Commercial Law Questions

Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.
com JayArhSals
good faith and for value (Sec. 52[c], Give two (2) instances where a prior party
Negotiable Instruments Law). may hold a subsequent party liable. (2%)
SUGGESTED ANSWER:
(B) Who is liable on the check. The drawer
or the indorser? Explain your answer. (5%) In the following cases, a prior party may
hold a subsequent party liable: (1) where
SUGGESTED ANSWER: an instrument is negotiated back to a
prior party, and he reissues and further
X, the drawer, will be liable. As the
negotiates the same, he is entitled to en
drawer, X engaged that on due
force payment against a subsequent
presentment the check would be paid
party who qualifies as an intervening
according to its tenor and that if it is
party to whom the prior party is not
dishonored and he is given notice of
personally liable; and (2) in the case of
dishonor, he will pay the amount to the
an accommodation party arrangement,
holder (Sec. 61, NIL). No notice of
where the accommodation party may
dishonor need be given to X if he is
recover from the party accommodated,
aware that he has insufficient funds in
even when the latter is a subsequent
his account. Under Section 114(d) of the
party (Sec. 29, NIL).
Negotiable Instruments Law, notice of
dishonor is not required to be given to (B) How does the ―shelter principle‖
the drawer where he has no right to embodied in the Negotiable Instruments
expect that the drawee will honor the Law operate to give the rights of a holder-
instrument. Z cannot hold Y, the in-dine course to a holder who does not
endorser, liable as the latter can raise have the status of a holder-in-due course?
the defense that there was no valuable Briefly explain. (2%)
consideration for the endorsement of the SUGGESTED ANSWER:
check(Sec. 58, NIL).
The “shelter principle” provides that a
holder who is not himself a holder in due
course but is not a party to any fraud or
illegality affecting the instrument, and
Parties; Instances a Subsequent Party is who derives his title from a holder in due
Liable (2008) course, acquires the rights of a holder in
due course (Sec. 58, NIL).
No.III. (A) As a rule under the Negotiable
Instruments Law, a subsequent party may
hold a prior party liable but not vice versa.
“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige
Page 76 of 173
Mercantile Law Q&As (2007-2013) [email protected] JayArhSals
Securities Regulation While working with Atty. Buenexito on

another file, he accidentally gave you the
Howey Test (2009) Coco Products file containing the
company’s planned corporate financial
No.XI. (C) The Howey Test states that there
rehabilitation. While you knew you had the
is an investment contract when a person
wrong file, your curiosity prevailed and you
invests money in a common enterprise and
browsed through the file before returning it.
is led to expect profits primarily from the
Thus, you learned that a petition for
efforts of others.
financial rehabilitation is imminent, as the
SUGGESTED ANSWER:
company could no longer meet its
The Howey Test requires a transaction,
obligations as they fell due.
contract, or scheme whereby a person
makes an investment of money in a
Soon After, you mother is rushed to the
common enterprise with the expectation
hospital for an emergency operation, and
of profits to be derived solely, not
you have to raise money for her hospital
primarily from the efforts of others
bills. An immediate option for you is to sell
(Power Homes Unlimited Corp. v. SEC,
your Coco Products shares. The sale would
546 SCRA 567 (2008)).
be very timely because the price of the
company’s stocks are still high.
Would you sell the shares to raise the
Insider Trading (2013) needed funds for your mother’s

hospitalization? Take into account legal
No.V. You are a member of the legal staff of (5%) and ethical (3%) considerations. (8%)
a law firm doing corporate and securities SUGGESTED ANSWER
work for Coco Products Inc., a company The sale of the shares does not
with unique products derived from constitute insider trading. Although
coconuts and whose shares are traded in Atty. Buenexito, as corporate secretary
the Philippine Stock Exchange. A partner in of Coco Products, Inc., was an insider, it
the law firm, Atty. Buenexito, to whom you did not obtain the information regarding
report, is the Corporate Secretary of Coco the planned corporate rehabilitation by a
Products. You have long been investing in communication from him. He just
Coco Products stocks even before you accidentally gave the wrong file (Section
become a lawyer. 3.8 of Securities Regulation Code).
Page 77 of 173
It would be unethical to sell the shares. (A) What provision of the Securities
Rule 1.01 of the Code of Professional Regulation Code (SRC) did they violate, if
Responsibility provide, “A lawyer shall any ? Explain. (4%)
not engage in unlawful, dishonest, SUGGESTED ANSWER:
immoral or deceitful conduct.”
The directors and key officers of the
company violated the prohibition against
A lawyer should not only refrain from
insider trading under Sec. 27 of the
performing unlawful acts. He should also
Securities Regulation Code, which
desist from engaging in unfair deceitful
declares it unlawful for an “insider”
conduct to conceal from the buyer of the
(which includes directors and officers of
shares the planned corporate
a publicly listed company) to sell or buy
rehabilitation.
its securities, if they know of a fact of
special significance with respect to the
company or the security, that is not
Insider Trading (2008)
generally available to the public, before
No.XIII. Grand Gas Corporation, a publicly such material information made public
listed company, discovered after extensive through disclosure proceedings. The
drilling a rich deposit of natural gas along directors and key officers are liable to
the coast of Antique. For five (5%) months, disgorge the profits earned and to pay
the company did not disclose the discovery damages.
so that it could quietly and cheaply acquire

neighboring land and secure mining rights (B) Assuming that the employees of the
to the land. Between the discovery and its establishment handling the printing work of
disclosure of the information to the Grand Gas Corporation saw the exploration
Securities and Exchange Commission, all reports which were mistakenly sent to their
the directors and key officers of the establishment together with other materials
company bought shares in the company at to be printed. They too bought shares in the
very low prices. After the disclosure, the company at low prices and later sold them
price of the shares went up. The directors at huge profits. Will they be liable for
and officers sold their shares at huge violation of the SRC? Why? (3%)
profits, SUGGESTED ANSWER:
The employees are liable for violation of

the prohibition against insider trading.
They fall within the definition of
Page 78 of 173
“insider”. Subsection 3.8 of the under the Securities Regulation Code.

Securities Regulation Code defines an An “investment contract” is a contract,
insider as “a person whose relationship transaction or scheme (1) involving an
or former relationship to Issuer gives or investment of money, (2) in a common
gave him access to a fact of special enterprise, (3) with expectation of
significance about Issuer or the security profits, (4) primarily from the efforts of
that is not generally available.” others (Power Homes Unlimited
Corporation v. Securities and Exchange
Commission, 546 SCRA 567 (2008)).
(B) What procedure must be followed under

Investment Contract; Procedure (2010)
the Securities Regulation Code to authorize
No.IV. Andante Really, a marketing the sale or offer for sale or distribution of
company that promotes and facilitates sales an investment contract? (2%)
of real property through leverage marketing,

solicits investors who are required to be a SUGGESTED ANSWER:
Business Center Owner (BCO) by paying an Before the investment contract is sold or
enrollment fee of S250. The BCO is then offered for sale or distribution to the
entitled to recruit two other investors who public in the Philippines, it should be
pay S250 each. The BCO receives S90 from registered with the Securities and
the S250 paid by each of his recruits and is Exchange Commission in accordance
credited a certain amount for payments with Section 8 of the Securities
made by investors through the initial efforts Regulation Code (Power Homes
of his Business Center. Once the Unlimited Corporation v. Securities and
accumulated amount reaches S5, 000, the Exchange Commission, 546 SCRA 567
same is used as down payment for the real (2008)).
property chosen by the BCO.

(C) What are the legal consequences of
(A) Does this multi-level marketing scheme failure to follow this procedure? (2%)
constitute an ―investment contract‖ under SUGGESTED ANSWER:
the Securities Regulation Code? Define an The failure to follow the procedure has
―investment contract.‖ (2%) criminal consequences (i.e., upon
SUGGESTED ANSWER: conviction, a fine 50,000 to 5 million
Yes. The multi-level marketing pesos and / or imprisonment of 7 to 21
constitutes an “investment contract” years). It carries also civil liabilities in
Page 79 of 173
that the purchaser can recover from the market price (Section 48, Securities
seller (i) the consideration paid with Regulation Code).
interest thereon, less the amount of any
income received on the purchased The purpose of the Margin Trading Rule
securities, upon the tender of such is to prevent excessive use of credit for
securities, or (ii) damages if the the purchase of securities. It is a counter
purchaser no longer owns such securities to a broker’s desire to generate more
(Sections 57 and 73, Securities sales by encouraging clients to but
Regulation Code). Furthermore, the securities on credit (Carolina Industries,
Securities and Exchange Commission Inc. vs. CMS STock Brokerage, Inc. 97
(SEC) may issue a cease and desist order SCRA 734 [1980]).
(Subsection 64.1, Securities Regulation
Code).
Securities; Exempt Securities (2009)
No.X. What are the so-called exempt

Margin Trading Rule (2009)
securities under the Securities Regulation
No.XX. Under the Securities Regulation Code? (2%)
Code, what is the margin Trading Rule?
(2%) SUGGESTED ANSWER:
SUGGESTED ANSWER: Under Section 9 of the Securities
Under the Margin Trading Rule, no Regulation Code, the so-called exempt
registered broker or dealer, or member of securities are:
an exchange shall extend credit on any
security an amount greater than (A) Those issued or guaranteed by the
whichever is higher of: government of the Philippines or any of
its political subdivisions or agencies;
(a) 65 percent of the current market
price of the security, or (B) Those issued or guaranteed by the
government of any foreign country with
(b) 100 percent of the lowest market which the Philippines has diplomatic
price of the security during the relation, or any other state on the basis
preceding 36 calendar months, but not of reciprocity, although the SEC may
more than 75 percent of the current
Page 80 of 173
require compliance with the form and authorized to sell securities, including
content of disclosures; timeshares.
(C) Those issued by the receiver or by On March 30, 1998, Leon and Carina wrote
the trustee in a bankruptcy duly PPR rescinding their purchase agreement
approved by the proper adjudicatory and demanding the refund of the amount
board; they paid because the Palacio Del Boracay
timeshare was sold to them by PPR without
(D) Those involving the sale or transfer the requisite license or authority from the
which is bylaw, under the regulation of SEC. PPR contended that the grant of the
the OIC, HLURB, BIR; and SEC authority had the effect of ratifying the
purchase agreement (with Leon and Carina)
(E) Those issued by banks, except its of Oct.6, 1996.
own shares.
Is the contention of PPR correct? Explain
(Note: It is suggested that any two of the (3%)
above exempt securities should be SUGGESTED ANSWER:
considered as enough answer to the The contention of PPR is not correct. It
question.) is settled that no securities shall be sold
or offered for sale or distribution in the
Philippines without a registration duly
filed and approved by the Commission.
Corporate registration is one of the
Securities; Selling of Securities (2009)
requirements under Sec. 8of batas
No.XVII. Philippine Palaces Realty (PPR) pambansa Blg. 178 (timeshare Realty
had been representing itself as a registered Corporation v. Lao, 544 SCRA 254
broker of securities, duly authorized by the (2008)).
Securities and Exchange Commission

(SEC). On October6, 1996, PPR sold to ALTERNATIVE ANSWER:
spouses Leon and Carina one timeshare of No. Such contention is not correct. Sale
Palacio del Boracay for US S7, 500.00. or offer to sell securities which are not
However, its Registration Statement became exempt securities or which do not arise
effective only on Feb.11, 1998 after the SEC out of exempt transactions, and,
issued a resolution declaring that PPR was therefore, requiring registration, is

unlawful as such act is violative of the
Page 81 of 173
Securities Regulation Cod. Subsequent any scheme that dilutes the share value
grant of authority by the SEC does not of their investments. It gives them the
retroact to past sales or offers to sell. chance to exit the company under the
same terms offered to the majority
stockholders.
Tender Offer (2010) Under the Securities Regulations Code

and its implementing rules, a mandatory
No.VII. Union Mines, Inc. has total assets of
tender offer is required (i) when at least
P60 Million with 210 stockholders holding
35% of the outstanding shares of a
at least 100 shared each.
public company is to be acquired in one
The company has two principal
transaction or a series of transaction
stockholders, ABC which owns 60% of the
during 12-month period, or (ii) even if
shares of stock, and XYZ; which owns 17%.
any acquisition is less than 35%
ABC in turns is owned to the extent of
threshold but the result thereof is the
21.13% by Acme, Inc.; 29.69% by Golden
ownership of more than 51% of the total
Boy Inc.; 9% by XYZ; and the rest by
outstanding shares of a public company.
individual stockholders.
The mandatory offer rule also applies to
None of the parties is a publicly-listed
share acquisition meeting the threshold,
company.
which is done at the level of the holding
XYZ now proposes to buy Acme’s and
or Parent Corporation controlling a
Golden Boy’s shares in ABC, which would
public company (Cemco Holding, Inc. v.
give it, direct control of ABC and indirect
National Life Insurance Company of the
control of Union Mines.
Philippines, Inc. 529 SCRA 355 [2007]).
Is the proposal acquisition by XYZ subject
to the mandatory tender offer rule? Why or
In this case, Union Mines is clearly a
why not? What is tender offer and when is
public company, since it has total assets
it mandatory? (5%)
of P60 million pesos with 210
SUGGESTED ANSWER
stockholders holding at least 100 shares
Yes, the proposed acquisition is subject
each. A public company is defined as a
to mandatory tender offer rule. A tender
corporation listed on the stock
offer is publicly announced intention by
exchange, or a corporation with assets
a person (acting alone or in concert with
exceeding 50 million pesos and with 200
other persons) to acquire shares of a
or more stockholders at least 200 of
public company. A tender offer is meant
them holding not less than 100 shares of
to protect minority stockholders against
such corporation.
Page 82 of 173
train and that it was not guilty of

XYZ’s acquisition of shares of Acme, Inc. negligence. Decide. (5%)
and Golden Boy, Inc., taken separately, SUGGESTED ANSWER:
does not reach 35% threshold. If taken
CRI is liable for death of Ricardo Santos
collectively, the two acquisitions total
because it failed to exercise
only 50%. However, when the
extraordinary diligence (LRTA v. Navidad
acquisitions are added to XYZ’s existing
G.R. No. 145804, 06 February 2003). The
shares in Union Mines, they meet the
contract of carriage began when the
more- than -51% thresholds for
passenger purchased his ticket and
mandatory tender offer.
proceeded to the designated loading
facilities to board the train (Dangwa
Transp. Co., Inc. v. Court of Appeals,
G.R. No. 95582, 07 October 1991), CRI is
also liable for all persons in its employ
Transportation Law
(Caltex Philippines, Inc. v. Sulpicio
Carriage; Breach of Contract Lines, Inc., G.R. No. 131166, 30
September 1999).
No.VIII. City Railways, Inc. (CRI) provides
train service, for a fee, to commuters from
Manila to Calamba, Laguna. Commuter are
required to purchase tickets and then
proceed to designated loading and Carriage; Breach of Contract; Cause of
unloading facilities to board the train. Action; Defenses (2009)
Ricardo Santos purchased a ticket for
No.XIX. One of the passenger buses owned
Calamba and entered the station. While
by Continental Transit Corporation (CTC),
waiting, he had an altercation with the
plying its usual route figured in a collision
security guard of CRI leading to a fistfight.
with another bus owned by Universal
Ricardo Santos fell on the railway just as a
Transport, Inc. (UTI). Among those injured
train was entering the station. Ricardo
inside the CTC bus were: Romeo, a stow
Santos was run over by the train. He died.
away: Samuel, a pickpocket then in the act
of robbing his seatmate when the collision
In the action for damages filed by the heirs
occurred; Teresita, the bus driver’s mistress
of Ricardo Santos, CRI interposed lack of
who usually accompanied the driver on his
cause of action, contending that the mishap
occurred before Ricardo Santos boarded the
Page 83 of 173
trips for free; and Uriel, holder of a free (B) Do Romeo, Samuel, Teresita, and Uriel
riding pass he won in a raffle held by CTC. have a cause of action for damages against
(A) Will a suit for breach of contract of UTI? Explain. (3%)
carriage filed by Romeo, Samuel, Teresita, SUGGESTED ANSWER:
and Uriel against CTC prosper? Explain. Romeo, Samuel, Teresita and Uriel may
(3%) sue UtI on the basis of quasi-delict since
they have no pre-existing contractual
SUGGESTED ANSWER: relationship with UTI. They may allege
Romeo cannot sue for breach of contract that the collision was due to the
of carriage. A stowaway like Romeo, Who negligence of driver of UTI and UTI was
secures passage by fraud, is not a negligent in the selection and
passenger (Vda. De nueca v. Manial supervision of its driver (Articles 2176
Railroad Company, 13 C.A. R. 49(1968)). and 2180, New Civil Code).
Samuel and Teresita cannot sue for (C) What, if any, are the valid defenses that
breach of contract of carriage. The CTC and UTI can raise in the respective
Elements in the definition of a passenger actions against them? Explain. (3%)
are: an undertaking of a person to travel SUGGESTED ANSWER:
in the conveyance provided by the With respect to Romeo, Samuel and
carrier and an acceptance by the carrier Teresita, since there was no pre-existing
of the person as a passenger. (14 Am Jur contractual relationship between them
2d, Carriers, So. 714,p. 164). Samuel did and CTC, CTC can raise the defense that
not board the bus to be transported but it exercised the due diligence of a good
to commit robbery. Teresita did not father of a family in the selection and
board the bus to be transported but to supervision of its driver (Article 2180,
accompany the driver while he was New Civil Code).
performing his work.
Uriel can sue for breach of contract. He It can raise the same defense against
was a passenger although he was being Uriel if there is a stipulation that
transported gratuitously, because he won exempts it from liability for simple
a free riding pass in a raffle held by CTC negligence, but not for willful acts or
(Article 1753, New Civil Code). gross negligence (Article 1758, New Civil
Code).
Page 84 of 173
CTC can also raise against all the de Oro airport; the pilot miscalculated the
plaintiffs the defense that the collision plane’s approach and undershot the
was due exclusively to the negligence of runway. Of the 150 people on board, ten
the driver of UTI, and this constitutes a (10) passengers died at the crash scene.
fortuitous event, because there was no
concurrent negligence on the part of its Of the ten who died, one was a passenger
own driver (Ampang v.Guinoo who managed to leave the plane but was
Transportation Company, G.R. No. L- run over by an ambulance coming to the
5044, April 30, 1953). rescue. Another was an airline employee
who hitched a free ride to Cagayan de Oro
CTC can also raise against Samuel the and who was not in the passenger manifest.
defense that he was engaged in a
seriously illegal act at the time of the It appears from the Civil Aeronautics
collision, which can render him liable for Authority investigation that the co-pilot
damages on the basis of quasi-delict who had control of the plane’s landing had
(Dobbs, the Law of Torts, pp.524-525). less than the required flying and landing
time experience, and should not have been
Since UTI had no pre-existing in control of the plane at the time. He was
contractual relationship with any of the allowed to fly as a co-pilot because of the
plaintiffs, it can raise the defense that it scarcity of pilots – Philippine pilots have
exercised due diligence in the selection been recruited by foreign airlines under
and supervision of its driver that the vastly improved flying terms and wages so
collision was due exclusively to the that newer and less trained pilots are being
negligence of the driver of CTC, and that locally deployed. The main pilot, on the
Samuel was committing a serious illegal other hand, had a very high level of blood
act at the time of the collision. alcohol at the time of the crash.
You are part of the team that the victims

hired to handle the case for them as a
group. In your case conference, the
Carriage; Breach of Contract;
following questions came up:
Presumption of Negligence (2013)
No.IX. Fil-Asia Flight 916 was on a (A) Explain the causes of action legally
scheduled passenger flight from Manila possible under the given facts against the
when it crashed as it landed at the Cagayan airline and the Pilots; whom will you
Page 85 of 173
specifically implead in these causes of over. This is in accordance with Articles

action? (5%) 2176 and 2180 of the Civil Code. There
could also be a criminal prosecution for
SUGGESTED ANSWER: reckless imprudence resulting in
A complaint for breach of contract of homicide against the ambulance driver
carriage can be filed against Fil-Asia for and the consequent civil liability.
failure to exercise extraordinary
diligence in transporting the passengers Since the airline employee was being
safety from their point of embarkation transported gratuitously, Fil-Asia Air was
to their destination (Article 1755, Civil not required to exercise extraordinary
Code). diligence for his safety and only ordinary
care. (Lara v. Valencia, 104 Phil. 65,
A complaint based on a quasi-delict can 1958).
be filed against the pilots because of
their fault and negligence (Article 2176,
Civil Code). Fil-Asia Air can be included
for negligence in the selection and
Maritime Protest (2007)
supervision of the pilots (Article 2180,
Civil Code). No.XI. Two vessels figured in a collision
along the Straits of Guimaras resulting in
A third cause of action may be a criminal considerable loss of cargo. The damaged
prosecution for reckless imprudence vessels were safely conducted to the Port of
resulting in homicide against two pilots. Iloilo Passenger A failed to file a maritime
The airline will be subsidiarily liable for protest. B, a non-passenger but a shipper
the civil liability only after the pilots are who suffered damage to his cargo, likewise
convicted and found to be insolvent. did not file a maritime protest at all. (10%)
(B) How will you handle the cases of the (A) What is a maritime protest?
passenger run over the ambulance and the

SUGGESTED ANSWER:
airline employee allowed to hitch a free ride
to Cagayan de Oro? (3%) A maritime protest is a sworn statement
SUGGESTED ANSWER: made with 24 hours after a collision in
It is the driver of the ambulance and his which the circumstances thereof are
employer who should be held liable for declared or made known before a
damages, because a passenger was run competent authority at the point of
Page 86 of 173
accident or the first port of arrival if in Trust Receipts Law

the Philippines or the Philippine consul
in a foreign country (Article 835, Code of Trust Receipt (2007)
Commerce; Goro v. William Lines, Inc., 3
No.V. C contracted D to renovate his
CAR 1(1963)).
commercial building. D ordered
construction materials from E and received
(B) Can A and B successfully maintain an
delivery thereof. The following day, C went
action to recover losses and damages
to F Bank to apply for loan to pay for the
arising from the collision? Reason briefly
construction materials. As security for the
SUGGESTED ANSWER: loan, C was made to execute a trust receipt.
One year later, after C failed to pay the
B, the shipper, can successfully maintain
balance of the loan, F Bank charged him
an action to recover losses and damages
with violation of the Trust Receipts Law.
arising from the collision
(5%)
notwithstanding his failure to file a
maritime protest since the filing thereof
(A) What is a Trust Receipt?
is required only on the part of A, who
SUGGESTED ANSWER:
being a passenger of the vessel at the
A Trust Receipt is a written or printed
time of the collision, was expected to
document signed by the entrustee in
know the circumstances of the collision.
favor of the entruster containing terms
A’s failure to file a maritime protest will
and conditions substantially complying
therefore prevent him from successfully
with the provision of the Trust Receipts
maintaining an action to recover his
Law, whereby the bank as entruster
losses and damages (Art. 836, Code of
releases the goods to the possession of
Commerce)
the entrustee but retains ownership
ALTERNATIVE ANSWER: thereof while the entrustee may sell the

goods and apply the proceeds for the full
A can maintain an action to recover payment of his liability to the bank
damages if he was not in a condition to (Section 3(j), Trust Receipts Law).
make known his wishes. B can maintain
an action to recover damages since he (B) Will the case against C prosper? Reason
was not on board the vessel (Article 836, briefly.
Code of Commerce). SUGGESTED ANSWER:
Page 87 of 173
No, the case against C will not prosper, No, Tom Cruz’s obligation to pay the
Since C received the Construction loan covered by the trust receipts to XYZ
material from E Before the trust receipt Bank remains, A “Trust receipt” is
transaction was a simple loan, with the merely a collateral agreement which
trust receipt merely as a collateral or serves as security for a loan, with the
security for the loan. This is Bank appearing as the owner of the
inconsistent with a trust receipt goods. The Bank cannot dispose of the
transaction where the title to the goods goods in any manner it chooses, because
remains with the bank and the goods are it is not the true owner thereof (Rosario
released to the entrustee before the loan Textile Miss v. Home Bankers, G.R. No.
is granted (Consolidated Bank and Trust 137232, 29 June 2005, citing Sia v.
Corporation v. Court of Appeals, 356 People, G.R. No. 30896, 28 April 1983,
SCRA 671 [2001]. Abad v. CA, G.R. No. 42735, 22 January
1990, and PNB v. Pineda, G.R. No.
46658, 13 May 1991). The loss of the
goods covered by the trust receipts
cannot extinguish the principal
Trust Receipt; Security for a Loan (2008)
obligation of the borrower to pay the
No.II. Tom Cruz obtained a loan of P1 bank (Landl & Company [Phil.] v.
Million from XYZ Bank to finance his Metropolitan Bank, G.R. 159622, 30 July
purchase of 5,000 bags of fertilizer. He 2004).
executed a trust receipt in favor of XYZ

Bank over the 5,000 bags of fertilizer. Tom
Cruz withdrew the 5,000 bags from the
warehouse to be transported to Lucena City
Trust Receipts Law; Liability for Estafa
where his store was located. On the way,
(2013)
armed robbers took from Tom Cruz the
5,000 bags of fertilizer. Tom Cruz now No.VI. Delano Cruz is in default in the
claims that his obligation to pay the loan to payment of his existing loan from BDP
XYZ Bank is extinguished because the loss Bank. To extend and restructure this loan,
was not due to his fault. Is Tom Cruz Delano agreed to execute a trust receipt in
correct? Explain. (4%) the bank’s favor covering the iron pellets
SUGGESTED ANSWER: Delano agreed to execute a trust receipt in
the bank’s favor covering the iron pellets
Delano imported from China one year
Page 88 of 173
earlier. Delano subsequently succeeded in consequence acquired ownership to the

selling the iron pellets to a smelting plant, goods, the transaction does not involve a
but the proceeds went to the payment of trust receipt but a simple loan even
the separation benefits of his employees though the parties denominated the
who were laid off as he reduced his transaction as one of trust receipt
operations. (Colinares vs. Court of Appels, 339 SCRA
609, 2000; Consolidated Bank and Trust
When the extend loan period expired Corporation v. CA, SCRA 671, 2001).
without any significant payment from
Delano (not even to the extent of the
proceeds of the sale of the iron pellets), BDP
Bank consulted you on how to proceed
Trust Receipts Law; Violation
against Delano. The bank is contemplating
Committed by a Corporation (2012)
the filing of estafa pursuant to the
provisions of Pres. Decree No. 115 (Trust
No.II. CCC Car, Inc. obtained a loan from
Receipts Law) to force Delano to tum in at
BBB Bank, which fund was used to import
least the proceeds of the sale of the iron
ten (10) units of Mercedes Benz S class
pellets.
vehicles. Upon arrival of the vehicles and
before release of said vehicles to CCC Car,
Would you, as bank counsel and as an
Inc., X and Y, the President and Treasurer,
officer of the court, advise the bank to
respectively, of CCC Car, Inc. signed the
proceed with its contemplated action? (8%)
Trust Receipt to cover the value of the ten
(10) units of Mercedes Benz S class vehicles
SUGGESTED ANSWER:
after which, the vehicles were all delivered
to the Car display room of CCC Car, Inc.
I will not advise BDP Bank to file a
Sale of the vehicles were slow, and it took a
criminal case for estafa against Delano.
month to dispose of the ten (10) units. CCC
Delano received the iron pellets he
Car, Inc. wanted to be in business and to
imported one year before the trust
save on various documentations required
receipt was executed. As held by the
by the bank, decided that instead of turning
Supreme Court, where the execution of a
over the proceeds of the sales, CCC Car,
trust of a trust receipt agreement was
Inc. used the proceeds to buy another ten
made after the goods covered by it had
(10) units of BMW 3 series.
been purchased by and delivered to the
entrustee and the latter as a
Page 89 of 173
(A) Is the action of CCC Car, Inc. legally [Note:The problem does not state that BBB
justified? Explain your answer. (5%) bank issued a letter of credit upon
application of CCC Car, Inc, to enable the
SUGGESTED ANSWER:
latter to pay for its importation. In the
No. It is the obligation of CCC Car, Inc., suggested answers above, we assume this
as entrustee, to receive the proceeds of to be the case because the trust receipt,
the sale of the Mercedes Benz S class being an accessory contract, cannot validly
vehicles intrust for BBB Bank, as exist without a principal contract, i.e., the
entruster, and turn over the same to application for the letter of credit.]
BBB Bank to the extent of the amount
owing to the latter or as appears in the
trust receipt (Sec. 9(2), Trust Receipt
Warehouse Receipts Law
Law).
Warehouse Receipt: Surrendering of

(B) Will the corporate officers of CCC Car,
Possession; Lien (2009)
Inc. be held liable under the
circumstances? Explain your answer. (5%) No.XI. (B) Under the Warehouse loses his
lien upon the goods when he surrenders
SUGGESTED ANSWER: possession thereof.
SUGGESTED ANSWER:
Yes, particularly the President and the
True. A lien is dependent on possession.
Treasurer of CCC Car, Inc. who both
When a warehouseman surrenders
signed the trust receipts in the problem.
possession, he thereby loses his lien on
Section 13 of the Trust Receipt Law(PD
the goods over which hi no longer has
115) provides that if the violation or
possession (Sec.29 (a), Warehouse
offense is committed by a corporation,
Receipts Law).
partnership, association, or other
juridical entity, the penalty provided for
in the law shall be imposed upon the
Negotiable Instrument; Delivery of Goods
directors, officers, employees or other
(2007)
officials or persons therein responsible
for the offense, without prejudice to the No.II. Alex deposited goods for which Billy,
civil liabilities arising from the criminal a warehousemen, issued a negotiable
offense. warehouse receipt wherein the good were
deliverable to Alex or order. Alex negotiated
the receipt TC Caloy. Thereafter, Dario a
Page 90 of 173
creditor, secured judgment against Alex

and served notice of levy over the goods on
the warehouseman.
(A) To whom should the warehousemen

deliver the goods upon demand?(5%)
SUGGESTED ANSWER:
The warehouseman should deliver the

goods upon demand to Caloy who is a
holder of the receipt in good faith and
for value. The goods cannot be levied
upon by the creditor of Alex after it was
negotiated to Caloy (Section 25,
Negotiable Instruments Law).
(B) Would your answer be the same if the

warehouseman issued a non-negotiable
warehouse receipt? Reason briefly. (5%)
SUGGESTED ANSWER:
No, my answer would not be the same if

the warehousemen issued a non-
negotiable warehouse receipt. In such
case. The warehouseman should deliver
the goods to Datio, if the notice of levy
was served on the warehouseman prior
to the notification of the warehouseman
by Alex or Caloy of the transfer of the
non-negotiable receipt. In such case, the
title of Caloy would be defeated by the
notice of levy by Dario (Section 42,
Warehouse Receipts Law).
Page 91 of 173
MULTIPLE CHOICE equivalent to a lawful pledge of the shares

of stock.
QUESTIONS (MCQ)
SUGGESTED ANSWER:
2013 Mercantile Law Exam
(D) Yes, because the execution of the
MCQ (October 20, 2013) Deed of Assignment of Shares of Stock is
equivalent to a lawful pledge of the
I. Claude, the registered stock holder of shares of stock (Lopez v. Court of
1,000 shares in ABC Corp., pledged the Appeals, 114 SCRA 617).
shares to Conrad by endorsement in blank
of the covering stock certificates and, I.(2) After Claude defaulted on the loan,
execution of a Deed of Assignment of Conrad sought to have the shares
Shares of Stock, intended as collateral for a registered in his name In the books of the
loan of P 1.0 Million that was also corporation. If you are the Corporate
supported by a separate promissory note. Secretary of ABC Corporation, would you
register the shares in the name of
I.(A) Under these facts, is there a valid Conrad without any written instruction
pledge of the shares of stock to Conrad? from Claude? (1%)
(1%)
(A) Yes, since the endorsement and delivery

(A) No, because shares of stock are of the certificates of stock executed by
intangible personal properties whose Claude constitute the legal authority to
possession cannot be delivered and, hence, cancel the shares in his name and to place
cannot be the subject of a pledge. them in Conrad’s name.
(B) No, because the pledge of shares of (B) Yes, since the execution of the Deed of
stock requires double registration with the Assignment by Claude would constitute the
Register of the principal place of business of legal authority to cancel the shares in his
the corporation and of the residence of the name and place them in Conrad’s name.
pledgor. (C) No, because corporate officers can only
(C) Yes, because endorsement and delivery take direct instructions from the registered
of the certificates of stock is equivalent to owners on the proper disposition of shares
the transfer of possession of the covered registered in their names.
shares to the pledgee. (D) No, because the corporation has a
(D) Yes, because the execution of the Deed primary lien on the shares covering the
of Assignment of Shares of Stock is unpaid subscription.
Page 92 of 173
SUGGESTED ANSWER: (A) The ―Filipino First Policy‖

None of the answer is correct. The (B) The ―Foreign Investment Positive Lists‖
pledge must be foreclosed. (Article 2112, concept
Civil Code) Conrad cannot just (C) The ―Foreign Investment Negative Lists‖
appropriate the shares of stock (Article concept
2088, Civil Code). (D) The ―Control Test‖ concept
(E) All of the above.
NOTE: (D) could have been the correct
answer if the facts stated that there are SUGGESTED ANSWER:
unpaid subscriptions because under (C) The “Foreign Investment Negative
Section 63 of the Corporation Code, the Lists” concept
corporation may refuse the transfer if it (Section 7 of Foreign Investments Act)
holds unpaid claim on the subscribed
shares (See China Banking Corp. v. CA II.(2) The delegation asked: aside from
and Valle Verde Country Club, G.R. No. Filipino citizens, what entities would fall
117604, March 26, 1997). under the definition of ―Philippine National‖
under FIA ’91?
II. A foreign delegation of businessmen and
investment bankers called on your law firm You replied that the definition of
to discuss the possibilities of investing in “Philippine national” under FIA ’91
various projects in the Philippines, and covers .(1%)
wanted your thoughts on certain issues
regarding foreign investment in the (A) domestic partnerships wholly composed
Philippines. of Filipino citizens
(B) domestic corporations 60% of whose
II.(1) The delegation has been told about capital stock, outstanding and entitled to
the Foreign Investment Act of 1991, as vote, are owned and held by Filipino
amended (FIA ’91), and they asked what citizens
exactly is the law’s essential thrust (C) foreign corporations considered as doing
regarding foreign investment in Philippine business in the Philippines under the
business and industries. Corporation Code, 100% of whose capital
stock, outstanding and entitled to vote, are
You replied that FIA ’91 essentially wholly-owned by Filipino citizens
reflects . (1%)
Page 93 of 173
(C) All of the above, because the law (D) Exports consistently at least 60% of its
considers the juridical personality, whether goods or services produced, and can sell
domestic or foreign, as a mere medium; the goods or services to the domestic market
test of nationally is on the individual who (E) None of the above.
control the medium
(D) None of the above, because the term SUGGESTED ANSWER:
Philippine national can only cover (E) None of the above.
individuals and not juridical entities. (Section 3(e) of Foreign Investments Act)
SUGGESTED ANSWER: II.(4) As a last question and by way of a

(D) All of the above, because the law concrete example, a delegation member
considers the juridical personality, finally inquired – which of the following
whether domestic or foreign, as a mere corporations or businesses in the
medium: the test of nationality is on the Philippines may it invest and up to what
individuals who control the medium extent? (1%)
(Section 3(a) of Foreign Investments Act)
(A) A lifestyle magazine publication
II.(3) The delegation heard that foreigners corporation, up to 40% equity
can invest up to 100% of the equity in (B) An advertising corporation, up to 100%
―export oriented enterprises‖ and you were equity
asked exactly what the term covers. (C) A commercial bank, up to 60% equity
(D) A jeepney manufacturing corporation,
You replies that an ―export oriented up to 100% equity
enterprise ”under FIA ’91 is an enterprise (E) A real estate development corporation,
that .(1%) up to 60% equity
(A) only engages in the export of goods and SUGGESTED ANSWER:

services, and does not sell goods or services (D) A Jeepney manufacturing
to the domestic market corporation, up to 100% equity
(B) exports consistently at least 40% of its (Section 7 of Foreign Investment Act)
goods or services, and sells at least 60% of
the rest to the domestic market
(C) exports consistently at least 60% of the III. Dennis subscribed to 10,000 shares of
goods or services produced, and sell at least XYZ Corporation with a par value of P100
40% of the rest to the domestic market. per share. However, he paid only 25% of the
Page 94 of 173
subscription or P250,000.00 No call has (D) ABC Corp. may redeem the shares at
been made on the unpaid subscription. the end of 10 years without need for
unrestricted earnings provided that, after
How many shares in Dennis entitled to the redemption, there are sufficient assets
vote at the annual meeting of the to cover its debts.
stockholders of XYZ? (1%) (E) All of the above are incorrect.
(A) 10,000 shares SUGGESTED ANSWER:

(B) 2,500 shares (D) ABC Corp. may redeem the shares at
(C) 100 shares the end of 10 years without need for
(D) 0 shares unrestricted earnings provided that,
(E) None of the above. after the redemption, there are sufficient
assets to cover its debts.
SUGGESTED ANSWER: (Section 8 of Corporation Code; Republic
(A) 10,000 Shares Planters Bank v. Agana, 269 SCRA 1,
(Section 24 and 71 of Corporation Code) 1997)
IV. ABC Corp, issued redeemable shares, V. Arnold, representing himself as an agent
Under the terms of the issuance, the shares of Brian for the sale of Brian’s car,
shall be redeemed at the end of 10 years approached Dennis who appeared
from date of issuance, at par value plus a interested in buying the car. At Arnold’s
premium of 10% prodding, Dennis issued a crossed check
would only be shown to Brian as evidence
Choose the correct statement relating to of Dennis’ good faith and interest in buying
these redeemable shares. (1%) the car. Instead, Arnold used the check to
pay for the medical expenses of his wife in
(A) ABC Corp. would need unrestricted Brian’s clinic after Brian, a doctor, treated
retained earnings to be able to redeem the her.
shares.
(B) Corporations are not allowed to issue Is Brian a holder in due course (HIDC)?
redeemable shares; thus, the issuance by (1%)
ABC Corp. is ultra vires.
(C) Holders of redeemable shares enjoy a (A) Yes, Brian is a HIDC because he was the
preference over creditors. payee of the check and he received it for
services rendered.
Page 95 of 173
(B) Yes, Brian is a HIDC because he did not (A) Gawsengsit Corp. is doing business in
need to go behind the check that was the Philippines and requires a license from
payable to him. the Securities and Exchange Commission
(C) No, Brian is not a HIDC because Dennis (SEC).
issued the check only as evidence of good (B) Gawsengsit Corp. is not doing business
faith and interest in buying the car. in the Philippines by its mere investment in
(D) No, Brian is not a HIDC because Brian a Philippine corporation and does not need
should have been placed on notice: the a license from the SEC
check was crossed in his favor and Arnold (C) Gawsengsit Corp. has to appoint a
was not the drawer. resident agent in the Philippines.
(E) No, Brian is not a HIDC because the (D) Gawsengsit Corp. cannot elect directors
requisite consideration to Dennis was not in Bumblebee Corp.
present. (E) All the above choices are incorrect.
SUGGESTED ANSWER: SUGGESTED ANSWER:

(D) No, Brian is not a HIDC because Brian (B) Gawsengsit Corp. is not doing
should have been placed on notice: the business in the Philippines by its mere
check was crossed in his favor and investment in a Philippines corporation
Arnold was not the drawer. and does not need a license from the
(Vicente R. de Ocampo & Company v. SEC.
Gatchalian, 3 SCRA 566, 1961) (Section 3(d) of Foreign Investment Act)
VI. Gawsengsit Corp. is a corporation VII. The BIR assessed ABC Corp. for
incorporated in Singapore. It invested in deficiency income tax for taxable year 2010
Bumblebee Corp., a Philippine corporation, in the amount of P26,731,208.00, inclusive
by acquiring 30% of its shares. As a result, of surcharge and penalties.
Gawsengsit Corp. nominated 30% of the The BIR Can . (1%)
directors of Bumblebee Corp., all of whom
are Singaporeans and officers of (A) Run after the directors and officers of
Gawsengsit Corp. ABC Corp. to collect the deficiency tax and
their liability will be solidary.
Choose the correct statement relating to (B) Run after the stockholders of ABC Corp.
Gawsengsit Corp. (1%) and their liability will be joint
(C) Run after the stockholders of ABC Corp.
and their liability will be solidary
Page 96 of 173
(D) Run after the unpaid subscriptions still (Rosario Textile Mills Corporation v.
due to ABC Corp., if any Home Bankers Savings and Trust
(E) None of the above choices is correct. Company, 462 SCRA 88, 2005)
SUGGESTED ANSWER: IX. A Bank may acquire real property

(D) Run after the unpaid subscriptions . (1%)
still due to ABC Corp., if any (A) By purchase at a public sale of
(Halley v. Printwell, 648 SCRA 116, properties levied to satisfy tax
2011). delinquencies
(B) By purchase from a real estate
VIII. Anton imported perfumes from corporation in the ordinary course of the
Taiwan and these were released to him bank’s business
by the bank under a trust receipt. While (C) Through dacion en pago in satisfaction
the perfumes were in Anton’s warehouse, of a debt in favor of the bank
thieves broke in and stole all of them. (D) In exchange for the purchase of shares
of stocks of the bank
Who will shoulder the lossof the stolen (E) All of the above.
perfumes? (1%) (F) None of the above.
(A) The loss of the perfumes will be borne SUGGESTED ANSWER:

by the bank in whose behalf the perfumes (B) By purchase from a real estate
were held in trust. corporation in the ordinary course of the
(B) Anton will bear the loss. bank’s business; or
(C) The exporter can hold both the bank (C) Through dacion en pago in
and Anton liable for the loss. satisfaction of a debt in favor of the
(D) The exporter form whom Anton bought bank; or
the perfumes will bear the loss. (D) in exchange for the purchase of
(E) No one bears the loss for an unforeseen shares of stocks of the bank.
event. (Section 36 (7) and 62 (2) of the
Corporation Code)
SUGGESTED ANSWER: (Section 52 of the General Banking Law)
(B) Anton will bear the loss.
(Section 10 of the Trust Receipts Law) X. Under the Anti-Money Laundering Act, a
depositor’s bank account may be frozen.
(1%)
Page 97 of 173
(A) By the bank when the account is the Auto Mo, Ayos Ko is a . (1%)
subject of a suspicious or covered
transaction report (A) De jure corporation
(B) By the Anti-Money Laundering Council (B) De facto corporation
(AMLC) when the account belongs to a (C) Corporation by estoppels
person already convicted of money (D) General partnership
laundering (E) None of the above.
(C) By the Regional Trial Court, upon ex
parte motion by the AMLC, in a criminal SUGGESTED ANSWER:
prosecution for money laundering pending NOTE: The last sentence of the given
before it. problem is unclear as to whether the
(D) By the Court of Appeals motu proprio in term “latter” refers to Enrico or to the
an appeal from a judgment of conviction of incorporators. As such, it is necessary to
a criminal charge for money laundering. qualify the answer depending on the
(E) In none of the above. meaning given to the term “latter”
(C) Corporation by estoppels
SUGGESTED ANSWER:
(E) In none of the above. If the term “latter” refers to the
(Section 10 of the Anti-Money incorporators, the correct answer is C
Laundering Act) (Section 20 and 21 of the Corporation
Code).
XI. Unknown to the other four proponents,
Enrico (who had been given the task of (E) None of the above.
attending to the Articles of Incorporation of If the term “latter” refers to Enrico, the
the proposed corporation, Auto Mo, Ayos correct answer is E (Sections 20 and 21
Ko) misappropriated the filing fees and of the Corporation Code).
never filed the Articles of Incorporation with
the Securities and Exchange Commission XII. Preferred shares cannot vote on the
(SEC). Instead, he prepared and presented proposal . (1%)
to the proposed incorporators a falsified
SEC certificate approving the Articles. (A) To include other corporate officers in the
Relying on the falsifies SEC certificate, the corporation’s by-laws
latter began assuming and discharging (B) To issue corporate bonds
corporate powers. (C) To shorten the corporate term
Page 98 of 173
(D) All of the above Is the policy valid and binding? (1%)
(E) None of the above.
(A) Yes, the policy is valid and binding
SUGGESTED ANSWER: because Aurelia has an insurable interest
(E) None of the above. on the life of Kaddafy Benjelani.
(B) No, the policy is not valid and binding
Under letter (A), to include other because Kaddafy Benjelani has been
corporate officers in the corporation’s officially declared a public enemy.
by-laws. This will require the (C) Yes, the policy is valid and binding
amendment of the by-laws, and as such, because it has been in force for more than
preferred shares shall be allowed to two years.
vote. (D) No, the policy is not valid and binding
Under letter (B), to issue corporate bonds since the spouses’ estrangement removed
– Such corporate bonds are construed as Aurelia’s insurable interest in Benjelani’s
bonded indebtedness, then preferred life.
shares shall be allowed to vote. (E) None of the above.
Under letter (C), to shorten the corporate
term, - Under Section 6 of the SUGGESTED ANSWER”
Corporation Code, preferred shares shall (A) Yes the policy is valid and binding
be allowed to vote. because Aurelia has an insurable interest
on the life of Kaddafy Benjelani.
XIII. In 2010, the Philippine National Police
declared Kaddafy Benjelani ―Public Enemy The policy is valid. Aurelia had insurable
No. 1‖ because of his terrorist activities in interest in the life of Kaddafy Benjelani,
the country that have resulted in the death because he is her husband even if they
of thousands of Filipino. A ransom of P15 are estranged (Section 10 (a) of the
million was placed on Kaddafy Benjelani’s Insurance Code). Kaddafy Benjelani is
head. not a public enemy, because he is not a
national of an enemy country (Filipinas
Worried about the future of their family, Compañia de Sejunos v. Christern,
Kaddafy Benjelani’s estranged wife, Aurelia, Huefeld & Company, Inc., 89 Phil. 54,
secured in December 2010 a life insurance 1951).
policy on his life and designated herself as
the beneficiary.
Page 99 of 173
XIV. Muebles Classico, Inc. (MC), a Manila- (B) Deny STI’s claim. The Stay Order covers
based furniture shop, purchased hardwood all claims against the debtor and binds all
lumber from Surigao Timber, Inc. (STI), a its creditors. The letter of credit is a claim
Mindanao-based logging company. MC was against the debtor that is covered by the
pay STI the amount of P5.0 million for 50 Stay Order.
tons of lumber. To pay STI, MC opened a (C) Grant STI’s claim. The letter of credit is
letter of credit with Baco de Plata (BDP). not a claim against the debtor under
BDP duly informed STI of the opening of a rehabilitation, but against the bank which
letter of credit in its favor. has assumed a solidary obligation.
(D) Deny STI’s claim. If the bank disregards
In The meantime, MC- which had been the Stay Order, it may be subject to
undergoing financial reverses = filed a contempt by the rehabilitation court. STI
petition for corporate rehabilitation. The should file its claim with the rehabilitation
rehabilitation court issued a Stay Order to court.
stay the enforcement of all claims against (E) File an action for interpleader to resolve
MC. the parties’ competing claims
After shipping the lumber, STI went to BDP, SUGGESTED ANSWER:

presented the shipping documents, and (C) Grant SIT’s claim. The letter of credit
demanded payment of the letter of credit is not a claim against the debtor under
opened in its favor. MC, on the other hand, rehabilitation. But against the bank
informed the bank of the Stay Order and which has assumed a solidary obligation.
instructed it to deny payment to STI (Metropolitan Waterworks and Sewerage
because of the Stay Order. System v. Daway, 432 SCRA 559, 2004)
BDP comes to you for advice. Your best XV. Akiro of Tokyo, Japan sent various
advice is to . (1%) goods to his friend Juan in Cebu City,
Philippines , through one of the vessels of
(A) Grant STI’s claim, Under the Worthsell Shippers, Inc., an American
―Independence Principle,‖ the bank deals corporation. En route to Cebu City, the
only with the documents and not the vessel had two stops, first in Hong Kong,
underlying circumstances; hence, the and second, in Manila.
presentation of the letter of credit is
sufficient. XV.(1) While traveling from Tokyo to Hong
Kong, the goods were damaged.
Page 100 of 173
SUGGESTED ANSWER:
What law will govern? (1%) (D) Yes, provided he files the complaint
within 1 year from delivery.
(A) Japanese law (Section 3 (6) of Carriage of Goods by Sea
(B) Hong Kong law Act; Belgian Overseas Chartering
(C) Chinese law &Shipping N.V. v. Philippine First
(D) Philippine law Insurance Company, Inc., 383 SCRA 23,
(E) American law 2002)
SUGGESTED ANSWER:
(A) Philippine law
(Article 1753, Civil Code)
(Eastern Shipping Lines, Inc. v.
Intermediate Appellate Court, G.R. No. L-
69044, May 29, 1987).
XV.(2) Assuming Philippine law to be

applicable and Juan fails to file a claim
with the carrier, may he still commence
an action to recover damages with the
court? (1%)
(A) No, the failure to file a claim with the

carrier is a condition precedent for
recovery.
(B) Yes, provided he files the complaint with
10 years from delivery.
(C) Yes, provided he files the complaint with
10 years from discovery of the damage.
(D) Yes, provided he files the complaint
within 1 year from delivery.
(E) Yes, provided he files the complaint with
1 year from discovery of the damage.
Page 101 of 173
2012 Mercantile Law Exam serves to reduce the risk of non-

performance is called -
MCQ (October 21, 2012) a. irrevocable letter of credit;
b. standby letter of credit;
1. Letters of Credit are financial
c. confirmed letter of credit;
devices in commercial transactions
d. None of the above.
which will ensure that the seller of
the goods is sure to be paid when he SUGGESTED ANSWER:
parts with the goods and the buyer
of the goods gets control of the b. standby letter of credit;
goods upon payment. Which
statement is most accurate?
a. The use of the Letter of
3. At the instance of CCC Corporation,
Credit serves to reduce the
AAA Bank issued an irrevocable
risk of nonpayment of the
Letter of Credit in favor of BBB
purchase price in a sale
Corporation. The terms of the
transaction.
irrevocable Letter of Credit state
b. The Letters of Credit can
that the beneficiary must presfmt
only be used exclusively in a
certain documents including a copy
sales transaction.
of the Bill of Lading of the
c. The Letters of Credit are
importation for the bank to release
issued for the benefit of the
the funds. BBB Corporation could
seller only.
not find the original copy of the Bill
d. (a), (b) and (c) are all correct.
of Lading so it instead presented to
SUGGESTED ANSWER: the bank a xerox copy of the Bill of

Lading. Would you advise the bank
a. The use of the Letter of Credit to allow the drawdown on theLetter
serves to reduce the risk of of Credit?
nonpayment of the purchase price a. No, because the rule of
in a sale transaction. strict compliance in
commercial transactions
involving letters of credit,
requiring documents set as
2. Letter of Credit which is used in
conditions for the release
non-sale transaction, where it
of the fund ,has to be
Page 102 of 173
strictly corn plied with or 4. AAA Carmakers opened an

else funds will not be irrevocable Letter of Credit with BBB
released. Banking Corporation with CCC Cars
b. Yes, because an irrevocable Corporation as beneficiary. The,
letter of credit means that irrevocable Letter of Credit was
the issuing bank undertakes opened to pay for the importation of
to release the fund anytime ten (1 0) units of Mercedes Benz S
when claimed by the class. Upon arrival of the cars, AAA
beneficiary, regardless of the Carmakers found out that the cars
kind of document presented. were all not in running condition
c. Yes, because the issuing and some parts were missing. As a
bank can always justify to consequence, AAA Carmakers
CCC Corporation that xerox instructed BBB Banking
copies are considered as Corporation not to allow drawdown
faithful reproduction of the on the Letter of Credit. Is this legally
original copies. possible?
d. Yes, because the issuing a. No, because under the
bank really has no discretion "Independence Principle",
to determine whether the conditions for the
documents presented by the drawdown on the Letters of
beneficiary are sufficient or Credit are based only on
not. documents, like shipping
documents, and not with
SUGGESTED ANSWER: the condition of the goods
subject of the importation.
a. No, because the rule of strict
b. Yes, because the acceptance
compliance in commercial
by the importer of the goods
transactions involving letters of
subject of importation is
credit, requiring documents set as
material for the drawdown of
conditions for the release of
the Letter of Credit.
the FUND ,has to be strictly corn
c. Yes, because under the
plied with or else funds will not be
"Independence Principle", the
released.
seller or the beneficiary is
always assured of prompt
payment if there is no breach
Page 103 of 173
in the contract between the b. Assign the warehouse receipt

seller and the buyer. to Z to transfer ownership of
d. No, because what was the goods.
opened was an irrevocable c. Negotiate the warehouse
letter of credit and not a receipt by specifically
confirmed letter of credit. indorsing it to Z.
d. The warehouse receipt in
SUGGESTED ANSWER: this case is non-negotiable.
a. No, because under the SUGGESTED ANSWER:

"Independence Principle",
conditions for the drawdown on a. No, because under the
the Letters of Credit are based "Independence Principle",
only on documents, like shipping conditions for the drawdown on
documents, and not with the the Letters of Credit are based
condition of the goods subject of only on documents, like shipping
the importation. documents, and not with the
condition of the goods subject of
the importation.
5. For a fee, X deposited 1,000 sacks of

corn in the warehouse owned by Y.
Y is in the business of warehousing. 6. The warehouseman, by issuing the
Y issued a warehouse receipt as warehouse receipt, acknowledges
proof of the possession of the 1,000 that the goods are in his possession,
sacks of corn. The warehouse but he can refuse to deliver the
receipt states as follows: "Deliver to goods to the holder of the
X or bearer 1,000 sacks of corn." X warehouse receipt covering the
wanted to use the warehouse receipt goods if -
as payment of his debt in favor of Z. a. the warehouse receipt
How can the ownership of the goods covering the goods is not
covered by the warehouse receipt be presented.
transferred? b. the lien of the
a. Negotiate the warehouse warehouseman is not
receipt by just delivering satisfied.
the warehouse receipt to Z.
Page 104 of 173
c. the said holder presents a was asked to sign a Trust Receipt

materially altered warehouse covering the goods. When the goods
receipt. were sold, X did not deliver the
d. All of the above. proceeds to BBB Banking
Corporation, arguing that he will
need the fund for the subsequent
importation. Is there sufficient basis
SUGGESTED ANSWER:
to sue for criminal action?
a. Yes, because X's failure to
d. All of the above.
turn over the proceeds to
the bank is a violation of
the Trust Receipt Law.
7. The legal remedy of the b. No, because the trust receipt
warehouseman in case of conflicting was signed only after the
claims is to --- delivery of the goods. When
a. file an action for the trust receipt was signed,
interpleader. the ownership of the goods
b. give the goods to the first one was already with X.
who first presented the c. Yes, because violation of
warehouse receipt. Trust Receipt Law is mala
c. use his discretion as to who prohibita, intention is
he believes has the prior irrelevant.
right. d. No, because X has a valid
d. keep the goods and reason not to deliver the
appropriate them to himself. proceeds to BBB Banking
Corporation.
SUGGESTED ANSWER:
SUGGESTED ANSWER:
a. file an action for interpleader.
a. Yes, because X's failure to turn
8. BBB Banking Corporation issued a over the proceeds to the BANK is
Letter of Credit in the amount of a violation of the Trust Receipt
P5Million, for the purchase of five (5) Law.
tons of corn by X. Upon arrival of
the goods, the goods were delivered
to the warehouse of X. Thereafter he
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Mercantile Law Q&As (2007-2013) hectorchristopher@yahoo.

Securities Regulation While working with Atty. Buenexito on

Would you sell the shares to raise the

Insider Trading (2013) needed funds for your mother’s

listed company, discovered after extensive through disclosure proceedings. The

the company did not disclose the discovery damages.

so that it could quietly and cheaply acquire

profits, SUGGESTED ANSWER:

The employees are liable for violation of

“insider”. Subsection 3.8 of the under the Securities Regulation Code.

(B) What procedure must be followed under

company that promotes and facilitates sales an investment contract? (2%)

of real property through leverage marketing,

credited a certain amount for payments with Section 8 of the Securities

of his Business Center. Once the Unlimited Corporation v. Securities and

same is used as down payment for the real (2008)).

property chosen by the BCO.

constitute an ―investment contract‖ under SUGGESTED ANSWER:

―investment contract.‖ (2%) criminal consequences (i.e., upon

SUGGESTED ANSWER: conviction, a fine 50,000 to 5 million

Yes. The multi-level marketing pesos and / or imprisonment of 7 to 21

constitutes an “investment contract” years). It carries also civil liabilities in

Securities; Exempt Securities (2009)

No.X. What are the so-called exempt

broker of securities, duly authorized by the (2008)).

Securities and Exchange Commission

issued a resolution declaring that PPR was therefore, requiring registration, is

Tender Offer (2010) Under the Securities Regulations Code

train and that it was not guilty of

You are part of the team that the victims

specifically implead in these causes of over. This is in accordance with Articles

passenger run over the ambulance and the

accident or the first port of arrival if in Trust Receipts Law

ALTERNATIVE ANSWER: thereof while the entrustee may sell the

purchase of 5,000 bags of fertilizer. He 2004).

executed a trust receipt in favor of XYZ

earlier. Delano subsequently succeeded in consequence acquired ownership to the

Warehouse Receipt: Surrendering of

creditor, secured judgment against Alex

(A) To whom should the warehousemen

The warehouseman should deliver the

(B) Would your answer be the same if the

No, my answer would not be the same if

MULTIPLE CHOICE equivalent to a lawful pledge of the shares

(A) Yes, since the endorsement and delivery

SUGGESTED ANSWER: (A) The ―Filipino First Policy‖

SUGGESTED ANSWER: II.(4) As a last question and by way of a

(A) only engages in the export of goods and SUGGESTED ANSWER:

(A) 10,000 shares SUGGESTED ANSWER:

SUGGESTED ANSWER: SUGGESTED ANSWER:

SUGGESTED ANSWER: IX. A Bank may acquire real property

(A) The loss of the perfumes will be borne SUGGESTED ANSWER:

After shipping the lumber, STI went to BDP, SUGGESTED ANSWER:

XV.(2) Assuming Philippine law to be

(A) No, the failure to file a claim with the

2012 Mercantile Law Exam serves to reduce the risk of non-

SUGGESTED ANSWER: the bank a xerox copy of the Bill of

strictly corn plied with or 4. AAA Carmakers opened an