Bar Exam 2018 Mercantile Law

I

Yeti Export Corporation {YEC), thru its President, negotiated for  Yahoo Bank of Manila {YBM) to issue a letter of credit to course the importation of electronic parts from China to be sold and distributed to various electronic manufacturing companies in Manila. YBM issued the letter of credit and forwarded it to its correspondent bank, Yunan Bank (YB) of Beijing, to notify the Chinese exporters to submit the bill of lading in the name of YBM covering the goods to be exported to Manila and to pay the Chinese exporters the purchase price upon verification of the authenticity of the shipping documents.

The electronic parts arrived in the Port of Manila, and YBM released them to the custody of YEC as an entrustee under a trust receipt. When YEC unpacked the imported parts in its warehouse, it found that they were not only of inferior quality but also did not fit the descriptions contained in the bill of lading. YEC refused to pay YBM the amount owed under the trust receipt. YBM thereafter commenced the following:

(a) Civil suit to hold YB liable for  failure  to  ensure  that the  electronic  parts loaded for exportation in China corresponded with  those described in the bill of lading. Is there any merit in the case against YB? (2.5%)

SUGGESTED ANSWER:

• There is no merit in the case against YB. YB only acted as an advising bank whose only obligation after determining the apparent authenticity of the letter of credit is to transmit a copy thereof to the beneficiary of the letter of credit. It has no obligation to ensure that the goods loaded for exportation corresponded with those described in the bill of lading (Bank of America v. Court of Appeals, G..R No. 105395, Dec. 10, 1993). YB cannot be considered a confirming bank, because to be one it must have assumed  a direct obligation to the seller as if it has issued the letter of credit

(Marphil Export Corporation v. Allied Banking Corporation, (G.R. No. 187922, September 21, 2016). YB not a  negotiating  bank  either, because it did not buy the draft of the beneficiary of the letter of credit. Even if, however, YB acted as a confirming or negotiating bank, such kind of correspondent bank has no similar obligation to ensure that the goods shipped match with those described in the bill of lading.

• Criminal suit against YEC and its President for estafa, and sought the payment of the amount covered in the trust receipt. The defense of the YEC President is that he cannot be held liable for a transaction of the corporation, of which he only acted as an officer, and that it is YEC as the principal that should be held liable under the trust receipt, which was entered into in the name of YEC and pursuant to YEC’s corporate purposes. He cited as his legal ground the “Doctrine of Separate Juridical Personality.” Is the President’s  contention  meritorious? (2.5%)

SUGGESTED ANSWER:

(b) The President of YEC cannot invoke as a defense the doctrine of separate juridical personality to avoid criminal liability. The law specifically makes the director, officer or any person responsible for the violation of the Trust Receipt agreement criminally liable precisely for the reason that a Corporation, being a juridical  entity, cannot be the subject of the penalty of imprisonment. Nevertheless, following the same doctrine of separate legal personality, he cannot be civilly liable there being no showing that he bound himself with YEC to pay the loan. Only YEC is liable to pay the loan covered by the letter of credit/trust receipt [Ching v. Secretary of Justice, (G. R. No. 164317, February 6, 2006 and  Section 13 of PD 115)].

II

Yolanda executed and signed a promissory note with all the requisites for negotiability being present, except for the amount which was left blank. She kept  the promissory note in her desk and decided to place the amount at a later date. The indicated payee, Yohann, managed to obtain the promissory note from Yolanda’s desk and filled out the amount for the sum of PhP 10 million,  which  was the amount actually lent by him to Yolanda, but excluding the agreed interest. Yohann later endorsed and delivered the check to Yvette, under circumstances that would constitute the latter to be a holder in due course.

(a) May Yvette hold Yolanda liable on the note? (2.5%)

SUGGESTED ANSWER:

• Yvette cannot hold Yolanda liable on the note. This is a case of incomplete and undelivered instrument, insofar as Yolanda is concerned. Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without  authority, be a valid contract in the hands of any holder, including a holder in due course as against Yolanda, whose signature was placed thereon before delivery (Section 15 of the Negotiable Instruments Law [NIL]).

• Would your answer be the same if the promissory note was actually completed by Yolanda (including the amount of PhP 10 million), but stolen from her desk by Yohann? Can Yvette enforce the note against Yolanda? (2.5%)

SUGGESTED ANSWER:

(b) The answer will not be the same. Now that the instrument  is  complete but undelivered and in the hands of Yvette, a holder in due course, a valid and intentional delivery to make all parties prior to Yvette liable is conclusively presumed under Section 16 of the NIL, therefore, Yvette can hold Yolanda , a prior party, liable. A complete but undelivered instrument is only a personal defense not available againt a holder in due course.

III

On November 23, 2017, Yas Ysmael loaned the amount of PhP 5 million to Yarn & Thread Corporation (YTC), through its President, Ylmas Yektas (Yektas), which loan was evidenced by a Promissory  Note (PN), which reads as follows:

Yektas was the controlling stockholder of YTC at the time the PN was issued. As security for the payment of the PN, Yektas issued and delivered to Yas Ysmael a postdated personal check covering the face value of the PN drawn from his account with Yellow Bell Bank and Trust Company (YBTC). The proceeds of the loan under the PN were used by YTC as working capital.

A year later, Yas Ysmael inserted the date of “ November 23, 2017” on the date section of the PN, and made a formal demand upon YTC, through Yektas, to pay the note, but which was refused on the ground that Yektas was no longer the President and controlling shareholder of YTC. By this time, all the shares of YTC had already been sold to a new group of investors. Yas Ysmael deposited the personal check issued by Yektas which bounced. He then filed a collection  suit  against YTC and Yektas including the accrued interest.

The defendants raised the following defenses in the collection suit. Rule on the merits of each defense. (2% each)

(a)  A PN issued with a blank date is one that is not payable on demand or   on a fixed or determinable future time, and therefore the insertion of  the date constituted material alteration that nullified it, so that no cause of action arose.

SUGGESTED ANSWER:

• The defense is not meritororious. Where the instrument is not dated, it will be considered to be dated as of the time it was issued (Section 17 of NIL (c)). Section 14 of NIL also concedes to the  payee the prima facie authority to fill-in the blanks in a negotiable instrument. Such prima facie stands in the absence of evidence to the contrary.

• Yektas cannot be made liable on the PN since he signed in his capacity as President of YTC, which fact was known to Ysmael although not indicated on the PN.

SUGGESTED ANSWER:

(b)    The defense is not meritorious.  Where the instrument contains, or  a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he must disclose his principal and must indicate that he is acting on benalf of his principal (Section 20 of NIL).

• Yektas signed the PN merely as an accommodation to YTC. As he received no consideration for the PN, it is void for lack of consideration.

SUGGESTED ANSWER:

• The defense is not meritorius. An accommodation party signs a negotiable instrument as a maker, drawer, endorser, acceptor without receiving value therefor and only for the purpose of lending his name in another, he is liable to a holder for value notwithstanding that such holder, at the time of taking the instrument, knew him only to be  an  accommodation  party (Section 29 of NIL).

• YTC, now owned by new owners, cannot be held liable on the  PN since it was entered into by its former owner and President, which act the new Board of Directors did not ratify.

SUGGESTED ANSWER:

• The defense is not meritorius. In stock sales, where shareholder  sell a block of stock to new or existing shareholders,  the transaction takes place at the shareholder level only. Because the corporation has a legal personality separate and distinct from that of its shareholders, a change in the composition of shareholders  will not affect its existence or extinguish its separate legal personality (SME Bank v. Samson, (G.R. No. 186641, October 8, 2013)).

• The PN is void for being in violation of the Usury Law seeking interest at an unconscionable rate of 120% p.a.

SUGGESTED ANSWER:

(e) The defense is not meritorius.  The  Usury  law  is  currently suspended in view of CB Circular 905 series of 1982, which lifted the ceiling on interest rate for loans. If the interest rate is deemed  to be unconscionable by the courtdespite the absence of the Usury Law, the legal rate of interest shall be deemed to apply; thus, the PN remains valid.

IV

Ysidro, a paying passenger, was on board Bus No. 904 owned and operated  by Yatco Transportation Company (“Yatco”). He boarded the bus at Munoz, Nueva Ecija with Manila as his final destination. He was seated on the first row, window seat on the left side of the bus. As the bus was negotiating the national highway in front of the public market of Gerona, Tarlac, the bus came to a full stop because of the traffic. The driver of the bus took this opportunity to check on the tires of the  bus and to relieve himself. As he was alighting from the bus to do these, an unidentified man standing along the highway hurled a huge rock at the left side of the bus and hit Ysidro between his eyes. He lost consciousness and immediately the driver, with the conductor, drove the bus to bring him to the nearest hospital. He expired before the bus could reach the hospital.

Ysidro’s wife and children brought a civil action to collect damages from Yatco, alleging that, as a common carrier, it was required to exercise extraordinary diligence in ensuring the safety of its passengers. They contended that in case of injuries and/or death on the part of any of its passengers, the common carrier is presumed to be at fault. In its defense, Yatco alleged that it is not an  absolute  insurer of its passengers and that Ysidro’s death was not due to any defect in the means of transport or method of transporting passengers, or the negligent acts of its employees. Since the accident was due to the fault of a stranger over whom the common carrier had no control, or of which it did not have any prior knowledge to be able to prevent it, the cause of Ysidro’s death should be considered a fortuitous event and not the liability of the common carrier.

(a) Is a common carrier presumed to be at fault whenever there is death or injury to its passengers, regardless of the cause of death or injury? (2.5%)

SUGGESTED ANSWER:

• Yes, by express provision of law, in case of death or injuries to passengers,  common carriers are presumed to have been at fault  or to have acted negligently, unless they prove that they exercised extraordinary diligence (Art. 1756 of the Civil Code).

• What kind of diligence is required of common carriers like Yatco for the protection of its passengers? (2.5%)

SUGGESTED ANSWER:

• A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of a very cautious person with a due regard for all the circumstances or simply put, with extraordinary diligence (Art. 1755 of the Civil Code).

• Will your answer be the same as your answer in (b) above, if the assailant was another paying passenger who boarded the bus and deliberately stabbed Ysidro to death? (2.5%)

SUGGESTED ANSWER:

(c) My answer will be different. A common carrier is responsible for death or injuries caused by wilfull acts of other passengers or strangers, only if the common carrier’s employees through the exercise of the diligence of a good father of a family could have prevented the act (Art 1763 of the Civil Code; GV.  Florida Transport v. Heirs of Romeo Battung, Jr, (G.R.  No.  208802,  October 14, 2015).

V

Yellow Fin Tuna Corporation (Yellow Fin), a domestic corporation, applied for a credit facility in the amount of PhP 50 million with Yengzi Financial Corporation (YFC). The application was approved and the Credit Agreement was signed and took effect. Ysko and Yuan, Yellow Fin Chairman and President, respectively, executed a Continuing Suretyship Agreement in favor of YFC wherein they guaranteed the due and full payment and performance of Yellow Fin’s guarantee obligations under the credit facility. YFC soon discovered material inconsistencies in the financial statements given by Yellow Fin, drawing YFC to conclude that Yellow Fin committed misrepresentation. Under the Credit Agreement, any misrepresentation by Yellow Fin or its sureties will constitute an event of default. YFC thus called an event of default and filed a complaint for sum of money against Yellow Fin, Ysko, and Yuan. Immediately thereafter, Yellow Fin filed a petition for rehabilitation. The court suspended the proceedings in YFC’s complaint until the rehabilitation court disposed of the petition for rehabilitation. YFC posits that the suspension of the proceedings should only be with respect to Yellow Fin but not with respect to Ysko and Yuan. Is YFC correct? (2.5%)

SUGGESTED ANSWER:

YFC is correct. Actions or proceedings against the surety of the insolvent debtor that filed a petition for rehabilitation are not subject to the stay order; consequently, the suit may continue against him (Section 18 (c) of FRIA).

VI

Shortly after Yin and Yang were wed, they each took out separate life insurance policies on their lives, and mutually designated one another as sole beneficiary. Both  life insurance policies provided for a double indemnity clause,  the cost for which was added to the premium rate. During the last 10 years of their marriage, the spouses had faithfully paid for the annual premiums over the life policies   from   both their  salaries.    

Unfortunately, Yin fell in love with his officemate, Yessel, and they carried on an affair. After two years, their relationship bore them a daughter named Yinsel. Without the knowledge of Yang, Yin changed the designation of the beneficiary to an “irrevocable designation” of Yinsel and Yessel jointly. When Yang learned of the affair, she was so despondent that, having chanced upon Yin and Yessel on a date, she rammed them down with the car she was driving, resulting in Yin’s death and Yessel’s complete loss of mobilization. Yang was sued for parricide, and while the case was pending, she filed a claim on the proceeds of the life insurance of Yin as irrevocable beneficiary, or at least his legal heir, and opposed the claims on behalf of Yessel and her daughter Yinsel. Yang claimed that her designation as beneficiary in Yin’s life insurance policy was irrevocable, in the nature of one “coupled with interest,” since it was made in accordance with their mutual agreement to designate one another as sole beneficiary in their respective life policies. She also claimed that the beneficiary designation of Yessel and the illegitimate minor child Yinsel was void being the product of an illicit relationship, and therefore without “insurable interest.”

(a)      Is Yang correct in saying that her designation as beneficiary was irrevocable? (2.5%)

SUGGESTED ANSWER:

• Yang is not correct. The insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in the policy. There is nothing in the life  insurance policy taken by Yang which indicated that the designation of Yin is irrevocable. As such, it is deemed to be revocable.

• Do Yessel and Yinsel have “insurance interest” on the life of Yin? (2.5%)

SUGGESTED ANSWER:

(b)  Yessel has no insurable interest on the life of Yin, because she can  not be lawfully designated as beneficiary. Persons who are proscribed to become donees under the rules on donation cannot  be designated as beneficiary in life insurance. These include persons in illicit relations as in the case of Yin and Yessel. Yinsel, however, has insurable interest on the life of Yin. There is no proscription in naming an illegitimate child as a beneficiary (Heirs of Loreta Maramag v. Maramag, (G.R. No. 181132, June 5, 2009)).

VII

Pictures Inc., a movie production company based in California, USA, entered into a contract with Yehey Movies Inc., a Filipino movie production and  distribution company which is registered in the Philippines under the Securities Regulation Code (SRC) and listed in the Philippine Stock Exchange Inc. (PSE), for the exclusive distribution in the Philippines of movies produced in the USA  by  Yelp Pictures Inc. Yehey Movies is currently owned 85% by Yavic Yamson, and  the balance, by the public in the Philippines. For purposes of entering into the contract, suing for breach of such contract, and prosecuting unauthorized showing  of movies produced by Yelp Pictures, it appointed Atty. Yson, a local lawyer, as its attorney-in-fact.

Simultaneously with the execution of the film distribution agreement, Yehey Movies also granted Yelp Pictures an option to acquire up to 40% of the total outstanding capital stock in Yehey Movies post-exercise of the option, at the option price of PhP .01 per number of shares covered by the option, exercisable within a period of one year from the date of the grant, at the exercise price of PhP 100 per share. Once exercised, Yelp Pictures was granted the right to nominate two (2) directors to the Board of Yehey Movies, and Yavic Yamson agreed to vote all his shares for the election of directors to be nominated by Yelp Pictures.

(a) May the acts of entering into the film distribution contract,  the  subsequent execution and performance of the terms of the contract in the Philippines, and the appointment of Atty. Yson, be considered as  act of “doing business” in the Philippines that will require Yelp  Pictures to register as a foreign corporation and obtain a license to do business in the Philippines? (2.5%)

SUGGESTED ANSWER:

• A foreign Corporation which owns the Copyright to foreign films and exclusive distribution rights in the Philippines and appointed an attorney in-fact to file criminal cases on behalf of the corporation is not doing business in the Philippines, because the contract was executed abroad and the hiring of the attorney-in-  fact is merely for the protection of its property rights [Columbia Pictures vs Court of Appeals (261 SCRA 144 (1996)].

• Will your answer in (a) be the same if Yelp Picture exercises  the option, becomes a substantial shareholder, and is able to elect two (2) directors in the Board of Directors of Yehey Movies? (2.5%)

SUGGESTED ANSWER:

• It will be the same. Mere passive investment in equity and voting the equity shares of the corporation to elect its director in  the board of a domestic corporation is not tantamount to doing business.

• Must the option granted to Yelp Pictures be registered under the SRC? (2.5%)

SUGGESTED ANSWER:

(c) While options are securities, the option was granted only to Yelp Pictures and not to the public. As a consequence, the option need not be registered with the SEC.

VIII

Yenkell Cement Corporation (YCC) is a public corporation whose shares are listed at the PSE. It is 60% owned by Yenkell Holdings Corporation  (YHC) and 20% by Yengco Exploration Inc. (YEI). The remaining 20% is held by the public.

YHC is a private non-listed corporation which, in turn, is 60% owned by Yatlas Mines Inc. (YMI), and 40% by Yacnotan Consolidated Inc. (YCI). On August 8, 2008, the Board of Directors of YEI passed a resolution approving the acquisition of 50% and 25% of the shares held by YMI and YCI, respectively,  in  the authorized capital stock of YHC.

Yolly, one of the staff members in the office of the Corporate Secretary of YEI was immediately asked to type the resolution and file the disclosure with the PSE and the Securities and Exchange Commission (SEC). Before doing that, she secretly called her brother who works with a stock brokerage company, to purchase, in the name of Yolly’s husband, 5,000 shares in YCC. After the acquisition was disclosed to the SEC and the PSE, the market price of YCC increased by 50%.

(a) In acquiring 75% of the total capital stock of YHC, should YEI be  required to do a mandatory tender offer? (2.5%)

SUGGESTED ANSWER:

• In acquiring 75% of the total capital stock of YCC, YEI should be required   to   do   a   mandatory   tender   offer.   By   acquiring the combined 75% shareholdings of YMI and YCIin YCC, YEI effectively owns 45% of YCC. Add that to the 20% it directly owns in YCC, YEI now owns and controls 65% of YCC. Once a person singly or in concert with others acquires more than 50% of the voting stock of a public company, the mandatory tender offer rule applies. The  tender offer rule covers not only direct acquisition  but also indirect acquisition or any type of acquisition. Whatever may be the method by which control of a public company is obtained either through the direct purchase of its stocks or  through indirect means, mandatory tender offer rule applies (Cemco Holdings v. National Life Insurance Company, [529 SCRA (2007).

• Can Yolly be held liable for insider trading? (2.5%)

SUGGESTED ANSWER:

(b)   Yolly cannot be held liable for insider trading. Insider trading is    the buying and selling of securities by an insider while in the possession of a material non-public information. While Yolly is an insider, because she has access to material non-public information by reason of her relationship with the Issuer, she did not, however, buy or sell securities. She is liable, however, for having communicated material non-public information about the issuer to any broker who by virtue of such communication becomes an insider considering that Yolly, the insider communicating the information knows or has reason to believe that the broker will likely buy or sell a security of the issuer while in possession of such information (Section 27.3 of the SRC). The law makes  no distinction that the insider is buying for himself or for the account of another, as such, it is immaterial that the broker purchased securities for the account of Yolly’s husband. The information about the MTO is also material as it will likely affect the decision  of a reasonable person to buy or sell the securities.

IX

Yangchou lnc.’s (YI) Articles of Incorporation (AOI) provides for two (2) types of shares of stock: common and preferred shares. Its AOI further provides that “the preferred shares shall have a guaranteed annual dividend of 3% of the par value.” Its By-Laws also specifically provides that “preferred shareholdings shall be cumulative and participating.” No other terms of preference are provided for preferred shares in either the AOI or By-Laws of YI.

For the first five years of operations, the company was operating at a loss. At the end of the sixth year, YI realized a net profit of PhP 100 million, and  unrestricted retained earnings of PhP 30 million. The YI Board of Directors  declared and paid out dividends of 1 % on common shares, and 5% on preferred shares, which amounted to a total of PhP 30 million.

However, the preferred shareholders made a formal demand that they  be given an additional 3% dividend for each of the five (5) years based on  the  preferred shares features of “cumulative and participating,” and an additional 1 % given to the common shareholders, which could all be accommodated within the remaining balance of the net profits.

Should Vi’s Board heed the demand of its preferred shareholders? (2.5%)

SUGGESTED ANSWER:

YI’s Board should not heed the demand of its preferred shareholders. While the preferred shares are cumulative and participating, the holders thereof are entitled to dividends only if the unrestricted retained earnings are sufficient to pay such dividends. Dividends are declared based on unrestricted retained earnings and not on the amount of net profit Republic Planters Bank

• Agana, (G.R. No. 51765, March 3, 1997; Section 43 of the Corporation Code).

X

Ybarra is the registered shareholder of 500 shares in Yakal Inc., of which  only 50% has been paid up, but for which the corporation had erroneously issued a covering certificate of stock for the entire 500 shares. Ybarra sells the entire 500

shares for cash pursuant to a notarized Deed of Sale in favor of Ynchon, and which certificate was duly endorsed and delivered. When Ynchon presented the Deed of Sale and the endorsed certificate of stock, as well as proof of payment to the Bureau of Internal Revenue (BIR) of the tax due on the sale of shares, the Corporate Secretary of Yakal Inc. refused to register the sale on the ground of lack of written authority from Ybarra to cancel the certificate and have the shares registered in the name of Ynchon.

• Does Ynchon have a cause of action to file a petition for mandamus to compel the corporation to register the 500 shares in his name in the corporation books? (2.5%)

SUGGESTED ANSWER:

• Yes, Ynchon has a cause of action to file the petition  for  mandamus to compel the corporation to register the 500 shares in the corporation’s books. In Andaya v. Rural Bank of Cabadbaran, (G.R. No. 188769, August 3, 2016), the Supreme Court abandoning its previous ruling in (Ponce v. Alsons Cement) ruled that the transferees of shares of stock are real parties in interest having a cause of action for mandamus to compel registration of the  transfer and the corresponding issuance of stock certificates even without the written authority from the seller to cancel the certificate and register the shares in the books of the corporation.

• Who is liable to pay the remaining unpaid 50% balance – Ybarra or Ynchon? (2.5%)

SUGGESTED ANSWER:

(b) Ynchon should be the one to  pay  the  remaining  balance  but  without prejudice to his right to recover from Ybarra. The effect  of the sale of the shares was to extinguish the obligation of the  seller to the Corporation to pay whatever is the balance in the contract of subscription. The sale of shares to the buyer with the consent of the corporation effectively resulted in novation  (Interport Resources Corporation v. Securities Specialist Inc., G.R. No. 154069, June 6, 2016).

XI

Yenetic Corporation wants to increase its Authorized Capital Stock (which is currently fully subscribed and issued) to be able to increase its working capital to undertake business expansions.

The Board of Directors consults with you as legal counsel on the proper answers to the following issues: (2.5% each)

(a) Can Yenetic’s AOI be formally amended to remove  the  right  of  appraisal on all dissenting stockholders in all matters under the law which requires a ratification vote of the stockholders?

SUGGESTED ANSWER:

• Yenetic’s AOI cannot be amended to remove  the  appraisal right of the stockholders on matters requiring their approval in cases where the law grants them such appraisal right, like :
  • In case any amendment to the articles of  incorporation  has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence;
  • In case of sale, lease, exchange, transfer , mortgage, pledge or other disposition of all or substantially all of the corporate property and assets;
  • In case of merger (Section 81 of the Corporation Code);
  • In case of investment of funds in the secondary purpose of the corporation or another business (Section 42).

Appraisal right is a statutory right. It cannot be denied to the stockholders in cases where the law allows such right. For all the other matters under the Corporation Code which require ratificatory approval of the shareholders, the AOI  may be formally amended to remove appraisal right, because the right does not exist anyway in those cases.

• If the increase in Authorized Capital Stock is formally submitted to the stockholders in a meeting duly called for the purpose, what is the vote

necessary for the stockholders’ ratification, and would the dissenting stockholders have a right to exercise their right of appraisal?

SUGGESTED ANSWER:

• Any provision or matter stated in the AOI may be amended by a majority vote of the board of directors and the vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock. Stockholders cannot exercise any appraisal right in case of amendment to the articles of incorporation to increase capital stock, because this is not one of the cases allowed by law where appraisal right may be exercised (Articles 81 and 42 of the Corporation Code).

• Once the increase in the Authorized Capital Stock of Yenetic has been legally effected with the SEC, can the new shares from the unissued shares be offered to a new limited group of investors without having to offer them to the shareholders of record since no pre-emptive right is provided for in the AOI and By-laws of Yenetic?

SUGGESTED ANSWER:

(c) The new shares from the unissued shares cannot be validly offered to a new limited group of investors without having to offer to shareholders of record, as pre-emptive rights are not explicitly denied in the AOI. Section 39 of the Corporation Code provides that all stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all  issues or disposition of shares of any class, in proportion to their respective shareholdings. There need not be an explicit grant of pre- emptive rights in the AOI for it to exercised.

XII

Yashtag Holdings, lnc.’s (Yashtag Holdings) AOI states that its primary purpose is “to invest in real and personal properties of every kind or otherwise acquire and deal with stocks, bonds, and other securities or evidence  of indebtedness of any other corporation, and to hold or to own, use, sell, deal in, and dispose of, any such stock.” It further states that it has an authorized capital stock of PhP 1 million, all of which have been fully subscribed and paid up.

Yashtag Holdings’ President, Mr. Yokada, convinced Yeh, Yah, and Yo to lend/invest money with Yashtag, which money will be invested in a sister company, Yashtag Realty, Inc. (Yashtag Realty), a corporation that develops premium real estate projects in the Philippines. For the amount loaned/invested, Yashtag

Holdings issued two (2) postdated checks to each lender/investor, one representing the principal amount, and the other covering the guaranteed interest that ranged between 18-32% p.a. On the maturity dates of the checks, the individual lender/investor can review the loans/investment, and may either collect only the interest or roll over the same with the principal amounts. Eventually, the bursting of the real estate bubble brought about a serious financial crisis around the world, including the Philippines. Yashtag Realty collapsed and with it Yashtag Holdings defaulted in the payment of its loans/investments, as well as the dishonor of the tens of thousands of postdated checks issued to its various lenders/investors.

Yeh, Yah, and Yo filed several charges against Yashtag Holdings and its President, making them solidarily liable for the investments they failed to recover. Yeh, Yah, and Yo proved that Yashtag Holdings, acting through Mr. Yokada, was able to get a total of PhP 800 million of loans/investments from the public under the scheme, and from which Mr. Yokada, as the controlling stockholder, was able to withdraw a total amount of PhP 300 million for his personal account and entered  into the books of Yashtag Holdings as “Advances to Stockholders.” Mr. Yokada pleads as a defense that he cannot be made personally liable on the claim of the group under the doctrines of “Separate Juridical Personality” and “Limited Liability.”

(a)      What are the doctrines of “Separate Juridical Personality” and “Limited Liability”? (2.5%)

SUGGESTED ANSWER:

(a) The doctrine of separate juridical personality is a principle of law which ordains that the corporation has a separate legal personality from the stockholders, directors and officers composing it. The limited liability rule, on the other hand, means that the liability of  a stockholder who is not a director, officer or agent of the corporation, is limited to his subscription to the capital stock of the corporation.

• Decide on the merits of Mr. Yokada’s defense against being made liable for Yashtag Holdings’ obligations. (2.5%)

SUGGESTED ANSWER:

(b) Yokada cannot validaly invoke the doctrine of separate juridical personality and limited liability. Yokada acted in bad faith in withrawing 300M for his personal account. Having acted in bad faith, he becomes solidarily liable with the corporation; furthermore, having issued securities to the public without prior approval of the SEC is also another basis to hold him solidarily liable with the issuer corporation.

XIII

YBC Bank extended a loan of PhP 50 million to Mr. Yamato secured by a  real estate mortgage (REM) on a large tract of land. The covering Transfer Certificate of Title (TCT) of the property mortgaged did not indicate any encumbrance or lien on it, and the bank was able to obtain a certified true copy of the TCT from the Register of Deeds showing that the owner’s copy submitted to the bank was a genuine title. The Loan Agreement provided an escalation clause which stated that, at the anniversary date of the loan, YBC Bank was granted the option to increase the interest rate whenever there would be an increase in the Bangko Sentral ng Pilipinas’ prevailing rates. Three years later, Mr. Yamato received a  formal notice from YBC Bank raising the interest rate of the loan based on the escalation clause provided for in the Loan Agreement. Mr. Yamato refused to pay based on   the increased interest rate that was effected without his consent. YBC Bank insists on the binding effect of the escalation clause appearing on their Loan Agreement.

Mr. Yamato subsequently defaulted on the loan and vanished. Thus, YBC Bank extrajudicially foreclosed on the REM, and was the highest bidder at  the public auction sale. It was only then that the bank determined that there were actually two separate TCTs issued for the property and one of which was in the name of Mr. Yamsuan who occupied the property after  having  bought it earlier from Mr. Yamato.

(a)         Can YBC Bank unilaterally increase the interest rates on the loan? (2.5%)

SUGGESTED ANSWER:

• YBC Bank cannot unilaterally increase the interest rates on the loan. A stipulation allowing the bank to increase the interest rate unilaterally is a solely-potestative condition which violates the principle of mutuality of contracts and as such is null and void [PNB v. Padilla SCRA 259 SCRA 174 (1991)].

• Is YBC Bank a mortgagee buyer in good faith? Is it preferred over Mr. Yamsuan? (2.5%)

SUGGESTED ANSWER:

(b) YBC Bank is not a mortgagee-buyer in good faith. As a bank, it should have exercised due diligence to determine who the actual and true owner of the real property is prior to the grant of the  loan; also, Yamsuan, being the first buyer, has a prior right to the property.

XIV

On June 21, 2008, Yate took out a life insurance policy on her life in the amount of PhP 10 million and named her husband Vandy and daughter as joint irrevocable beneficiaries. Before the policy was issued and the premiums were paid, Yate underwent a medical checkup with a physician accredited by the insurer, and the only result found was that she was suffering from high blood pressure. Yate was previously diagnosed by a private physician of having breast cancer which she did not disclose to the insurer in her application, nor to the insurer’s accredited  physician because by then, she was told that she was already cancer-free after undergoing surgery which removed both her breasts. She was later diagnosed with psychotic tendency that graduated into extreme despondency. She was found dead hanging in her closet 36 months after the issuance of the policy. The police authorities declared it to be a case of suicide. The policy did not include suicide as an excepted risk.

(a)      Can the insurer raise the issue of failure to disclose that she had cancer as a cause for denying the claim of the beneficiaries? (2.5%)

SUGGESTED ANSWER:

• The insurer cannot raise the issue of concealment, because only material facts known to the insured at the time of the issuance of the policy should be disclosed to the insurer (Section 28 of the Insurance Code). Yate’s previous cancer diagnosis is no longer a material fact at the time she procured the policy.
• Are the beneficiaries entitled to receive the proceeds of the life insurance notwithstanding the fact that the cause of death was suicide? (2.5%)

SUGGESTED ANSWER:

(b) Yes, the beneficiaries  are  entitled  to  received  the  proceeds. The rule is that the insurer in life insurance is liable in case of suicide only when it is committed after the policy has been in force for a period of two years from the date of issue or last reinstatement.  The rule, however, admits of an exception so that when suicide is committed in the state of insanity, it shall be compensable regardless of the date of commission (Section 183 of the Insurance Code). In the facts given, Yate was diagnosed with psychotic tendency that graduated into extreme despondency; thus, even though Yate committed suicide 36 months from issuance of the policy, the insurer is liable.

XV

A distinctive-tasting pastillas is well-known throughout the country as having been developed within a close-knit women’s group in Barangay San Ysmael which  is located along a very busy national highway. Its popularity has encouraged the setting up of several shops selling similar delicacies, with the most famous product being the pastillas of “Barangay San Ysmael.” Eventually, the pastillas of Aling Voling under the brand name “Ysmaellas” began to attract national distinction. Aling Voling therefore registered it as a copyright with the National Library. Her neighbor, Aling Yasmin, realizing the commercial value of the brand, started using the term “Ysmaellas” for her pastillas but used different colors. Aling Yasmin registered the brand name “Ysmaellas” with the Intellectual Property Office (IPO).

• Can Aling Voling successfully obtain court relief to prohibit Aling Yasmin from using the brand name “Ysmaellas” in her products on the basis of her (Aling Yoling’s) copyright? What is the difference between registration as a copyright and registration as a trade or brand name? (2.5%)

SUGGESTED ANSWER:

• Aling Yoling cannot successfully obtain court relief to prohibit Aling Yasmin from using the brand name “ Ysmaellas “ in her product on the basis of Aling Yoling’s copyright. The brand name  “ Ysmaellas “ is proper subject of trademark, not copyright. They can not be interchanged. The copyright on a trade name or mark does not guarantee her the right to the exclusive use of the same  for the reason that it is not a proper subject of said intellectual right (Kho v. Court of Appeals, (G.R. No. 115758, March 19, 2002); Juan v. Juan, (G.R. No. 221372, August 23, 2017)).

The registration of a copyright is only a proof of the recording of the copyright but not a condition precedent for the copyright to subsist and for copyright infringement suit  to prosper; whereas, registration of a trademark is an indispensable requisite for any trademark infringement suit.

• Can Aling Yasmin seek injunctive relief against Aling Yoling from using the brand name “Ysmaellas,” the latter relying on the doctrine of “prior use” as evidenced by her prior copyright registration? (2.5%)

SUGGESTED ANSWER:

• Aling Yasmien can seek injunctive relief against Aling Yoling from using the brand name “ Ysmaellas “ because of the doctrine of prior use. It is ownership of the trademark that confers the right to register. Registration does not confer ownership. Since Aling Yasmin was the first one to use the brand or trade name in commerce, then she is considered the owner thereof [EY Industrial Sales v. Shen Dar 634 SCRA 363(2010)].

• Can Aling Yoling seek the cancellation of Aling Yasmin’s trademark registration of the brand name “Ysmaellas” on the ground of “Well Known Brand” clearly evidenced by her (Aling Yoling’s) prior copyright registration, actual use of the brand, and several magazine coverages? (2.5%)

SUGGESTED ANSWER:

(c) NO, Aling Yoling can not seek the cancellation of Aling Yasmin’s trademark registration of the brand name “ Ysmaellas on the ground of well-known brand, because the well- known mark rule only applies to a mark which is well-known internationally and in the Philippines [Section 123 ( E ) of the Intellectual Property Code]. She, however, can seek the cancellation of the trademark for being the prior user even though the mark is not well-known.

XVI

Yosha was able to put together a mechanical water pump in his garage consisting of suction systems capable of drawing water from the earth using less human effort than what was then required by existing models. The water pump system provides for a new system which has the elements of novelty and inventive steps. Yosha, while preparing to have his invention registered with the IPO, had several models of his new system fabricated and sold in his province.

Is Yosha’s invention no longer patentable by virtue of the fact that he had  sold several models to the public before the formal application for registration of patent was filed with the IPO? (2.5%)

SUGGESTED ANSWER:

• Yosha’s invention is still patentable despite the fact he had sold several models to the public before the formal application for registration of the patent was filed with the IPO. It is true that an invention shall not be considered new if it forms part of a prior art and that prior art shall consist of everything which has been made available to the public anywhere in the world,  before the filing  date or the priority date of the application claiming the invention.This, however, presupposes that the one who has made available the patentable invention to the public is a person other than the applicant for patent.

• If Yosha is able to properly register his patent with the IPO, can he revent anyone who has possession of the earlier models from using them? (2.5%)

SUGGESTED ANSWER:

(b)  Yosha can no longer prevent anyone who has possession of the  earlier models from using them even if Yosha is able to properly register the patent with the IPO. One of the limitations of patent rights is the use of the patented product which has been put on the market in the Philippines by the owner of the product insofar as such use is performed after the product has been so put on the said market [Section 172 of the Intellectual Property Code].

XVII

Yvan was a slot machine operator supervisor in a casino operated by the Philippine Amusement and Gaming Corporation (PAGCOR). On the basis of an intelligence report, he was found, in connivance with some slot machine customers, to have padded the credit meter readings of slot machines in the casino where he  was employed. After being served with notice and opportunity to contest the findings, he was found guilty of the charges and ordered dismissed by PAGCOR. After receiving his copy of the order for dismissal, he claimed to have sent to the Board of PAGCOR his motion for reconsideration through facsimile transmission. After a considerable time, when his motion for reconsideration was unacted upon,  he filed an action with the Civil Service Commission (CSC) for illegal dismissal. PAGCOR claimed that his action has prescribed because it was filed more than 15 days after his dismissal became final. Yvan claimed that there was  no  final  decision yet because the Board of PAGCOR has not yet acted on his motion for reconsideration. He presented a copy of his facsimile transmission addressed to the Board of PAGCOR seeking reconsideration of his dismissal, and the fact that there has been no action taken. He claimed that based on the Electronic Commerce Act of 2000, his facsimile transmission should be considered like any genuine and  authentic paper pleading. PAGCOR denied having received it and was able to prove that the telephone number of PAGCOR used in the facsimile transmission was wrong. CSC denied his complaint on account of prescription. He appealed CSC’s dismissal in court.

(a)      Was CSC correct in dismissing the case? (2.5%) SUGGESTED ANSWER:

• CSC is correct in dismissing the  case. The E-commerce law does  not cover or allow e-filing or facsimile transmission as a mode of filing  of  pleadings  in  administrative  cases      [Torres v. PAGCOR, (G.R. No. 193531, December 6, 2011)].

• Can Yvan’s bank be ordered by the court to disclose if there were unreasonable increases in his bank deposit when the alleged acts were committed? (2.5%)

SUGGESTED ANSWER:

(b) No, Yvan’s bank cannot be ordered by the court to disclose if there were unreasonable increases in his bank deposit when the alleged acts were committed. The inquiry into bank deposits allowable under RA 1405 must be premised on the fact that the money deposited in the account is itself the subject of the action;  otherwise, the inquiry will amount to an impermissible encroachment into one’s right to privacy (BSB Group v. Go, G.R. No. 168644, February 16, 2010)].

XVIII

Through various acts of graft and bribery, Mayor Ycasiano accumulated a large amount of wealth which he converted into U.S. dollars and deposited in a Foreign Currency Deposit Unit (FCDU) account with the Yuen Bank (YB). On a tip given by the secretary of the mayor, the Anti-Money Laundering Council (AMLC) sent an order to YB to confirm the amount of U.S. dollars that Mayor Ycasiano had in his FCDU account. YB claims that, under the Foreign Currency Deposit Act  (R.A. No. 6426, as amended), a written permission from the depositor is the only instance allowed for the examination of FCDU accounts. YB alleges that AMLC on its own cannot order a banking institution to reveal matters relating to bank accounts.

(a) Is the legal position of YB, in requiring written permission from the depositor, correct? (2.5%)

SUGGESTED ANSWER:

• Yes, the legal position of YB in requring written permission from the depositor is correct. The AMLC cannot order the bank to inquire into the bank account of any depositor on mere suspicion  of acts of graft and bribery without his written consent or a bank inquiry order issued by the competent court.

• Does AMLC have the power to order a banking institution to reveal matters relating to bank accounts? (2.5%)

SUGGESTED ANSWER:

(b) The AMLC has no power to order a banking institution to reveal matters relating to bank accounts without a bank inquiry order issued by the competent court about the existence of probable  cause that the deposits, funds or investments of the person relate to unlawful activities under the Anti-Money Laundering law. A bank inquiry order, however, is not necessary, however, and as such, the AMLA may order the disclosure of information about bank accounts if the predicate crime/s is/are: a) hijacking, b)  kidnapping, c) violation of the terrorism financing act, d) murder, e) arson and, f) violation of the Dangerous Drugs law (Section 11 of AMLA).