discount and negotiate promissory notes, drafts, bills of exchange, and other evidence of debt:(4) accept or create demand deposits; (5) receive other types of deposits, as well as deposit substitutes; (6) buy and sell foreign exchange, as well as gold or silver bullion; (7) acquire marketable bonds and other debts securities; and (8) extend credit, subject to such rules promulgated by the Monetary Board (Section 29, Rep. Act No. 8791, “The General Banking Law of 2000”}

  1. thrift bank

SUGGESTED ANSWER:

A thrift bank is que established as a savings and mortgage bank, a stock savings and loan association, or a private development bank, for the purpose of: (1) accumulating the savings of depositors and investing them in outlets determined by the Monetary Board as necessary in the furtherance of national economic objectives; (2) providing short-term working capital, medium and long-term financing, to businesses engaged in agriculture, services, industry and housing; and (3) providing diversified financial and allied services for its chosen market and constituencies specially for small and medium enterprises and individuals (Section 3[a], Rep. Act No. 7906 Thrift Banks Act of 1995″).

  1. rural bank

SUGGESTED ANSWER

A rural bank is one established to provide credit facilities to farmers and merchants or their cooperatives and, in general, to the people of the rural communities (Section 3, Rep. Act No. 7353, “The Rural Banks Act of 1992”).

  1. cooperative bank

SUGGESTED ANSWER:

A cooperative bank is organized under the Cooperative Code to provide financial and credit services to cooperatives. It may perform any or all the services offered by a rural bank, including the operation of a Foreign Currency Deposit Unit subject to certain conditions (Section 100, Rep. Act No. 6938, “The Cooperative Code of the Philippines”).

II

  1. How do you characterize the legal relationship between a commercial bank and its safety deposit box client? (2%)

 

 SUGGESTED ANSWER:

The relationship between a commercial bank and its safety deposit box client is that of a bailee and a bailor, the bailment being for hire and mutual benefit (Sia v. Court of Appeals, 222 SCR4 24/1993; CA Agro-Industrial Development Corp. v. Court of Appeals, 219 SCRA 426 (1993).

ALTERNATIVE ANSWER:

The legal relationship of the bank and its safety deposit box client is that of lessor and lessee.

  1. Is a stipulation in the contract for the use of a safety deposit box relieving the bank of liability in connection with the use thereof valid? (2%)

SUGGESTED ANSWER

The stipulation relieving the bank of liability in connection with the use of the safety deposit box is void as it is against law and public policy (CA Agro-Industrial Development Corp. v. Court of Appeals, supra).

  1. Differentiate “bank deposits from “deposit substitutes.” (2%]

 

SUGGESTED ANSWER:

Bank deposits are funds obtained by a bank from the public which are relent by such bank to its own borrowers. Deposit substitutes are alternative forms of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the own account of the borrower, for the purpose of relending or purchasing of receivables and other obligations. These instruments may include, but need not be limited to, bankers acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements (Section 95, Rep. Act No. 7653, “The New Central Bank Act”).

  1. Why are banks required to maintain reserves against their deposits and deposit substitutes? State one of three purposes for these reserves. (2%)

SUGGESTED ANSWER:

Any one of the following four (4) purposes for requiring banks to maintain reserves against their deposits and deposit substitutes will suffice:

1) One of the purposes of the requirement to maintain bank reserves is to control the volume of money created by the credit operations of the banking system (Section 94 of the New Central Bank Act):

2) It is to enable the banks to answer any withdrawal;

3) To help Government to finance its operation;

4) To help the Government control money supply.

III

Ozamis Paper Corporation secured loans from ABC Universal Bank in the aggregate principal amount of P100 million, evidenced by several promissory notes, and secured by a continuing guaranty of its principal stockholder Menandro Marquez; a pledge of Marquez’s shares in the corporation valued at P45 million; and a real estate mortgage over certain parcels of land owned by Marquez.

The corporation defaulted and the bank extra judicially foreclosed on the real estate mortgage. The bank, which was the sole bidder for P75 million, won the award.

A Can the bank sue Marquez for the deficiency or P25 million? Explain. (2%)

SUGGESTED ANSWER:

Yes, the bank can gue Marquez for the deficiency of P25million. In extrajudicial foreclosure of a real estate mortgage, If the proceeds of the sale are insufficient to pay the debt, the mortgagee has the right to sue for the deficiency (Suico Rattan and Burl Interiors, Inc. v. Court of Appeals, 490 SCRA 560 [2006]).

  1. If the bank opts to file an action for collection against the corporation, can it afterwards institute a real action to foreclose the mortgage? Explain. (2%)

SUGGESTED ANSWER

No, the bank can no longer file an action to foreclose the real estate mortgage. When it filed a collection case, it was deemed to have abandoned the real estate mortgage (Bank of America, NT and SA 1. American Realty Corporation, 321 SCRA 659/1999]).

  1. Can the bank foreclose on the pledged shares of Marquez and recover the deficiency from the corporation? Explain. (294)

SUGGESTED ANSWER:

If the bank forecloses the pledge, it cannot recover the deficiency because the foreclosure extinguishes the principal obligation, whether or not the proceeds from the foreclosure are equal to the amount of the principal obligation (Art. 2115, Civil Code).

IV

Andante Realty, a marketing company that promotes and facilitates sales of real property through leverage marketing, solicits Investors who are required to be a Business Center Owner (BCO) by paying an enrollment fee of $250. The BCO is then entitled to recruit two other investors who pay $250 each. The BCO receives $90 from the $250 paid by each of his recruits and is credited a certain amount for payments made by investors through the initial efforts of his Business Center. Once the accumulated amount reaches $5,000, the same is used as down payment for the real property chosen by the BCO.

  1. Does this. multi-level marketing scheme constitute an “investment contract” under the Securities Regulation Code? Define an investment contract.” (2%).

SUGGESTED ANSWER:

Yes. The multi-level marketing constitutes an “investment contract” under the Securities Regulation Code. An “Investment contract” is a contract, transaction or scheme (1) involving an investment of money, (2) in a common enterprise, (3) with expectation of profits, (4) primarily from the efforts of others (Power Homes Unlimited Corporation v. Securities and Exchange Commission, 546 SCRA 567/2008]).

  1. What procedure must be followed under the Securities Regulation Code to authorize the sale or offer for sale or distribution of an investment contract? (2%)

SUGGESTED ANSWER

Before the investment contract is sold or offered for sale or distribution to the public in the Philippines, it should be registered with the Securities and Exchange Commission in accordance with Section 8 of the Securities Regulation Code (Power Homes Unlimited Corporation v. Securities and Exchange Commission, 546 SCRA 567 [2008].)

  1. What are the legal consequences of failure to follow this procedure? (2%)

SUGGESTED ANSWER:

The failure to follow the procedure has criminal consequences (i.e., upon conviction, a fine 50,000 to 5 million pesos and / or imprisonment of 7 to 21 years). It carries also clvil liabilities in that the purchaser can recover from the seller (i) the consideration paid with interest thereon, less the amount of any income received on the purchased securities, upon the tender of such securities, or (II) damages if the purchaser no longer owns such securities (Sections 57 and 73, Securities Regulation Code). Furthermore, the Securities and Exchange Commission (SEC) may issue a cease and desist order (Subsection 64.1, Securities Regulation Code).

Venezia is a famous international fashion chain with outlets in Makati, Ortigas, and Manila. It has complied with the minimum capitalization required under the Retail Trade Nationalization Act and carries on retail business worth more than $3 million for each of its outlets. As its Manila outlet is not doing very well, it decides to sell all of its business there consisting of remaining inventory, furniture and fixtures and other assets to its competitor.

A Venezia’s Manila outlet constitutes one-third (1/ 3) of its total business. Should it comply with the requirements of the Bulk Sales Law? Why or why not? (29)

SUGGESTED ANSWER:

Venezia need not comply with the requirements of the Bulk Sales Law as its Manila outlet constitutes only one-third of its total business and, therefore, it would not be a sale of all or substantially all of the business conducted by Venezia. Moreover, the requirements of the Bulk Sales Law reflected in Sections 3, 4, 5, and 9, by the express language of said provisions, apply only to the first type of bulk sales, i.e., to any sale, transfer, mortgage or assignment of a stock of goods, wares, merchandise, provisions or materials otherwise than in the ordinary course of trade and the regular prosecution of business of the vendor, mortgagor, transferor, or assignor, and not to the second type (as in the sale described in the problem) or the third type (i.c., sale, etc. of all or substantially all of the fixtures and equipment used in and about the business). As the Bulk Sales Law is penal in nature, it should be interpreted strictly against the State (People v. Wong Szu Tung, CA G.R. No. 9776-R, March 26, 1954: 50 O.G. 4867: Section 2 of the Bulk Sales Law).

  1. If instead of selling its Manila outlet, Venezia merely mortgages its assets there, would it need to comply with the requirements of the Bulk Sales Law? (2%)

SUGGESTED ANSWER:

For the same reasons stated in the answer to A above, Venezia need not comply with the requirements of the Bulk Sales Law. The second type of bulk sales also includes the mortgage of all or substantially all of the business of the mortgagor (Section 2, Bulk Sales Law).

  1. What are the legal consequences of a failure to comply with the requirements of the Bulk Sales Law? (2%)

SUGGESTED ANSWER:

Failure to comply with the requirements of the Bulk Sales Law renders the sale, transfer, mortgage, er assignment fraudulent and void (Section 4, Bulk Sales Law), and makes any person found guilty of violating any provision of the Bulk Sales Law punishable by imprisonment for not less than 6 months not more than

5 years, or a fine in an amount not exceeding P5,000, or both such imprisonment and fine in the discretion of the court (Section 1], Bulk Sales Law).

VI

What contractual stipulations are required in all technology transfer agreements? (29%)

SUGGESTED ANSWER:

The following stipulations are required in all technology transfer agreements:

  1. The laws of the Philippines shall govern its interpretation and in the event of litigation, the venue shall be the proper court in the place where the licensee has its principal office;
  2. Continued access to improvements in techniques and processes related to the technology shall be made available during the period of the technology transfer arrangement;
  3. In case it shall provide for arbitration, the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations Commission on International Trade Law or the Rules of Arbitration of the International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the Philippines or any neutral country:
  4. The Philippine taxes on all payments relating to the technology transfer agreement shall be borne by the licensor (Sec. 88, Intellectual Property Code).
  5. Enumerate three (3) stipulations that are prohibited in technology transfer agreements. (3%)

 

SUGGESTED ANSWER

The following stipulations are prohibited in technology transfer agreements:

  1. Those that contain restrictions regarding the volume and structure of production;
  2. Those that prohibit the use of competitive technologies in a non-exclusive agreement; and
  3. Those that establish a full or partial purchase option in favor of the licensor (Subsections 87.3, 87.4 and 87.5 of the Intellectual Property Code).
  4. Can an article of commerce serve as a trademark and at the same time enjoy patent and copyright protection? Explain and give an example. [2%.

SUGGESTED ANSWER

A stamped or marked container of goods can be registered as a trademark (Subsection 121.1 of the Intellectual Property Code). An original ornamental design or model for articles of manufacturer can be copyrighted (Subsection 172.1 of the Intellectual Property Code). An ornamental design cannot be patented, because aesthetic creations cannot be patented (Section 22 of the Intellectual Property Code). However, it can be registered as an industrial design (Subsections 113.1 and 172.1 of the Intellectual Property Code). Thus, a container of goods which has an original ornamental design can be registered as a trademark, can be copyrighted, and can be registered as an industrial design.

ALTERNATIVE ANSWER

It is entirely possible for an article of commerce to bear a registered trademark, be protected by a patent, and have most, or some part, of it copyrighted. A book is

a good example. The name of the publisher or the colophon used in the book may be registered trademarks, the Ink used in producing the book may be covered by a patent, and the text and design of the book may be covered by copyright.

VII

Union Mines, Inc. has total assets of P60 million with 210 stockholders holding at least 100 shares each.

The company has two principal stockholders, ABC which owns 60% of the shares of stock, and XYZ which owns 17%.

ABC in turn is owned to the extent of 21.31% by Acme, Inc.; 29.69% by Golden Boy, Inc.: 9% by XYZ; and the rest by individual stockholders.

None of the parties is a publicly-listed company.

XYZ now proposes to buy Acme’s and Golden Boy’s shares in ABC, which would give it direct control of ABC and indirect control of Union Mines.

– Is the proposed acquisition by XYZ subject to the mandatory tender offer rule? Why or why not? What is a tender offer and when is it mandatory? (5%)

SUGGESTED ANSWER:

Yes, the proposed acquisition is subject to mandatory tender offer rule. A tender offer is a publicly announced intention by a person (acting alone or in concert with other persons) to acquire shares of a public company. A tender offer is meant to protect minority stockholders against any scheme that dilutes the share value of their investments. It gives them the chance to exit the company under the same terms offered to the majority stockholders.

Under the Securities Regulations Code and its implementing rules, a mandatory tender offer is required (i) when at least 35% of the outstanding shares of a public company is to be acquired in one transaction or a series of transaction during a 12-month period, or (11) even if any acquisition is less than 35% threshold but the result

thereof is the ownership of more than 51% of the total outstanding shares of a public company. The mandatory offer rule also applies to share acquisition meeting the threshold, which is done at the level of the holding or parent corporation controlling a public company (Cemco Holdings, Inc. v. National Life Insurance Company of the Philippines, Inc. 529 SCRA 355 (2007).

In this case, Union Mines is clearly a public company, since it has total assets of 60 million pesos with 210 stockholders holding at least 100 shares each. A public company is defined as a corporation listed on the stock exchange, or a corporation with assets exceeding 50 million pesos and with 200 or more stockholders at least 200 of them holding not less than 100 shares of such corporation.

XYZ’s acquisition of shares of Acme, Inc. and Golden Boy, Inc., taken separately, does not reach 35% threshold. Iftaken collectively, the two acquisitions total only 50%. However, when the acquisitions are added to XYZ’s existing shares in Union Mines, they meet the more-than -51% threshold for mandatory tender offer.

VIII

Marlon deposited with LYRIC Bank a money market placement of P1 million for a term of 31 days. On maturity date, one claiming to be Marlon called up the LYRIC Bank account officer and instructed him to give the manager’s check representing the proceeds of the money market placement to Marlon’s girlfriend Ingrid.

The check, which bore the forged signature of Marlon, was deposited in Ingrid’s account with YAMAHA Bank. YAMAHA Bank stamped a guaranty on the check reading: “All prior endorsements and/or lack of endorsement guaranteed.”

Upon presentment of the check, LYRIC Bank funds the check. Days later, Marlon goes to LYRIC Bank to collect his money market placement and discovers the foregoing transactions.

Marlon thereupon sues LYRIC Bank which in turn files a third-party complaint against YAMAHA Bank Discuss the respective rights and liabilities of the two banks. (5%)

SUGGESTED ANSWER:

Since the money market placement of Marlon is in the nature of a loan to Lyric Bank, and since he did not authorize the release of the money market placement to Ingrid, the obligation of Lyric Bank to him has not been paid. Lyric Bank still has the obligation to pay him.

Since Yamaha Bank indorsed the check bearing the forged indorsement of Marlon and guaranteed all Indorsements, including the forged indorsement, when it presented the check to Lyric Bank, it should be held liable to it.

However, since the issuance of the check was attended with the negligence of Lyric Bank, it should share the loss with Yamaha Bank on a fifty percent (50%) basis (Allied Banking Corporatton u. Lim Sio Wan, 549 SCRA 504 [2008]).

IX

Your client Dianne approaches you for legal advice on putting up a medium-sized restaurant business that will specialize in a novel type of cuisine. As Dianne feels that the business is a little risky, she wonders whether she should use a corporation as the business vehicle, or just run it as a single proprietorship. She already has an existing corporation that is producing meat products profitably and is also considering the alternative of simply setting up the restaurant as a branch office of the existing corporation.

A Briefly explain to your client what you see as the legal advantages and disadvantages of using a separate corporation, a single proprietorship, or a branch of an existing corporation for the proposed restaurant business. (3%)

SUGGESTED ANSWER:

If Dianne will set up a separate corporation, her liability for its obligations and losses will be limited to the amount of her subscription in the absence of showing that there is a ground to disregard its separate juridical personality. If she were to operate a single proprietorship. her liability for its debts and losses will be unlimited.

The formation and the operation of a corporation require a great deal of paper work and record-keeping. This is not the situation in the case of a single proprietorship.

If Dianne will form a separate corporation, it can raise more funds for the business than if she were to set up a single proprietorship.

If she were to set up the restaurant as a branch office an existing corporation, the corporation will have more funds as capital than if she were to form 1 separate corporation. However, all the assets of the existing corporation will be liable for the debts and losses of the restaurant business.

  1. If you advise your client to use a corporation, what officer positions must the corporation at least have? [2%)

SUGGESTED ANSWER:

The corporation must have at least five (5) directors (Section 14 of the Corporation Code). It must also have a president, a treasurer, and a secretary (Section 25 of the Corporation Code).

  1. What particular qualifications, if any, are these officers legally required to possess under the Corporation Code? (2%)

SUGGESTED ANSWER:

Every director must own at least one share of the capital stock of the corporation, which must be recorded in his name on the books of the corporation, and a majority of the directors must be residents of the Philippines (Section 25 of the Corporation Code).

The president must also be a director. The secretary must be a resident and citizen of the Philippines (Section 25 of the Corporation Code).

To secure a loan of P10 million, Mario mortgaged his building to Armando. In accordance with the loan arrangements, Mano had the building insured with First Insurance Company for P10 million, designating Armando as the beneficiary.

Armando also took an insurance on the building upon his own interest with Second Insurance Company for P5 million.

The building was totally destroyed by fire, a peril insured against under both insurance policies. It was subsequently determined that the fire had been intentionally started by Mario and that in violation of the loan agreement, he had been storing inflammable materials in the building

  1. How much, if any, can Armando recover from either or both insurance companies? (2%)

SUGGESTED ANSWER:

Armando can receive P5 million from Second Insurance Company. As mortgagee, he had an insurable interest in the building Panlileo v. Cosio, 97 Phil 919 11955. Armando cannot collect anything from First Insurance Company. First Insurance Company is not liable for the loss of the building. First, it was due to a willful act of Mario, who committed arson (Section 87 of the Insurance Code; East Furnitures, Inc. v. Globe do Rutgers Fire Insurance Company, 57 Phil. 576 /1932). Second, fire insurance policies contain a warranty that the insured will not store hazardous materials within the
averages include all damages and expenses which are deliberately caused to save the vessel, Its cargo, or both at the same time, from a real and known risk (Article 811 of the Code of Commerce).

XVII

The Supreme Court has held that fraud is ári exception to the “independence principle” governing letters of credit. Explain this principle and give an example of how fraud can be an exception. (3%)

SUGGESTED ANSWER:

The “independence principle” posits that the obligations of the parties to a letter of credit are independent of the obligations of the parties to the underlying transaction. Thus, the beneficiary of the letter of credit, which is able to comply with the documentary requirements under the letter of credit, must be paid by the issuing or confirming bank, notwithstanding the existence of a dispute between the parties to the underlying transaction, say a contract of sale of goods where the buyer is not satisfied with the quality of the goods delivered by the seller. The Supreme Court in Transfield Philippines, Inc. v. Luzon Hydro Corporation, 443 SCRA 307 (2004) for the first time declared that fraud is an exception to the independence principle. For instance, if the beneficiary fraudulently presents to the issuing or confirming bank documents that contain material facts that, to his knowledge, are untrue, then payment under the letter of credit may be prevented through a court injunction.

XVIII

For years, Y has been engaged in the parallel importation of famous brands, including shoes carrying the foreign brand MAGIC. Exclusive distributor X demands that Y cease importation because of his appointment as exclusive distributor of MAGIC shoes in the Philippines,

Y counters that the trademark MAGIC is not registered with the Intellectual Property Office as a trademark and therefore no one has the right to prevent its parallel importation,

  1. Who is correct? Why? (2%)

SUGGESTED ANSWER:

X is correct. His rights under his exclusive distributorship agreement are property rights entitled to protection. The importation and sale by Y of MAGIC shoes constitute unfair competition (Yu v. Court of Appeals, 217 SCRA 328 (1993). Registration of the trademark is not necessary in case of an action for unfair competition (Del Monte Corporation v. Court of Appeals, 181 SCRA 410 [1990].

ALTERNATIVE MISWA

Y is correct. The rights in a trademark are acquired through registration made validly in accordance with the Intellectual Property Code (Section 122 of the Intellectual Property Code).

  1. Suppose the shoes are covered by a Philippine patent issued to the brand owner, what would your answer be? Explain. (2%)

SUGGESTED ANSWER:

A patent for a product confers upon its owner the exclusive right of Importing the product (Subsection 71.1 of the Intellectual Property Code). The importation of a patented product without the authorization of the owner of the patent constitutes infringement of the patent (Subsection 76.1 of the Intellectual Property Code). X can prevent the parallel importation of such shoes by Y without its authorization.

 

XIX

Dr. Nobel discovered a new method of treating Alzheimer’s involving a special method of diagnosing the disease, treating it with a new medicine that has been discovered after long experimentation and field testing, and novel mental isometric exercises. He comes to you for advice on how he can have his discoveries protected. Can he legally protect his new method of diagnosis, the new medicine, and the new method of treatment? If no, why? If yes, how? [4%)

SUGGESTED ANSWER:

Dr. Nobel can be protected by a patent for the new medicine as It falls within the scope of Sec. 21 of the Intellectual Property Code (Rep. Act No. 8293, as amended). But no protection can be legally extended to him for the method of diagnosis and method of treatment which are expressly non-patentable (Sec. 22, Intellectual Property Code).

NOTE: For any answer, the candidate should be given full credit as Bulk Sales Law has not been included in the coverage of the examination in Commercial Law.

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