MERCANTILE LAW

BAR EXAMINATIONS 2005

MERCANTILE LAW
18 September 2005 8 A.M. — 12 Noon

INSTRUCTIONS

This questionnaire consists of fifteen (15) numbers contained in ten (10)

pages. Read each question very carefully. Answer legibly, clearly and
concisely. Start each number on a separate page; an answer to a sub-
question under the same number may be written continuously on the same
and immediately succeeding pages until completed. Do not repeat the
question.

HAND IN YOUR NOTEBOOK WITH THIS QUESTIONNAIRE GOOD LUCK!!!

(Sgd.) Romeo J. Callejo, Sr.

Chairman
2005 Bar Examination Committee

PLEASE CHECK THE NUMBER OF PAGES IN THIS SET WARNING: NOT FOR
SALE OR UNAUTHORIZED USE

MERCANTILE LAW

-I-

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

instrument. (2%)

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

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

(i) Postal Money Order;

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

(iii) Letters of credit;

(iv) Warehouse receipts;

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

- II -

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

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

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

What are the effects of crossing a check? Explain.

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

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

What defense or defenses can Señorita Isobel set up against Pete? Explain.
(3%)

- III -

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

(2.) Janice rendered some consultancy work for XYZ Corporation. Her
compensation included shares of stock therein.
Can XYZ Corporation issue shares of stock to pay for the services of Janice
as its consultant?

Discuss your answer. (2%)

- IV -

Divine Corporation is engaged in the manufacture of garments for export. In

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

a) How would you classify the transaction?

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

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

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

Corporation?

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

-V-

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

(2%)

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

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

(2.) A Korean national joined a corporation which is engaged in the furniture

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

- VI -

Jojo deposited several cartons of goods with SN Warehouse Corporation. The

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

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

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

property, what is the proper recourse of the corporation? Explain. (5%)

- VII -

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

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

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

Explain.

b) Was it proper for Malyn to file a derivative suit with a prayer for injunctive
relief? Explain.
c) Assuming that a derivative suit is proper, may the action continue if the
corporation is dissolved during the pendency of the suit? Explain. (5%)

- VIII -

Aaron, a well-known architect, is suffering from financial reverses. He has

four creditors with a total claim of P26 Million. Despite his intention to pay
these obligations, his current assets are insufficient to cover all of them. His
creditors are about to sue him. Consequently, he was constrained to file a
petition for insolvency.

a) Since Aaron was merely forced by circumstances to petition the court to

declare him insolvent, can the judge properly treat the petition as one for
involuntary insolvency? Explain.

b) If Aaron is declared an insolvent by the court, what would be the effect, if

any, of such declaration on his creditors? Explain.

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

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

- IX -

(1.) What are the effects of an irrevocable designation of a beneficiary under

the Insurance Code? Explain. (2%)

(2.) Jacob obtained a life insurance policy for P1 Million designating

irrevocably Diwata, a friend, as his beneficiary. Jacob, however, changed his
mind and wants Yob and Jojo, his other friends, to be included as
beneficiaries considering that the proceeds of the policy are sufficient for the
three friends.

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

-X-

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

a) Was there “constructive total loss” to entitle the shipowner to recover

from the insurance company? Explain.

b) Was it proper for the shipowner to send a notice of abandonment to the

insurance company? Explain. (5%)

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

b) What is the nature of the liability of the several insurers in double

insurance? Explain. (2%)

- XI -

Ricardo mortgaged his fishpond to AC Bank to secure a P1 Million loan. In a

separate transaction, he opened a letter of credit with the same bank for
$500,000.00 in favor of HS Bank, a foreign bank, to purchase outboard
motors. Likewise, Ricardo executed a Surety Agreement in favor of AC Bank.
The outboard motors arrived and were delivered to Ricardo, but he was not
able to pay the purchase price thereof.

a) Can AC Bank take possession of the outboard motors? Why?

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

- XII -

Hi Yielding Corporation filed a complaint against five of its officers for

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

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

- XIII -

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

(2.) Procopio purchased an Isuzu passenger jeepney from Enteng, a holder

of a certificate of public convenience for the operation of public utility vehicle
plying the Calamba-Los Baños route. While Procopio continued offering the
jeepney for public transport services, he did not have the registration of the
vehicle transferred in his name. Neither did he secure for himself a
certificate of public convenience for its operation. Thus, per the records of
the Land Transportation Franchising and Regulatory Board, Enteng remained
its registered owner and operator. One day, while the jeepney was traveling
southbound, it collided with a ten-wheeler truck owned by Emmanuel. The
driver of the truck admitted responsibility for the accident, explaining that
the truck lost its brakes.

Procopio sued Emmanuel for damages, but the latter moved to dismiss the
case on the ground that Procopio is not the real party in interest since he is
not the registered owner of the jeepney. Resolve the motion with reasons.
(3%)

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

Resolve with reasons. (2%)

- XIV -

(1.) On a clear weather, M/V Sundo, carrying insured cargo, left the port of
Manila bound for Cebu. While at sea, the vessel encountered a strong
typhoon forcing the captain to steer the vessel to the nearest island where it
stayed for seven days. The vessel ran out of provisions for its passengers.
Consequently, the vessel proceeded to Leyte to replenish its supplies.
a) Assuming that the cargo was damaged because of such deviation, who
between the insurance company and the owner of the cargo bears the loss?
Explain.

b) Under what circumstances can a vessel properly proceed to a port other

than its port of destination? Explain. (4%)

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

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

- XV -

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

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

b) How does the international affiliation of Shangrila Corporation affect the

outcome of the dispute? Explain. (5%)

(2.) Cezar works in a car manufacturing company owned by Joab. Cezar is

quite innovative and loves to tinker with things. With the materials and parts
of the car, he was able to invent a gas-saving device that will enable cars to
consume less gas. Francis, a co-worker, saw how Cezar created the device
and likewise, came up with a similar gadget, also using scrap materials and
spare parts of the company. Thereafter, Francis filed an application for
registration of his device with the Bureau of Patents. Eighteen months later,
Cezar filed his application for the registration of his device with the Bureau
of Patents.

a) Is the gas-saving device patentable? Explain. b) Assuming that it is

patentable, who is entitled to the patent?
What, if any, is the remedy of the losing party?

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

NOTHING FOLLOWS.