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MERCANTILE LAW UPDATES

2013-2018
By Esther M. Weigand

LETTERS OF CREDIT

1. Explain the various transactions giving rise to a letter of credit.

In simpler terms, the various transactions that give rise to a letter of credit proceed as follows: Once the seller
ships the goods, he or she obtains the documents required under the letter of credit. He or she shall then
present these documents to the issuing bank which must then pay the amount identified under the letter of
credit after it ascertains that the documents are complete. The issuing bank then holds on to these documents
which the buyer needs in order to claim the goods shipped. The buyer reimburses the issuing bank for its
payment at which point the issuing bank releases the documents to the buyer. The buyer is then able to
present these documents in order to claim the goods. At this point, all the transactions are completed. The
seller received payment for his or her performance of his obligation to deliver the goods. The issuing bank is
reimbursed for the payment it made to the seller. The buyer received the goods purchased.

Owing to the complexity of these contracts, there may be a correspondent bank which facilitates the ease of
completing the transactions. A correspondent bank may be a notifying bank, a negotiating bank or a
confirming bank depending on the nature of the obligations assumed. A notifying bank undertakes to inform
the seller-beneficiary that a letter of credit exists. It may also have the duty of transmitting the letter of credit.
As its obligation is limited to this duty, it assumes no liability to pay under the letter of credit. A negotiating
bank, on the other hand, purchases drafts at a discount from the seller-beneficiary and presents them to the
issuing bank for payment. Prior to negotiation, a negotiating bank has no obligation. A contractual relationship
between the negotiating bank and the seller-beneficiary arises only after the negotiating bank purchases or
discounts the drafts. Meanwhile, a confirming bank may honor the letter of credit issued by another bank or
confirms that the letter of credit will be honored by the issuing bank. A confirming bank essentially insures
that the credit will be paid in accordance with the terms of the letter of credit. It therefore assumes a direct
obligation to the seller-beneficiary. Parenthetically, when banks are involved in letters of credit transactions,
the standard of care imposed on banks engaged in business imbued with public interest applies to them. Banks
have the duty to act with the highest degree of diligence in dealing with clients. 84 Thus, in dealing with the
parties in a letter of credit, banks must also observe this degree of care. [The Hongkong & Shanghai Banking
Corporation, Limited v. National Steel Corporation and Citytrust Banking Corporation, G.R. No. 183486.
February 24, 2016]

2. What rules are applicable to letters of credit?

Letters of credit are defined and their incidences regulated by Articles 567 to 572 of the Code of Commerce.
These provisions must be read with Article 2 of the same code which states that acts of commerce are
governed by their provisions, by the usages and customs generally observed in the particular place and, in the
absence of both rules, by civil law. In addition, Article 50 also states that commercial contracts shall be
governed by the Code of Commerce and special laws and in their absence, by general civil law. The
International Chamber of Commerce (ICC) drafted a set of rules to govern transactions involving letters of
credit. This set of rules is known as the Uniform Customs and Practice for Documentary Credits (UCP). Since
its first issuance in 1933, the UCP has seen several revisions, the latest of which was in 2007, known as the
UCP 600. However, for the period relevant to this case, the prevailing version is the 1993 revision called the
UCP 400. Throughout the years, the UCP has grown to become the worldwide standard in transactions
involving letters of credit. It has enjoyed near universal application with an estimated 95% of worldwide letters
of credit issued subject to the UCP. Thus, letters of credit are governed primarily by their own provisions, by
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2013-2018
By Esther M. Weigand
laws specifically applicable to them, and by usage and custom. Consistent with our rulings in several cases,
usage and custom refers to UCP 400. When the particular issues are not covered by the provisions of the letter
of credit, by laws specifically applicable to them and by UCP 400, our general civil law finds suppletory
application. [Ibid.]

3. G was granted by SMC the right to distribute and sell its goods, as a result of which G applied for a
credit line with SMC. To get the credit line, G was required to obtain a letter of credit. He was granted
an irrevocable letter of credit by the PNB in the amount of P2,000,000.00. Under the credit agreement,
PNB has the obligation to release the proceeds of G’s credit line to SMC upon presentation of the
invoices and official receipts of G’s purchases of SMC goods to the PNB. G then started availing of his
credit line with PNB and sold SMC goods. After some time, G applied for and was granted an additional
letter of credit amounting to P2,400,000.00. he continued to sell SMC goods, and was able to pay for
his purchases, but eventually, he became delinquent with his accounts. SMC now seeks to recover the
amounts owed by G, both from PNB and G himself, by filing a complaints for collection of sum of
money. The two cases were tried separately, and G was held liable by the lower court, while the case
against PNB remained. Can PNB, as issuing bank, evade payment due to the court findings against G?

No. In a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is
a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are
presented and the conditions of the credit are complied with. Precisely, the independence principle liberates
the issuing bank from the duty of ascertaining compliance by the parties in the main contract. As the principle's
nomenclature clearly suggests, the obligation under the letter of credit is independent of the related and
originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction. Thus,
it does not matter whether G was found liable against SMC. It remains that PNB is liable to SMC as a result of
the letter of credit. [Philippine National Bank v. San Miguel Corporation, G.R. No. 186063, January 15, 2014]

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MERCANTILE LAW UPDATES
2013-2018
By Esther M. Weigand

TRUST RECEIPTS LAW

1. S Corp. obtained letters of credit from M Bank to cover its purchase of construction materials. M
Bank required HTY, representative of S Corp. to sign 24 trust receipts as security for the construction
materials and to hold those materials or the proceeds of the sales in trust for M Bank to the extent
of the amount stated in the trust receipts. S Corp. defaulted thus M Bank filed a criminal action
against HTY for estafa. Can HTY be held liable for estafa under the trust receipts law?

No. A trust receipt transaction is one where the entrustee has the obligation to deliver to the entruster the
price of the sale, or if the merchandise is not sold, to return the merchandise to the entruster. There are,
therefore, two obligations in a trust receipt transaction: the first refers to money received under the obligation
involving the duty to turn it over (entregarla) to the owner of the merchandise sold, while the second refers
to the merchandise received under the obligation to “return” it (devolvera) to the owner. When both parties
enter into an agreement knowing fully well that the return of the goods subject of the trust receipt is not
possible even without any fault on the part of the trustee, it is not a trust receipt transaction penalized under
Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed upon by
the parties would be the return of the proceeds of the sale transaction. This transaction becomes a mere loan,
where the borrower is obligated to pay the bank the amount spent for the purchase of the goods. In this case,
the dealing between HTY and M Bank was not a trust receipt transaction but one of simple loan. HTY’s
admission––that he signed the trust receipts on behalf of S Corp., which failed to pay the loan or turn over the
proceeds of the sale or the goods to M Bank upon demand––does not conclusively prove that the transaction
was, indeed, a trust receipts transaction. In contrast to the nomenclature of the transaction, the parties really
intended a contract of loan. It has been ruled that the fact that the entruster bank knew even before the
execution of the trust receipt agreements that the construction materials covered were never intended by the
entrustee for resale or for the manufacture of items to be sold is sufficient to prove that the transaction was
a simple loan and not a trust receipts transaction. [Hur Tin Yang v. People of the Philippines, G.R. No. 195117,
August 14, 2013]

2. Spouses dela Cruz was in the business of selling fertilizers and agricultural products, for which they
were granted a credit line by PPI, and to secure it, trust receipts were issued covering the goods to
be paid for by using the credit line. The trust receipts contained the following: “In the event, I/We
cannot deliver/serve to the farmer-participants all the inputs as enumerated above within 60 days,
then I/We agree that the undelivered inputs will be charged to my/our credit line, in which case,
the corresponding adjustment of price and interests shall be made by PPI.” Is there a trust receipt
transaction?

No. The contract, its label notwithstanding, was not a trust receipt transaction in legal contemplation or within
the purview of the Trust Receipts Law such that its breach would render the Spouses criminally liable for
estafa. Under Sec. 4 of the Trust Receipts Law, the sale of goods by a person in the business of selling goods
for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods,
or who sells the goods to the buyer on credit, retaining title or other interest as security for the payment of
the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of
the law. The sale of goods, documents or instruments by a person in the business of selling goods, documents
or instruments for profit who, at the outset of the transaction, has, as against the buyer, general property
rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title
or other interest as security for the payment of the purchase price, does not constitute a trust receipt
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2013-2018
By Esther M. Weigand
transaction and is outside the purview and coverage of this Decree. When both parties enter into an
agreement knowing that the return of the goods subject of the trust receipt is not possible even without any
fault on the part of the trustee, it is not a trust receipt transaction penalized under Sec. 13 of P.D. 115; the
only obligation actually agreed upon by the parties would be the return of the proceeds of the sale transaction.
This transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for
the purchase of the goods. [Spouses Dela Cruz v. Planters Products, Inc., G.R. No. 158649, February 18, 2013]

3. In a trust receipt transaction, what is the effect of failure of the entrustee to tum over the proceeds
of the sale of the goods, covered by the trust receipt to the entruster or to return said goods if they
were not disposed of in accordance with the terms of the trust receipt?

Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to the
entruster or to return said goods if they were not disposed of in accordance with the terms of the trust receipt
shall be punishable as estafa under Art. 315 (1) of the Revised Penal Code, without need of proving intent to
defraud. The offense punished under P.D. No. 115 is in the nature of malum prohibitum. Mere failure to deliver
the proceeds of the sale or the goods, if not sold, constitutes a criminal offense that causes prejudice not only
to another, but more to the public interest. Likewise, the entrustee may also be liable for civil fraud in the non-
compliance with the trust receipts to warrant the issuance of a writ of preliminary attachment. In a civil case
involving a trust receipt, the entrustee's failure to comply with its obligations under the trust receipt constitute
as civil fraud provided that it is alleged, and substantiated with specificity, in the complaint, its attachments
and supporting evidence. [Security Bank v. Great Wall Commercial Press Company, G.R. No. 219345, January
30, 2017]

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By Esther M. Weigand

NEGOTIABLE INSTRUMENTS LAW

1. W was accused of estafa for using a bum check to defraud another person. The check he issued was
payable to cash. Can he be held liable for estafa?

No, since the check delivered was made payable to cash. Under the Negotiable Instruments Law, this type of
check is payable to the bearer and could be negotiated by mere delivery without the need of an indorsement.
This rendered it highly probable that W had issued the check not to the person allegedly defrauded, but to
somebody else, who then negotiated it to another. It bears stressing that to be guilty of estafa as charged, the
drawer should have used the check to defraud the complainant. What the law punishes is the fraud or deceit,
not the mere issuance of the worthless check. W could not be held guilty of estafa simply because he had
issued the check, which was then used to defraud a person. The proof of guilt must still clearly show that it
had been W, as the drawer, who had defrauded a person by means of the check. Absent any proof that the
drawer issued the check as a means to defraud another, no conviction for estafa can be had. [People of the
Philippines v. Gilbert Reyes Wagas, G.R. No. 157943, September 4, 2013]

2. A postdated check with the date October 9, 2003 was issued, drawn against an account of S with
BPI, presented for deposit with ABank, on October 10, 2002. Upon presentment, the check was sent
to the PCHC. It was cleared by BPI and its amount was debited from the account of S, and credited
to the account of the payee. The account of S was closed, but he asked for the return of the amount
of the check, which BPI agreed to. When BPI sent a photocopy of the check to ABank saying it was
postdated, ABank refused to accept it. After the check was sent back and forth between the two
banks, ABank filed a complaint saying BPI should solely bear the loss. Is ABank correct?

No. ABank and BPI should both bear the loss by allocating the damage on a 60-40 ratio. In light of the
contributory negligence of BPI, it should bear 40% of the loss, but ABank should bear 60%. "Contributory
negligence is conduct on the part of the injured party, contributing as a legal cause to the harm he has suffered,
which falls below the standard to which he is required to conform for his own protection." Admittedly, ABank’s
acceptance of the subject check for deposit despite the one year postdate written on its face was a clear
violation of established banking regulations and practices. In such instances, payment should be refused by
the drawee bank and returned through the PCHC within the 24-hour reglementary period. Abank’s failure to
comply with this basic policy regarding post-dated checks was "a telling sign of its lack of due diligence in
handling checks coursed through it." It bears stressing that "the diligence required of banks is more than that
of a Roman paterfamilias or a good father of a family. The highest degree of diligence is expected," considering
the nature of the banking business that is imbued with public interest. While it is true that respondent's liability
for its negligent clearing of the check is greater, petitioner cannot take lightly its own violation of the long-
standing rule against encashment of post-dated checks and the injurious consequences of allowing such
checks into the clearing system.

If only BPI exercised ordinary care in the clearing process, it could have easily noticed the glaring defect upon
seeing the date written on the face of the check "Oct. 9, 2003". BPI could have then promptly returned the
check and with the check thus dishonored, ABank would have not credited the amount thereof to the payee’s
account. Thus, notwithstanding the antecedent negligence of the ABank in accepting the post-dated check for
deposit, it can seek reimbursement from BPI in the amount credited to the payee’s account covering the check.
[Allied Banking Corporation v. Bank of the Philippine Islands, G.R. No. 188363, 27 February 2013]

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MERCANTILE LAW UPDATES
2013-2018
By Esther M. Weigand
3. C and A were engaged in the business of buying and selling cars, and they had two deposit accounts
with E Bank. G ordered a second hand Pajero and a brand new Honda CRV from them who paid
them 9 checks payable to different payees, with PV Bank as drawee. P was the branch manager of
E Bank, who assisted the transaction. When the checks were deposited, P told C and A that the
checks were honored, and the amounts were credited in their accounts. However, the checks were
later on returned by the drawee due to alteration of the amounts thereon. When C and A issued a
check from their account with E Bank, it was dishonored due to “deposit on hold.” They asked the
bank to honor their check, to which the bank refused, and later on closed the account. The
intermediary bank, on the other hand, withdrew the amount of the check deposited by C and A
which was dishonored due to material alteration. What are the liabilities of the drawee bank,
intermediary bank, and C and A in this case?

As for the drawee bank, Sec. 63 of the Negotiable Instruments Law provides that the acceptor, by accepting
the instrument, engages that he will pay it according to the tenor of his acceptance. The acceptor is a drawee
who accepts the bill. In Philippine National Bank v. Court of Appeals, the payment of the amount of a check
implies not only acceptance but also compliance with the drawee’s obligation.

In case the negotiable instrument is altered before acceptance, is the drawee liable for the original or the
altered tenor of acceptance? There are two divergent interpretations proffered by legal analysts. The first view
is supported by the leading case of National City Bank of Chicago v. Bank of the Republic. In said case, a certain
Andrew Manning stole a draft and substituted his name for that of the original payee. He offered it as payment
to a jeweler in exchange for certain jewelry. The jeweler deposited the draft to the defendant bank which
collected the equivalent amount from the drawee. Upon learning of the alteration, the drawee sought to
recover from the defendant bank the amount of the draft, as money paid by mistake. The court denied
recovery on the ground that the drawee by accepting admitted the existence of the payee and his capacity to
endorse.

The second view is that the acceptor/drawee despite the tenor of his acceptance is liable only to the extent of
the bill prior to alteration. This view appears to be in consonance with Sec. 124 of the Negotiable Instruments
Law which states that a material alteration avoids an instrument except as against an assenting party and
subsequent indorsers, but a holder in due course may enforce payment according to its original tenor. Thus,
when the drawee bank pays a materially altered check, it violates the terms of the check, as well as its duty to
charge its client’s account only for bona fide disbursements he had made. If the drawee did not pay according
to the original tenor of the instrument, as directed by the drawer, then it has no right to claim reimbursement
from the drawer, much less, the right to deduct the erroneous payment it made from the drawer’s account
which it was expected to treat with utmost fidelity. The drawee, however, still has recourse to recover its loss.
It may pass the liability back to the collecting bank which is what the drawee bank exactly did in this case. It
debited the account of E Bank for the altered amount of the checks.

As for the depositary bank and collecting bank, a depositary/collecting bank where a check is deposited, and
which endorses the check upon presentment with the drawee bank, is an endorser. Under Section 66 of the
Negotiable Instruments Law, an endorser warrants "that the instrument is genuine and in all respects what it
purports to be; that he has good title to it; that all prior parties had capacity to contract; and that the
instrument is at the time of his endorsement valid and subsisting." It has been repeatedly held that in check
transactions, the depositary/collecting bank or last endorser generally suffers the loss because it has the duty
to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain

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2013-2018
By Esther M. Weigand
the genuineness of the endorsements. If any of the warranties made by the depositary/collecting bank turns
out to be false, then the drawee bank may recover from it up to the amount of the check.

As collecting banks, the E Bank and intermediary Bank are both liable for the amount of the materially altered
checks.

As for C and A, the Bank cannot debit their savings account. A depositary/collecting bank may resist or defend
against a claim for breach of warranty if the drawer, the payee, or either the drawee bank or depositary bank
was negligent and such negligence substantially contributed to the loss from alteration. In the instant case, no
negligence can be attributed to C and A. At the time of the sales transaction, the Bank’s branch manager was
present and even offered the Bank’s services for the processing and eventual crediting of the checks. True to
the branch manager’s words, the checks were cleared three days later when deposited by petitioners and the
entire amount of the checks was credited to their savings account. [Areza v. Express Savings Bank, G.R. No.
176697, September 10, 2014]

4. What is the sequence of recovery in cases of unauthorized payment of checks?

In cases of unauthorized payment of checks to a person other than the payee named therein, the drawee bank
may be held liable to the drawer. The drawee bank, in tum, may seek reimbursement from the collecting bank
for the amount of the check. This rule on the sequence of recovery in case of unauthorized check transactions
had already been deeply embedded in jurisprudence.

The liability of the drawee bank is based on its contract with the drawer and its duty to charge to the latter's
accounts only those payables authorized by him. A drawee bank is under strict liability to pay the check only
to the payee or to the payee's order. When the drawee bank pays a person other than the payee named in
the check, it does not comply with the terms of the check and violates its duty to charge the drawer's account
only for properly payable items.

On the other hand, the liability of the collecting bank is anchored on its guarantees as the last endorser of the
check. Under Sec. 66 of the Negotiable Instruments Law, an endorser warrants "that the instrument is genuine
and in all respects what it purports to be; that he has good title to it; that all prior parties had capacity to
contract; and that the instrument is at the time of his endorsement valid and subsisting." It has been
repeatedly held that in check transactions, the collecting bank generally suffers the loss because it has the
duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check
for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain
the genuineness of the endorsements. If any of the warranties made by the collecting bank turns out to be
false, then the drawee bank may recover from it up to the amount of the check.

Although the rule on the sequence of recovery has been deeply engrained in jurisprudence, there may be
exceptional circumstances which would justify its simplification. Stated differently, the aggrieved party may
be allowed to recover directly from the person which caused the loss when circumstances warrant. [BDO
Unibank, Inc. v. Lao, G.R. No. 227005, June 19 2017]

5. JMC is a domestic corporation engaged in the business of selling wines and liquors. It has a current
account with Metrobank from which it draws check to pay its suppliers, specifically, Jardine and
Premiere Wines. In 2000, while its financial statements were being audited, it was discovered that
11 of its crossed checks issued to Jardine and Premiere had already been charged against its account,
and an examination of the dorsal portion of the subject checks revealed that all had been deposited
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2013-2018
By Esther M. Weigand
with Bankcom, Dau branch, under Account No. 0015-32987-7.6 Upon inquiring with Jardine and
Premiere, however, JMC was able to confirm that neither of the said suppliers owns Bankcom
Account No. 0015-32987-7. Sometime later, its president received a letter from its former
accountant that during her time as such, she stole several company checks drawn against JMC's
current account. She professed that the said checks were never given to the named payees but were
forwarded by her to one Lita Bituin. The accountant further admitted that she, Bituin and an
unknown bank manager colluded to cause the deposit and encashing of the stolen checks and
shared in the proceeds thereof. JMC, thinking that the 11 anomalous checks were among those
stolen by the accountant, they filed a complaint for sum of money against the accountant, Bankcom,
and Metrobank, alleging that the wrongful conversion of the subject checks was caused by a
combination of the "tortious and felonious" scheme of the accountant and the "negligent and
unlawful acts" of Bankcom and Metro bank. Can the banks be held liable?

The instant case involves the unauthorized payment of valid checks, i.e., the payment of checks to persons
other than the payee named therein or his order. The subject checks herein are considered valid because they
are complete and bear genuine signatures. Following the rule on sequence of recovery in cases of
unauthorized payment of checks, Metrobank, as drawee bank, is liable to return to JMC the amount of the
subject checks. The liability of the drawee bank to the drawer in cases of unauthorized payment of checks has
been regarded in jurispn1dence to be strict by nature. This means that once an unauthorized payment on a
check has been made, the resulting liability of the drawee bank to the drawer for such payment attaches even
if the former had acted merely upon the guarantees of a collecting bank. Indeed, it is only when the
unauthorized payment of a check had been caused or was attended by the fault or negligence of the drawer
himself can the drawee bank be excused, whether wholly or partially, from being held liable to the drawer for
the said payment. In the present case, it is apparent that Metrobank had breached JMC's instructions when it
paid the value of the subject checks to Bankcom for the benefit of a certain Account No. 0015-32987-7. The
payment to Account No. 0015-32987-7 was unauthorized as it was established that the said account does not
belong to Jardine or Premiere, the payees of the subject checks, or to their indorsees. In addition, causal or
concurring negligence on the part of JMC had not been proven. Under such circumstances, Metrobank is
clearly liable to return to JMC the amount of the subject checks. However, it may seek reimbursement from
Bankcom, the collecting bank.

A collecting or presenting bank-i.e., the bank that receives a check for deposit and that presents the same to
the drawee bank for payment-is an indorser of such check. When a collecting bank presents a check to the
drawee bank for payment, the former thereby assumes the same warranties assumed by an indorser of a
negotiable instrument pursuant to Section 66 of the Negotiable Instruments Law. These warranties are: (1)
that the instrument is genuine and in all respects what it purports to be; (2) that the indorser has good title to
it; (3) that all prior parties had capacity to contract; and ( 4) that the instrument is, at the time of the
indorsement, valid and subsisting. If any of the foregoing warranties turns out to be false, a collecting bank
becomes liable to the drawee bank for payments made under such false warranty. Here, it is clear that
Bankcom had assumed the warranties of an indorser when it forwarded the subject checks to PCHC for
presentment to Metrobank. By such presentment, Bankcom effectively guaranteed to Metrobank that the
subject checks had been deposited with it to an account that has good title to the same. This guaranty,
however, is a complete falsity because the subject checks were, in tn1th, deposited to an account that neither
belongs to the payees of the subject checks nor to their indorsees. Hence, as the subject checks were paid
under Bankcom's false guaranty, the latter-as collecting bank-stands liable to return the value of such checks
to Metrobank. [Metropolitan Bank and trust Company v. Junnel’s Marketing Corporation, G.R. Nos. 235511 &
235565, June 20, 2018]

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By Esther M. Weigand
6. R obtained a loan from the spouses C, covered by a promissory note, with R promising to pay
spouses C P120,000.00 on December 31, 1995. Failure to pay the said amount on the said date would
cause R to pay 5% monthly interest until the entire amount is paid, and in case the matter is referred
to a lawyer, R further promised to pay 20% of the amount due as attorney’s fees, which should not
be less than P5,000.00, in addition to litigation costs. About three years after the stipulated date of
payment, R issued to the spouses C a check as partial payment, drawn against R’s account with PC
Bank. When presented for payment, the checks were dishonored. Is demand (presentment for
payment) still necessary to make R liable on the promissory note?

No. The subject promissory note is not a negotiable instrument and the provisions of the NIL do not apply to
this case. The Promissory Note is made out to specific persons, the spouses C, and not to order or to bearer,
or to the order of the Spouses C as payees.

However, even if R’s Promissory Note is not a negotiable instrument and therefore outside the coverage of
Sec. 70 of the NIL which provides that presentment for payment is not necessary to charge the person liable
on the instrument, R is still liable under the terms of the Promissory Note that he issued.

The Promissory Note is unequivocal about the date when the obligation falls due and becomes demandable—
31 December 1995. As of 1 January 1996, R had already incurred in delay when he failed to pay the amount of
P120,000.00 due to the Spouses C on 31 December 1995 under the Promissory Note. [Rivera v. Spouses Chua,
G.R. No. 184458, January 14, 2015]

7. A and N entered into a business venture. In the course of their business, A pre-signed several checks
to answer for expenses, but these did not indicate any payee, date, nor amount. The checks were
entrusted to N with instructions not to fill them out without notice and approval of A. Without the
knowledge of A, N went to M to secure a loan in the amount of P200,000.00 on the ground that
A needed money for construction of his house, with payment of interest at 5% per month. M agreed,
and thereafter, N delivered to M one of the pre-signed blank checks, with the blank portions filled
out with the words "Cash" "Two Hundred Thousand Pesos Only", and the amount of "P200,000.00".
The upper right portion of the check corresponding to the date was also filled out with the words
"May 23, 1994." M was later on told that the loan was not really for A. When M deposited the check,
it was dishonored due to “account closed.” When M could not recover from N, he filed a case against
A for violation of B.P. 22, while A filed a Complaint for Declaration of Nullity of Loan and Recovery
of Damages against N and M. Can A be held liable?

No. Sec. 14 of the NIL provides the rule for an incomplete but delivered instrument. Under this rule, if the
maker or drawer delivers a pre-signed blank paper to another person for the purpose of converting it into a
negotiable instrument, that person is deemed to have prima facie authority to fill it up. It merely requires that
the instrument be in the possession of a person other than the drawer or maker and from such possession,
together with the fact that the instrument is wanting in a material particular, the law presumes agency to fill
up the blanks.

In order however for one who is not a holder in due course to be able to enforce the instrument against a
party prior to the instrument’s completion, two requisites must exist: (1) that the blank must be filled strictly
in accordance with the authority given; and (2) it must be filled up within a reasonable time. If it was proven
that the instrument had not been filled up strictly in accordance with the authority given and within a
reasonable time, the maker can set this up as a personal defense and avoid liability. However, if the holder is

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a holder in due course, there is a conclusive presumption that authority to fill it up had been given and that
the same was not in excess of authority.

In the present case, M is not a holder in due course. Sec. 52 of the NIL states that a holder in due course is one
who takes the instrument "in good faith and for value,” and at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Acquisition in good faith means taking without knowledge or notice of equities of any sort which could be set
up against a prior holder of the instrument. It means that he does not have any knowledge of fact which would
render it dishonest for him to take a negotiable paper. The absence of the defense, when the instrument was
taken, is the essential element of good faith. In the instant case, M knew that A was not a party to the loan.
Since he knew that the underlying obligation was not actually for the A, the rule that a possessor of the
instrument is prima facie a holder in due course is inapplicable. His inaction and failure to verify, despite
knowledge of that the petitioner was not a party to the loan, may be construed as gross negligence amounting
to bad faith.

Yet, it does not follow that simply because he is not a holder in due course, M is already totally barred from
recovery. The NIL does not provide that a holder who is not a holder in due course may not in any case recover
on the instrument. The only disadvantage of a holder who is not in due course is that the negotiable
instrument is subject to defenses as if it were non-negotiable. Among such defenses is the filling up blank not
within the authority. And in this case, the check was not completed strictly under the authority of A. While
under the law, N had a prima facie authority to complete the check, such prima facie authority does not extend
to its use (i.e., subsequent transfer or negotiation) once the check is completed. In other words, only the
authority to complete the check is presumed. Further, the law used the term "prima facie" to underscore the
fact that the authority which the law accords to a holder is a presumption juris tantum only; hence, subject to
contrary proof. Thus, evidence that there was no authority or that the authority granted has been exceeded
may be presented by the maker (A) in order to avoid liability under the instrument.

N was only authorized to use the check for business expenses; thus, he exceeded the authority when he used
the check to pay the loan he supposedly contracted for the construction of A's house. This is a clear violation
of the A's instruction to use the checks for the expenses of their business venture. It cannot therefore be
validly concluded that the check was completed strictly in accordance with the authority given by the A.
[Patrimonio v. Gutierrez, G.R. No. 187769, June 4, 2014]

4. Can corporate officers be held civilly liable if they are acquitted from the criminal charge of violation
of B.P. 22?

No. A corporate officer who issues a bouncing corporate check can only be held civilly liable when he is
convicted. Civil liability of a corporate officer in a B.P. 22 case is extinguished with the criminal liability.
[Pilipinas Shell Petroleum v. Duque, G.R. No. 216647, February 15, 2017]

8. Can a check be discharged by prescription?

Yes. A negotiable instrument like a check may be discharged by any other act which will discharge a simple
contract for the payment of money. A check therefore is subject to prescription of actions upon a written
contract, which, according to Art. 1144 of the Civil Code, is barred by the 10-year prescriptive period for
written contracts. Barring any extrajudicial or judicial demand that may toll the 10-year prescription period
and any evidence which may indicate any other time when the obligation to pay is due, the cause of action
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based on a check is reckoned from the date indicated on the check. If the check is undated, however, the cause
of action is reckoned from the date of the issuance of the check. [Evangelista v. Screenex, Inc., G.R. No. 211564,
November 20, 2017.]

9. ABI Corp. issued 10 checks and 16 demand drafts to Mr. G, for a total value of Php3,785,257.38, all
of which are crossed and bore the annotation “endorsed by EPCI Bank, Ayala Branch. All prior
endorsement and/or lack of endorsement guaranteed.” However, these instruments did not reach
Mr. G, but were taken by a Mr. K who, pretending to be Mr. G, opened accounts with EPCI Bank and
deposited the instruments there. ABI Corp. and Mr. G now sue EPCI Bank to demand payment. Do
the complainants have a cause of action against EPCI Bank?

Yes. Sec. 16 of the NIL states that every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for purposes of giving effect to it. Without delivery, the payee would not have any
right or interest on the instruments. However, the same provision of the law states that when the instrument
is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by
him is presumed until the contrary is proved. To debunk this, EPCI Bank should be able to prove, through
sufficient evidence, that no such delivery was made. Since its appears that no delivery was made to Mr. G,
then the instrument never became effective. [Asia Brewery Inc. v. Equitable PCI Bank, G.R. No. 190432, April
25, 2017.]

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CORPORATION CODE

1. Can stockholders of a previously dissolved corporation, whose shares are held in trust by a newly
created corporation, be considered as individual subscribers of the latter corporation?

Yes. A holder or stockholder includes a person holding stocks in trust, and trustees holding corporate stock
are regarded for all legal purposes as stockholders. However, the rights of a beneficial owner will, of course,
be recognized and protected in equity in proper cases. In other words, even where legal title to stock is vested
in a certain person, equity will treat him as a trustee holding it for the real and beneficial owners, in proper
cases. Article 1455 of the Civil Code provides that when any trustee uses trust funds for the purchase of
property and causes the conveyance to be made to him or a third person, a trust is established by operation
of law in favor of the person to whom the funds belong. Moreover, a trustee must not make investments of
funds in their own names but always indicate that they are made in trust capacities. Thus, the trustee merely
acts for the stockholders whose stocks are held in trust, with the latter being the owners thereof. thus, they
are individual subscribers of shares of stock. [SEC OGC Opinion No. 13-09, 2 September 2013]

2. F jr. filed an action against AT, a tabloid, for publishing an article which was alleged to be libelous.
AT, not being incorporated, argued that it cannot be sued since it is not a juridical person. Can AT
be sued?

AT can be sued for being a corporation by estoppel. AT was a corporation by estoppel as the result of its having
represented itself to the reading public as a corporation despite its not being incorporated. The non-
incorporation of AT with the Securities and Exchange Commission was of no consequence, for, otherwise,
whoever of the public who would suffer any damage from the publication of articles in the pages of its tabloids
would be left without recourse. [Macasaet v. Francisco Co, Jr., G.R. No. 156759, June 5, 2013]

3. Can previously incurred indebtedness be used as payment for subscription of shares?

Yes. Sec. 62 of the Corporation Code expressly allows a previously incurred indebtedness to be used as
consideration for the issuance of stocks, provided that the valuation of the indebtedness be determined by
the board of directors, subject to approval of the SEC, in order to prevent watering of stocks. Watering of
stocks is a situation wherein the consideration for subscription is not a fair valuation equal to the par or issue
value of the stock. The amount of the indebtedness or liabilities to be settled should be at least equal to the
par value of the shares of stock which the corporation intends to issue. However, there must first be an
indebtedness incurred in order that a liability may be converted into subscription payment. In this connection,
the following requirements are to be submitted to the SEC:

1. Detailed schedule of liabilities being offset, showing all debts and credit to such liability
account, date, nature of account and amount.
2. Deed of assignment executed by the creditor(s] assigning the amount due to him in payment
for the unpaid subscription(s].
3. Company's book of accounts must be kept up to date and be made available for examination
by the Commission to determine that the liabilities represent valid and legitimate claims against the
company.
4. If the principal office of the corporation is located in the province, a report by an independent
certified public accountant must be submitted.
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[SEC OGC Opinion No. 13-03, 17 April 2013; SEC Opinion, 2 October 1992; SEC Opinion, 24 February 1988]

4. Doesn’t payment through previously incurred indebtedness violate pre-emptive rights of stockholders?

No. Such payment through previously incurred indebtedness does not violate the stockholders’ preemptive
rights, so long the terms are on equal terms as with the owners of the original stocks. A pre-emptive right
under Sec. 39 of the Corporation Code refers to the right of a stockholder of a stock corporation to subscribe
to all issues or disposition of shares of any class, in proportion to their respective shareholdings, and on equal
terms with other holders of the original stocks, before subscriptions are received from the general public.
Thus, if the payments by other persons or entities are in the form of conversion of the previously incurred
indebtedness, while the payments of the other stockholders for their subscriptions shall be in cash, it is still
considered to be “on equal terms”. However, even when payment of the debt is in terms required to be made
by the corporation in money or cash, a set-off of the debt without going through this unnecessary formality is
equivalent to a payment for the stock in cash. [SEC OGC Opinion No. 13-03, 17 April 2013]

4. What should be done when properties requiring registration, such as land, are used as paid-up
capital of a corporation?

Where payment is made in the form of land, the corporation involved shall submit to the SEC proof of the
transfer of the certificate of ownership thereon, in the name of the transferee corporation, within 120 days
from the date of approval of the application filed therefor with the SEC. Such period may be extended for
justifiable reasons. For properties other than land, the proof of transfer of registration shall be submitted to
the SEC within 90 days from approval of the application by the SEC, which period may also be extended for
justifiable reasons. [SEC Memorandum Circular No. 14, series of 2013]

5. GSIS acquired a Savings Bank, for which it sought the approval of the SEC to have the name of the
bank changed to “GSIS Family Bank.” BPI Family Bank learned of this, and thus, it petitioned the SEC
to prevent GSIS from using such name, or any name with the words “Family Bank” in it, claiming
that it had exclusive ownership to such name having acquire the same since way back in 1985. The
SEC sided with BPI Family Bank. Is the SEC correct?

Yes. In Philips Export B.V. v. Court of Appeals, the SC has ruled that to fall within the prohibition of the law on
the right to the exclusive use of a corporate name, two requisites must be proven, namely:

(1) that the complainant corporation acquired a prior right over the use of such corporate name; and
(2) the proposed name is either:

(a) identical or
(b) deceptive or confusingly similar to that of any existing corporation or to any other name
already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.

In the instant case, BPI appears to have a prior right to the name. Likewise, the second requisite in the Philips
Export case is also present because: the proposed name is (a) identical or (b) deceptive or confusingly similar
to that of any existing corporation or to any other name already protected by law. The enforcement of the
protection accorded by Sec. 18 of the Corporation Code to o corporate names is lodged exclusively in the SEC.
The jurisdiction of the SEC is not merely confined to the adjudicative functions provided in Sec. 5 of the SEC
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Reorganization Act, as amended. By express mandate, the SEC has absolute jurisdiction, supervision and
control over all corporations. It is the SEC’s duty to prevent confusion in the use of corporate names not only
for the protection of the corporations involved, but more so for the protection of the public. It has authority
to de-register at all times, and under all circumstances corporate names which in its estimation are likely to
generate confusion. [GSIS Family Bank-Thrift Bank (Formerly Comsavings Bank, Inc.) v. BPI Family Bank, G.R.
No. 175278. September 23, 2015]

6. De La Salle Montessori International Malolos, Inc. was able to register its name with the SEC, and
after filing the necessary corporate documents, was able to obtain a certificate of registration. It
was likewise granted DepEd recognition for its elementary and secondary courses. Several of DLSU’s
schools filed a petition with the SEC seeking to compel De La Salle Montessori International Malolos,
Inc. to change its corporate name. as it is misleading or confusingly similar with their names, and
they have acquired the prior right to use such name, and that their consent to use such name was
not obtained. Should the SEC compel De La Salle Montessori International Malolos, Inc. to change
its name?

Yes. The rule against the registration of a corporate name which is "identical or deceptively or confusingly
similar" to that of any existing corporation or which is "patently deceptive" or "patently confusing" or
"contrary to existing laws," is the avoidance of fraud upon the public which would have occasion to deal with
the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of
administration and supervision over corporations. Indeed, parties organizing a corporation must choose a
name at their peril; and the use of a name similar to one adopted by another corporation, whether a business
or a non-profit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless
of intent, may be prevented by the corporation having a prior right, by a suit for injunction against the new
corporation to prevent the use of the name. To fall within the prohibition, two requisites must be proven, to
wit: (1) that the complainant corporation acquired a prior right over the use of such corporate name; and (2)
the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law; or ( c) patently deceptive, confusing or contrary
to existing law. With respect to the first requisite, the right to the exclusive use of a corporate name with
freedom from infringement by similarity is determined by priority of adoption. In this case DLSU schools are
the prior registrants, and have certainly acquired the right to use the words “De La Salle” or “La Salle” as part
of their corporate names. The second requisite is also satisfied since· there is a confusing similarity between
petitioner's and respondents' corporate names. While these corporate names are not identical, it is evident
that the phrase "De La Salle" is the dominant phrase used. In determining the existence of confusing similarity
in corporate names, the test is whether the similarity is such as to mislead a person using ordinary care and
discrimination. In so doing, inquiry must be made into the record as well as the names themselves. In this case,
the use of the words “De La Salle” can reasonably mislead a person using ordinary care and discretion into
thinking that the Montessori is an affiliate or a branch of, or is likewise founded by, any or all of DLSU, thereby
causing confusion. [De La Salle Montessori International of Malolos, Inc. v De La Salle Brothers, G.R. No.
205548, February 7, 2018]

7. A Special Stockholders’ meeting was held in C Corp. on September 7, 2004, with notice thereof dated
August 31, 2004 having been received by 2 stockholders on September 10, 2004. One stockholder
received notice of the meeting on September 22, 2004, 15 days after the meeting. The by-laws of C
Corp states that notice of a meeting shall be mailed not less than 5 days prior to the date set for
meeting. Was there valid notice of the stockholders’ meeting?

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Yes. For a stockholders' special meeting to be valid, certain requirements must be met with respect to notice,
quorum and place. In relation thereto, one of the requirements is a previous written notice sent to all
stockholders at least one (1) week prior to the scheduled meeting, unless otherwise provided in the by-laws.
The Corporation Code itself permits the shortening (or lengthening) of the period within which to send the
notice to call a special (or regular) meeting. Thus, no irregularity exists in the mailing of the notice sent on 2
September 2004 calling for the special stockholders' meeting to be held on 7 September 2004, since it abides
by what is stated in C Corp.’s by-laws. What matters is the date when the notices were sent, and not the date
of receipts. [Simny Guy v. Gilbert Guy, G.R. No. 184068, April 19, 2016]

8. An annual stockholders meeting was held by the stockholders of PSI on March 15, 2002. The
stockholder list used in determining the stockholders who are entitled to be present during the
meeting was different from the list of stockholders as stated in its general information sheet.
Previously, they had already been ordered by the SEC to use the GIS as basis for determining the
corporate stockholders, but despite this, the same was not used during the meeting. During the said
meeting a new set of directors were elected, and the authorized capital was increased by 300%. Was
the meeting valid, and can the stockholders who were not notified of the meeting hold the new set
of directors, who also organized the meeting, liable for damages?

The meeting was not valid and any act done during the same, including election of new directors, is likewise
invalid. The meeting should not have been carried out in defiance of the SEC order to use the GIS as basis for
determining the stockholders entitled to attend the meeting. As to the award of damages, since the persons
who organized the meeting unjustifiably and obstinately refused to recognize the eliminated stockholders’
shareholdings in PSI and to allow them to participate in the 2002 stockholders' meeting and elections of the
corporation's directors. They did this despite the previous Orders of the SEC; thus, depriving the stockholders
of their property rights. Such acts may be said to cause mental anguish, serious anxiety and social humiliation
to the stockholders who were not notified of the meeting. [Lydia Lao v. Yao Bio Lim, G.R. No. 201306, August
9, 2017]

9. A, director and stockholder of Corporation X, filed a complaint for intra-corporate dispute against
the other directors and stockholders of the corporation. The complaint arose when A sought to have
the real board of directors rectify entries in the Corporation’s General Information Sheet (GIS) and
questioned the stockholder’s meeting, and to allow him to inspect the books of the corporation, all
of which were not acted upon. Subsequently, the corporation was dissolved by revocation of its
franchise. Does the Complaint filed by A seek a continuation of business?

No. Sec. 122 of the Corporation Code prohibits a dissolved corporation from continuing its business, but allows
it to continue with a limited personality in order to settle and close its affairs, including its complete
liquidation.

There is nothing in the above facts which shows any intention to continue the corporate business of
Corporation X. The Complaint does not seek to enter into contracts, issue new stocks, acquire properties,
execute business transactions, etc. Its aim is not to continue the corporate business, but to determine and
vindicate an alleged stockholder’s right to the return of his stockholdings and to participate in the election of
directors, and a corporation’s right to remove usurpers and strangers from its affairs. There is nothing to show
that the resolution of these issues can be said to continue the business of Corporation X. [Vitaliano N. Aguirre
II and Fidel N. Aguirre II and Fidel N. Aguirre v. FQB+, Inc., Nathaniel D. Bocobo, Priscila Bocobo and Antonio
De Villa, G.R. No. 170770. January 9, 2013]

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In relation to the Question above, will the dissolution render the complaint moot and academic?

No. A corporation’s board of directors is not rendered functus officio by its dissolution. Since Sec. 122 allows
a corporation to continue its existence for a limited purpose, necessarily there must be a board that will
continue acting for and on behalf of the dissolved corporation for that purpose. In fact, Sec. 122 authorizes
the dissolved corporation’s board of directors to conduct its liquidation within three years from its dissolution.
Jurisprudence has even recognized the board’s authority to act as trustee for persons in interest beyond the
said three-year period. Thus, the determination of which group is the bona fide or rightful board of the
dissolved corporation will still provide practical relief to the parties involved. [Ibid.]

10. Can a corporation’s dissolution also bar a stockholder from enforcing or vindicating his property
right to his shareholdings?

No. A party’s stockholdings in a corporation, whether existing or dissolved, is a property right which he may
vindicate against another party who has deprived him thereof. The corporation’s dissolution does not
extinguish such property right. Sec. 145 of the Corporation Code ensures the protection of this right, since it
states that no right or remedy in favor of or against any corporation, its stockholders, members, directors,
trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors,
trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or
by any subsequent amendment or repeal of this Code or of any part thereof. [Ibid.]

11. A Corporation entered into a real estate mortgage which was later on foreclosed due to
corporation’s failure to pay the loan secured by the mortgage. Can the corporation, which was
dissolved, exercise its right to redeem the foreclosed property?

This depends on when the corporation was dissolved. Any new business in which the dissolved corporation
would engage in, other than those for the purpose of liquidation, "will be a void transaction because of the
non-existence of the corporate party." Two things must be said of the foregoing in relation to the facts of this
case. First, if the corporation entered into the real estate mortgage agreement after its dissolution, then
resultantly, such real estate mortgage agreement would be void ab initio because of the non-existence of the
corporation’s juridical personality. Second, if, however, the corporation entered into the real estate mortgage
agreement prior to its dissolution, then its redemption of the subject property, even if already after its
dissolution (as long as it would not exceed three years thereafter), would still be valid because of the
liquidation/winding up powers accorded by Section 122 of the Corporation Code. A corporation which has
already been dissolved, be it voluntarily or involuntarily, retains no juridical personality to conduct its business
save for those directed towards corporate liquidation. [Dr. Gil J. Rich v. Guillermo Paloma III, G.R. No. 210538,
March 7, 2018]

12. A group of persons executed a continuing guaranty in the name of Bancom, to guarantee the full
and due payment of obligations incurred by Marbella under an Underwriting Agreement with
Bancom. These obligations included certain Promissory Notes issued by Marbella in favor of Bancom
sometime in 1979 for the aggregate amount of P2,828, 140.32. Marbella was not able to pay, thus
a complaint for sum of money was filed against them, including Bancom. During the proceedings of
the case, the certificate of registration of Bancom was revoked by the SEC due non-compliance with
SEC reportorial requirements. Is the suit against Bancom abated because of the revocation of its SEC
certificate of registration?

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No. Though a defunct corporation loses the right to sue and be sued in its name upon the expiration of the
three-year period provided by law, jurisprudence has carved out an exception to this rule. In several cases, it
has been ruled that an appointed receiver, an assignee, or a trustee may institute suits or continue pending
actions on behalf of the corporation, even after the winding-up period. In subsequent cases, it was further
clarified that a receiver or an assignee need not even be appointed for the purpose of bringing suits or
continuing those that are pending. In the absence of a receiver or an assignee, suits may be instituted or
continued by a trustee specifically designated for a particular matter, such as a lawyer representing the
corporation in a certain case. The board of directors of the corporation may be considered trustees by legal
implication for the purpose of winding up its affairs. The mere revocation of the charter of a corporation does
not result in the abatement of proceedings. Since its directors are considered trustees by legal implication, the
fact that Bancom did not convey its assets to a receiver or assignee was of no consequence. It must also be
emphasized that the dissolution of a creditor-corporation does not extinguish any right or remedy in its favor.
As a necessary consequence of the said rule, the corresponding liability of the debtors of a dissolved
corporation must also be deemed subsisting. To rule otherwise would be to sanction the unjust enrichment
of the debtor at the expense of the corporation. [Reyes v. Bancom Development, G.R. No. 190286, January 11,
2018]

13. B Corp. was dissolved through an amendment of its articles of incorporation shortening and
terminating its corporate life. It was issued a SEC certificate of dissolution, and during such time, it
had deposit accounts with BPI which were assigned to E Insurance to serve as security for surety
bonds issued by the latter to guaranty monetary claims of a complainant in the labor case filed
against B Corp. with the NLRC. NLRC ordered the release and cancellation of the bonds because the
case was terminated. The certificates of deposit covering the deposits with BPI were surrendered
by E Insurance to the former director and corporate secretary of B Corp. Who can act as trustees of
the corporation even after the expiration of the 3 year winding-up period for its final liquidation?

The counsel of B Corp. during the labor case before the NLRC can be considered as a trustee of the corporation
as to matters related to the labor case. Likewise, the former director and corporate secretary can also act as
trustee-in-liquidation of B Corp. A corporation can go beyond the three-year period in Sec. 122 of the
Corporation Code to complete its liquidation and to fully dispose of the remaining corporate assets. If the
three-year period expires without a trustee being appointed, the board of directors or trustees itself, may be
permitted to continue as trustees by legal implication to complete corporate liquidation. Likewise, counsel
who prosecuted and defended the corporation in a labor case, when there was no trustee appointed, and who
in fact in behalf of the corporation may be considered as a trustee of the corporation at least with respect to
the matter in litigation only. As to which of them is the proper trustee, this cannot be determined, since the
liquidation process is an internal concern of the corporation and falls within the power of the directors and
stockholders to determine. [SEC OGC Opinion No. 14-02, 21 February 2014]

14. Bank A granted loans to Corporation X, which were secured by promissory notes and mortgages
over properties owned by another corporation. The transactions were entered into by Corporation
X’s president and General Manager. Since Corporation X defaulted in paying its loans, then the
mortgage was foreclosed and the properties eventually sold. Because there was still remaining
amount to be paid, an action was filed against Corporation X, its President, and the latter’s wife,
who signed a surety agreement in favor of the bank, which the lower court had declared as falsified.
Can the wife of the President be held liable?

No. Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the people
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comprising it. Following this principle, obligations incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally not
held personally liable for obligations incurred by the corporation. Nevertheless, this legal fiction may be
disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues.

Before a director or officer of a corporation can be held personally liable for corporate obligations, however,
the following requisites must concur: (1) the complainant must allege in the complaint that the director or
officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence
or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful acts, negligence or
bad faith.

In this case, there is no evidence that the wife of the president of Corporation X committed an act of an officer
of the said corporation that would permit the piercing of the corporate veil. The facts presented simply reveal
that the said wife, together with her errant husband acted as surety, as evidenced by her signature on the
Surety Agreement which was later found by the lower court to have been forged.

The piercing of the veil of corporate fiction is frowned upon and can only be done if it has been clearly
established that the separate and distinct personality of the corporation is used to justify a wrong, protect
fraud, or perpetrate a deception. Hence, any application of the doctrine of piercing the corporate veil should
be done with caution. It must be certain that the corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result
from an erroneous application. [Heirs of Fe Tan Uy (Represented by her heir, Manling Uy Lim) v. International
Exchange Bank/Goldkey Development Corporation vs. International Exchange Bank, G.R. No. 166282/G.R. No.
166283, February 13, 2013.]

In relation to the question above, can the corporation, whose property was mortgaged to secure the loans
of Corporation X, be held liable for the said loans? Note that the two corporations are owned by the same
family, sharing the same office space, with their assets being co-mingled. The President of Corporation X is
also the Chief Operating Officer of the other corporation involved, who has now gone missing, while the
other corporation stopped operations.

Yes. Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises
are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect
the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them
as identical or one and the same.

While the conditions for the disregard of the juridical entity may vary, the following are some probative factors
of identity that will justify the application of the doctrine of piercing the corporate veil, as laid down in Concept
Builders, Inc. v NLRC:

(1) Stock ownership by one or common ownership of both corporations;


(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records, and
(4) Methods of conducting the business.

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In this case, both corporations are family corporations, who share the same office, with the same set of
officers, and their assets are co-mingled. Likewise, when the President of Corporation X went missing, the
other corporation ceased its operations. Based on these, it is apparent that the said corporation was merely
an adjunct of Corporation X and, as such, the legal fiction that it has a separate personality from that of the
other corporation should be brushed aside as they are, undeniably, one and the same. [Ibid.]

15. Spouses F entered into a contract to sell with G Corp, covering a parcel of land, in G Corp’s
subdivision. Spouses F fully paid the purchase price, but G Corp. failed to execute the deed of sale
and deliver the title to the spouses. Thus, the spouses filed an action for specific performance or
rescission against G Corp and its Board of Directors. Can the Board of Directors be held liable?

No. There is no basis to hold the members of the board solidarily liable with G Corp for the payment of
damages in favor of Sps. F since it was not shown that they acted maliciously or dealt with the latter in bad
faith. Settled 1s the rule that in the absence of malice and bad faith, as in this case, officers of the corporation
cannot be made personally liable for liabilities of the corporation which, by legal fiction, has a personality
separate and distinct from its officers, stockholders, and members. [Gotesco Properties, Inc. v. SpousesFajardo,
G.R. No. 201167, 27 February 2013]

16. DBP and PNB foreclosed mortgages on the properties of MMIC, a corporation. As a result, they
acquired substantially all the assets of NMIC and resumed its business operations. NMIC engaged
the services of H Corporation for which it paid the latter. But, NMIC still had an unpaid balance of
around 8 million pesos. Can DBP and PNB be held liable for such amount?

No. A corporation is an artificial entity created by operation of law. It has a personality separate and distinct
from that of its stockholders and from that of other corporations to which it may be connected. By virtue of
the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the
stockholder. This protection from liability for shareholders is the principle of limited liability. However, the
corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a
person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil
will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against
third persons.

But, any application of the doctrine of piercing the corporate veil should be done with caution.. The
wrongdoing must be clearly and convincingly established; it cannot be presumed. In this connection, case law
lays down a three-pronged test to determine the application of the alter ego theory, which is also known as
the instrumentality theory, namely:

(1) Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss
complained of.

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The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely
under the control and domination of the parent. It examines the parent corporation’s relationship with the
subsidiary. It inquires whether a subsidiary corporation is so organized and controlled and its affairs are so
conducted as to make it a mere instrumentality or agent of the parent corporation such that its separate
existence as a distinct corporate entity will be ignored. It seeks to establish whether the subsidiary corporation
has no autonomy and the parent corporation, though acting through the subsidiary in form and appearance,
"is operating the business directly for itself."

The second prong is the "fraud" test. This test requires that the parent corporation’s conduct in using the
subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the
corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a
way that harms the plaintiff creditor. As such, it requires a showing of "an element of injustice or fundamental
unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s control, exerted
in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection
between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless
the corporate veil is pierced, it will have been treated unjustly by the defendant’s exercise of control and
improper use of the corporate form and, thereby, suffer damages.

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three
elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental
unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act
of the corporation. Absence of any of these elements prevents piercing the corporate veil.

In applying the alter ego doctrine, focus should be on reality and not form, and with how the corporation
operated and the individual defendant’s relationship to that operation. With respect to the control element,
it refers not to paper or formal control by majority or even complete stock control but actual control which
amounts to "such domination of finances, policies and practices that the controlled corporation has, so to
speak, no separate mind, will or existence of its own, and is but a conduit for its principal." In addition, the
control must be shown to have been exercised at the time the acts complained of took place.

While ownership by one corporation of all or a great majority of stocks of another corporation and their
interlocking directorates may serve as indicia of control, by themselves and without more, however, these
circumstances are insufficient to establish an alter ego relationship or connection between DBP and PNB on
the one hand and NMIC on the other hand, that will justify the puncturing of the latter’s corporate cover.
"Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the separate corporate personality." Likewise,
the "existence of interlocking directors, corporate officers and shareholders is not enough justification to
pierce the veil of corporate fiction in the absence of fraud or other public policy considerations." [Phil. National
Bank v. Hydro Resources Contractors Corp., G.R. Nos. 167530, 167561, 16760311. March 13, 2013]

17. Y bought several country club shares from M Corp. but the latter failed to develop the country club
project. Y then demanded return of his payment for the shares, but M Corp. could no longer do so
since it had transferred all the business and all its assets to Y Corp. Can Y Corp. now be held liable
by Y?

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Yes. While the Corporation Code allows the transfer of all or substantially all of the assets of a corporation,
the transfer should not prejudice the creditors of the assignor corporation. Under the business-enterprise
transfer, the transferee has consequently inherited the liabilities of M Corp. because they acquired all the
assets of the latter corporation. The continuity of M Corp.’s land developments is now in the hands of the Y
Corp., with all its assets and liabilities. There is absolutely no certainty that Y can still claim its refund from M
Corp. with the latter losing all its assets. To allow an assignor to transfer all its business, properties and assets
without the consent of its creditors will place the assignor’s assets beyond the reach of its creditors. Thus, the
only way for Y to recover his money would be to assert his claim against the Y Corp. as transferees of the
assets. Jurisprudence has held that in a business-enterprise transfer, the transferee is liable for the debts and
liabilities of his transferor arising from the business enterprise conveyed. Many of the application of the
business-enterprise transfer have been related by the Court to the application of the piercing doctrine. Fraud
is not an essential element for the application of the business-enterprise transfer.

The Nell Doctrine states the general rule that the transfer of all the assets of a corporation to another shall
not render the latter liable to the liabilities of the transferor. If any of the above-cited exceptions are present,
then the transferee corporation shall assume the liabilities of the transferor. The exception of the Nell
doctrine, which finds its legal basis under Sec. 40, provides that the transferee corporation assumes the debts
and liabilities of the transferor corporation because it is merely a continuation of the latter’s business. A
cursory reading of the exception shows that it does not require the existence of fraud against the creditors
before it takes full force and effect. Sec. 40 of the Corporation Code refers to the sale, lease, exchange or
disposition of all or substantially all of the corporation's assets, including its goodwill. The sale under this
provision does not contemplate an ordinary sale of all corporate assets; the transfer must be of such degree
that the transferor corporation is rendered incapable of continuing its business or its corporate purpose. Sec.
40 suitably reflects the business-enterprise transfer under the exception of the Nell Doctrine because the
purchasing or transferee corporation necessarily continued the business of the selling or transferor
corporation. Given that the transferee corporation acquired not only the assets but also the business of the
transferor corporation, then the liabilities of the latter are inevitably assigned to the former. It must be
clarified, however, that not every transfer of the entire corporate assets would qualify under Sec. 40. It does
not apply (1) if the sale of the entire property and assets is necessary in the usual and regular course of business
of corporation, or (2) if the proceeds of the sale or other disposition of such property and assets will be
appropriated for the conduct of its remaining business. Thus, the litmus test to determine the applicability of
Sec. 40 would be the capacity of the corporation to continue its business after the sale of all or substantially
all its assets. [Y-I Leisure Philippines, Inc., Yats International Ltd. and Y-I Clubs and Resorts, Inc. v. Yame Yu, G.R.
No. 207161. September 8, 2015]

18. Can corporate officers and directors be held criminally liable under Sec. 144 of the Corporation Code,
which imposes criminal liability upon any person who violates the provisions of the said Code, for
violations concerning Sec. 31 (liability of directors, trustees or officers who willfully and knowingly
vote for or assent to patently unlawful acts, or who are guilty of gross negligence or bad faith in
conducting corporate affairs, or acquire personal or pecuniary interest in conflict with their duty to
the corporation, or those who acquire an interest adverse to the corporation) and Sec. 34 (disloyalty
of directors by acquiring business opportunity which should properly belong to the corporation,
thereby acquiring profits as a result)?

No. The Corporation Code was intended as a regulatory measure, not primarily as a penal statute. Secs. 31 to
34 were intended to impose exacting standards of fidelity on corporate officers and directors but without
unduly impeding them in the discharge of their work with concerns of litigation. Considering the object and
policy of the Corporation Code to encourage the use of the corporate entity as a vehicle for economic growth,
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a strict construction of Secs. 31 and 34 as penal offenses in relation to Sec. 144 should not be made, in the
absence of unambiguous statutory language and legislative intent to that effect. When Congress intends to
criminalize certain acts it does so in plain, categorical language, otherwise such a statute would be susceptible
to constitutional attack. Had the Legislature intended to attach penal sanctions to Secs. 31 and 34 of the
Corporation Code it could have expressly stated such intent in the same manner that it did for Sec. 74 of the
same Code. [Ient v. Tullett (Philippines), Inc., G.R. Nos. 189158 & 189530, January 11, 2017]

19. In several opinions, the SEC imposed fines on violators of the Corporation Code. Are these fines
penal in nature?

No. The fines imposed by the SEC in these instances of violations of the Corporation Code are in the nature of
administrative fines and are not penal in nature. Such opinions support the view that the word "penalty" as
used in Sec. 144 encompasses administrative penalties, not only criminal sanctions. [Ibid.]

20. M filed a complaint against the Cuencas for collection of sum of money, for which the court issued
a writ of preliminary attachment, with M posting a bond issued by S Insurance. The properties of A
C Inc. were levied upon in the execution of the writ. The Cuencas sought to quash the writ alleging
that (1) the action involved intra-corporate matters that were within the original and exclusive
jurisdiction of the Securities and Exchange Commission (SEC); and (2) there was another action
pending in the SEC as well as a criminal complaint in the Office of the City Prosecutor of Parañaque
City. This was denied by the CA. Thus, the Cuencas filed an action for damages against the S
Insurance as a result of the wrongful attachment. Can the action prosper?

No. The complaint of the Cuencas lacks a cause of action. It is true that the Cuencas could bring in behalf of
AC Inc. a proper action to recover damages resulting from the attachment, however, such action would be
one directly brought in the name of the corporation. In the instant case, the Cuencas presented the claim in
their own names. The Cuencas were only stockholders of AC Inc., which had a personality distinct and separate
from that of any or all of them. The damages occasioned to the properties by the levy on attachment, wrongful
or not, prejudiced AC Inc., not them. As such, only AC Inc. had the right under the substantive law to claim and
recover such damages. This right could not also be asserted by the Cuencas unless they did so in the name of
the corporation itself. But that did not happen herein, because AC Inc. was not even joined in the action either
as an original party or as an intervenor. The Cuencas were clearly not vested with any direct interest in the
personal properties coming under the levy on attachment by virtue alone of their being stockholders in AC
Inc. Their stockholdings represented only their proportionate or aliquot interest in the properties of the
corporation, but did not vest in them any legal right or title to any specific properties of the corporation.
Without doubt, AC Inc. remained the owner as a distinct legal person. [Stronghold Insurance v. Cuenca, G.R.
No. 173297, March 6, 2013]

21. SMP Corp paid local business taxes to the city of Manila, but they wrote a letter to the latter claiming
a refund of the amount paid on the ground of double taxation. The letter was not acted upon, thus
SMP filed and action in the RTC for refund of taxes. The verification and certification of forum
shopping attached to the petition filed by SMP was signed by B, but there was no secretary’s
certificate to show her authority to file the action on behalf of SMP. Can B file the case on behalf of
SMP?

No. The power of a corporation to sue and be sued is lodged in the board of directors, which exercises its
corporate powers. It necessarily follows that “an individual corporate officer cannot solely exercise any
corporate power pertaining to the corporation without authority from the board of directors.” Thus, physical
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acts of the corporation, like the signing of documents, can be performed only by natural persons duly
authorized for the purpose by corporate by-laws or by a specific act of the board of directors. Consequently,
a verification signed without an authority from the board of directors is defective. However, the act of B in
filing the action may be ratified by a subsequent board resolution passed by the corporation. [Swedish Match
Philippines v. Treasurer of the City of Manila, G.R. No. 181277, 3 July 2013]

22. H Corp. filed a petition for certiorari against the Esguerras, but they did not secure and/or attach a
certified true copy of a board resolution authorizing any of its officers to file said petition, but it
attached a secretary’s certificate. Should the case be dismissed?

No. The general rule is that a corporation can only exercise its powers and transact its business through its
board of directors and through its officers and agents when authorized by a board resolution or its bylaws.
The power of a corporation to sue and be sued is exercised by the board of directors. The physical acts of the
corporation, like the signing of documents, can be performed only by natural persons duly authorized for the
purpose by corporate bylaws or by a specific act of the board. Absent the said board resolution, a petition may
not be given due course. H Corp attached all the necessary documents for the filing of a petition for certiorari
before the court. While the board resolution may not have been attached, H Corp complied just the same
when it attached the Secretary’s Certificate, thus proving that its representative had the authority from the
board of directors to appoint the counsel to represent them in the case. [Esguerra v. Holcim Philippines, Inc.,
G.R. No. 182571, 2 September 2013

23. Can the court dismiss a complaint filed and signed by a person allegedly on behalf of a corporation,
who is not a director or officer and without any proof of valid authorization from the said
corporation?

Yes. Sec. 23, in relation to Sec. 25 of the Corporation Code, clearly enunciates that all corporate powers are
exercised, all business conducted, and all properties controlled by the board of directors. A corporation has a
separate and distinct personality from its directors and officers and can only exercise its corporate powers
through the board of directors. Thus, it is clear that an individual corporate officer cannot solely exercise any
corporate power pertaining to the corporation without authority from the board of directors. Absent the said
board resolution, a petition may not be given due course. The complaint should have been filed by an officer
or member of the board of directors or by one who is duly authorized by a resolution of the board of directors;
otherwise, the complaint will have to be dismissed. A complaint that is filed for and in behalf of a plaintiff by
one who is not authorized to do so, is not deemed filed. An unauthorized complaint does not produce any
legal effect. Hence, the court should dismiss the complaint on the ground that it has no jurisdiction over the
complaint and the plaintiff. [Philippine Numismatic and Antiquarian Society v. Aquino, G.R. No. 206617,
January 30, 2017]

24. SMBI is a family owned and run corporation. One of the family members agreed to loan money to
SMBI and other corporations owned by the same family to settle corporate obligations of other
corporations. A check was thus issued in the name of the family members. SMBI thereafter
increased its capital stock. Thereafter, a series of events transpired, which lead one of the
stockholders to file a derivative suit, claiming he has been illegally excluded from management and
participation in the business of SMBI and that some of the family members refuse to settle their
obligations with the corporation. Is the complaint a derivative suit?

No. A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce corporate
rights against the corporation’s directors, officers or other insiders. Under Secs. 23 and 36 of the Corporation
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Code, the directors or officers, as provided under the by-laws, have the right to decide whether or not a
corporation should sue. Since these directors or officers will never be willing to sue themselves, or impugn
their wrongful or fraudulent decisions, stockholders are permitted by law to bring an action in the name of
the corporation to hold these directors and officers accountable. In derivative suits, the real party in interest
is the corporation, while the stockholder is a mere nominal party.

Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative suits:

(1) The person filing the suit must be a stockholder or member at the time the acts or transactions
subject of the action occurred and the time the action was filed;
(2) He must have exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.

Applying the foregoing, the Complaint is not a derivative suit. The Complaint failed to show how the acts of
some of the family members resulted in any detriment to SMBI. The loan was not a corporate obligation, but
a personal debt. The check was issued to specific persons and not SMBI. The proceeds of the loan were used
for payment of the obligations of the other corporations owned by the family as well as the purchase of real
properties for the brothers. SMBI was never named as a co-debtor or guarantor of the loan. Both loan
instruments were executed by two of the family members in their personal capacity, and not in their capacity
as directors or officers of SMBI. Thus, SMBI is under no legal obligation to satisfy the obligation, and thus the
acts of the family are not detrimental thereto. [Juanito Ang, for and in behalf of Sunrise Marketing (Bacolod),
Inc. v. Sps. Roberto and Rachel Ang, G.R. No. 201675, June 19, 2013]

25. FEGDI is a stock corporation involved in developing golf courses, while FELI is engaged in real estate
development. FEGDI obtained shares of stock in one of FELI’s projects as a result of its financing
support and construction efforts. It sold some of its shares to RSACC, which the latter later sold to
VST. However, the shares remained under the name of FEGDI, and the stock certificates were never
delivered to RSACC and VST. Can VST be considered as owner of the shares of stock?

No. In a sale of shares of stock, physical delivery of a stock certificate is one of the essential requisites for the
transfer of ownership of the stocks purchased. Here, FEGDI clearly failed to deliver the stock certificates,
representing the shares of stock purchased by VST, within a reasonable time from the point the shares should
have been delivered. VST still cannot enjoy the rights a shareholder. The enjoyment of these rights cannot
suffice where the law, by its express terms, requires a specific form to transfer ownership. [Fil-Estate Gold and
Development, Inc., et al. v. Vertex Sales and Trading, Inc., G.R. No. 202079, June 10, 2013]

26. Is the surrender of the certificates of stock to the corporation a requisite before registration of their
transfer may be made in the corporate books and for the issuance of new certificates in its stead?

The surrender of the certificates of stock is required only for the issuance of new stock certificates, but not for
registration of the transfer in corporate books. Sec. 63 of the Corporation Code prescribes the manner by
which a share of stock may be transferred. Under the provision, certain minimum requisites must be complied
with for there to be a valid transfer of stocks, to wit: (a) there must be delivery of the stock certificate; (b) the
certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make
the transfer; and (c) to be valid against third parties, the transfer must be recorded in the books of the
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corporation. It is the delivery of the certificate, from the original owner to the transferee, coupled with the
endorsement by the owner or his duly authorized representative that is the operative act of transfer of shares
from the original owner to the transferee. And when the corporation does not hold any unpaid claim against
the shares intended to be transferred, the respective duties of the corporation and its secretary to transfer
stock in its books are purely ministerial. The surrender of the original certificate of stock is necessary before
the issuance of a new one so that the old certificate may be cancelled. A corporation is not bound and cannot
be required to issue a new certificate unless the original certificate is produced and surrendered. Surrender
and cancellation of the old certificates serve to protect not only the corporation but the legitimate shareholder
and the public as well, as it ensures that there is only one document covering a particular share of stock. [Ana
Teng v. Securities and Exchange Corporation, G.R. No. 184332, February 17, 2016]

27. Is the presentation of a stock certificate a condition sine qua non for proving one's shareholding in
a corporation?

No. A stock certificate is prima facie evidence that the holder is a shareholder of the corporation, but the
possession of the certificate is not the sole determining factor of one’s stock ownership. To establish stock
ownership, other documents may be presented, such as official receipts of payments of subscription of shares,
certification from the SEC stating that the company issued shares in favor of the particular stockholder.
[Insigne v. Abra Valley Colleges, Inc., G.R. No. 204089, July 29, 2015]

28. F and S were incorporators of A Corp., along with their daughter, A. Since F and S died, A inherited
their shares, resulting in her obtaining 70.82% of A Corp.’s shares of stock. A became the chairman
of the board, but later on died with only her spouse, M, as her sole heir. M executed an affidavit of
self-adjudication covering A’s shares of stock in A Corp. Thinking that he is already the controlling
stockholder, M called for a stockholders’ meeting. On the other hand, the current corporate
secretary also called a special stockholders’ meeting. During the two meetings, a new board of
directors and a new set of officers were elected, resulting in A Corp. having two sets of directors and
officers. During the meeting called by the corporate secretary, only two board members attended.
Which meeting is valid?

Both meetings are not valid. The meeting called by the corporate secretary is invalid for lacking a quorum. On
the other hand, the meeting called by M, is likewise invalid since he cannot yet be considered a stockholder
at the time considering that the transfer of A’s shares to him had not yet been recorded in the corporate
books. M's inheritance of A's shares of stock does not ipso facto afford him the rights accorded to such majority
ownership of A Corp.’s shares of stock. Sec. 63 of the Corporation Code governs the rule on transfers of shares
of stock. It is stated that no transfer, shall be valid, except as between the parties, until the transfer is recorded
in the books of the corporation showing the names of the parties to the transaction, the date of the transfer,
the number of the certificate or certificates and the number of shares transferred. Verily, all transfers of shares
of stock must be registered in the corporate books in order to be binding on the corporation. Specifically, this
refers to the Stock and Transfer Book. An owner of shares of stock cannot be accorded the rights pertaining
to a stockholder -such as the right to call for a meeting and the right to vote, or be voted for -if his ownership
of such shares is not recorded in the Stock and Transfer Book. This is so even if he is reflected as a stockholder
in the General Information Sheet (GIS). The contents of the GIS should not be deemed conclusive as to the
identities of the registered stockholders of the corporation, as well as their respective ownership of shares of
stock, as the controlling document should be the corporate books, specifically the Stock and Transfer Book. [F
& S Velasco Company, Inc., et al. v. Dr. Rommel L. Madrid, et al., G.R. No. 208844, November 10, 2015]

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29. AP is a domestic corporation with G as its President, and C, the latter’s wife, as its General Manager.
AT is also a Domestic corporation, with T as its President and U as its treasurer. AT purchased
notebooks from AP on credit. Loans were also obtained by AT from AP upon the representation of
T and U. To pay for its purchases, AT gave AP 82 postdated checks signed T and U. the check were
dishonored for having been drawn against insufficient funds. A complaint for collection of sum of
money was filed AT, U, T, and its other officers. Can AT be held liable?

Yes. The acts of T and U clearly bound the corporation, and thus, it could be made liable therefor under the
doctrine of apparent authority. The doctrine of apparent authority provides that a corporation will be
estopped from denying the agent’s authority if it knowingly permits one of its officers or any other agent to
act within the scope of an apparent authority, and it holds him out to the public as possessing the power to
do those acts. The doctrine of apparent authority does not apply if the principal did not commit any acts or
conduct which a third party knew and relied upon in good faith as a result of the exercise of reasonable
prudence. Moreover, the agent’s acts or conduct must have produced a change of position to the third party’s
detriment.

Under Sec. 23 of the Corporation Code, the power and responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in the board, subject to the articles of
incorporation, bylaws, or relevant provisions of law. However, just as a natural person who may authorize
another to do certain acts for and on his behalf, the board of directors may validly delegate some of its
functions and powers to officers, committees or agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly
or impliedly by habit, custom or acquiescence in the general course of business.

Apparent authority is derived not merely from practice. Its existence may be ascertained through (1) the
general manner in which the corporation holds out an officer or agent as having the power to act or, in other
words the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts
of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his
ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor
of other parties. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a
corporate officer with the power to bind the corporation. In the absence of a charter or by-law provision to
the contrary, the president is presumed to have the authority to act within the domain of the general
objectives of its business and within the scope of his or her usual duties. [Advance Paper Corporation and
George Haw, in his capacity as President of Advance Paper Corporation v. Arma Traders Corporation, Manuel
Ting, et al., G.R. No. 176897, December 11, 2013]

The doctrine of apparent authority provides that even if no actual authority has been conferred on an agent,
his or her acts, as long as they are within his or her apparent scope of authority, bind the principal. However,
the principal's liability is limited to third persons who are reasonably led to believe that the agent was
authorized to act for the principal due to the principal 's conduct. Apparent is determined by the acts of the
principal and not by the acts of the agent. When a corporation intentionally or negligently clothes its agent
with apparent authority to act in its behalf, it is estopped from denying its agent's apparent authority as to
innocent third parties who dealt with this agent in good faith. [Calubad v. Ricarcen Development Corporation,
G.R. No. 202364, August 30, 2017]

30. P, the OIC of an Aircraft Hangar executed a Memorandum of Agreement with Capt. A, the president
of a company, whereby for a period of 4 years the hangar space was allowed to be used by the
company exclusively for the company helicopter/aircraft. The said hangar space was previously
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leased to LA Corp. which assigned the same to P. An issue arose when P insisted that Capt. A was
using the hangar space for purposes other than for the company aircraft/helicopter, resulting in the
company filing a complaint in court against P. P insists that the case filed by the company should be
dismissed for failure of the company to satisfy the essential requisites of being a party to an action,
i.e., legal personality, legal capacity to sue or be sued, and real interest in the subject matter of the
action. Decide.

Sec. 21 of the Corporation Code explicitly provides that one who assumes an obligation to an ostensible
corporation, as such, cannot resist performance thereof on the ground that there was in fact no corporation.
Clearly, P is bound by his obligation under the MOA not only on estoppel but by express provision of law. [Paz
v. New International Environmental Universality, G.R. No. 203993, April 20, 2015]

31. L filed a complaint for recovery of ownership of land against R, alleging that the latter encroached
on a quarter of her property by arbitrarily extending his concrete fence beyond the correct limits. R
alleged that this was the fault of OLFI, a corporation, after the latter trimmed his property for the
construction of the subdivision road. He thus filed a third party complaint against OLFI. Acting on
the third party complaint, the court ordered OLFI to reimburse R, and issued a writ of execution.
The sheriff then proceeded to garnish the accounts of the general manager of OLFI in UCPB. Can the
funds of the general manager be garnished to satisfy the judgment against OLFI?

No. In order to hold the general manager personally liable alone for the debts of the corporation and thus
pierce the veil of corporate fiction, it is required that the bad faith of the officer must first be established
clearly and convincingly. However, there is nothing to indicate any wrongdoing of the general manager.
Necessarily, it would be unjust to hold the latter personally liable. Any piercing of the corporate veil has to be
done with caution. There is no evidence that would prove OLFI's status as a dummy corporation. A court should
be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to
such an extent that injustice, fraud, or crime was committed against another, in disregard of rights. The
wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that
was never unintended may result from an erroneous application. [Roxas v. Our Lady’s Foundation, Inc., G.R.
No. 182378, 6 March 2013]

32. P granted loans to NSI. On the part of NSI, the loan agreement between the two parties was signed
by its president, N. Though payments were initially made by N, NSI eventually defaulted on its loan
obligation to P, for which the latter filed a collection suit against N and NSI. Can N be held jointly
and severally liable for the loan obligation of NSI?

No. The rule is settled that a corporation is vested by law with a personality separate and distinct from the
persons composing it. Following this principle, a stockholder, generally, is not answerable for the acts or
liabilities of the corporation, and vice versa. The obligations incurred by the corporate officers, or other
persons acting as corporate agents, are the direct accountabilities of the corporation they represent, and not
theirs. A director, officer or employee of a corporation is generally not held personally liable for obligations
incurred by the corporation9 and while there may be instances where solidary liabilities may arise, these
circumstances are exceptional.

Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks of
the corporation is not, by itself, a sufficient ground for disregarding the separate corporate personality. Other
than mere ownership of capital stocks, circumstances showing that the corporation is being used to commit
fraud or proof of existence of absolute control over the corporation have to be proven. In short, before the
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corporate fiction can be disregarded, alter-ego elements must first be sufficiently established. The mere fact
that it was N who, in behalf of the corporation, signed the loan agreement is not sufficient to prove that he
exercised control over the corporation’s finances. Neither the absence of a board resolution authorizing him
to contract the loan nor NSI’s failure to object thereto supports this conclusion. These may be indicators that,
among others, may point the proof required to justify the piercing the veil of corporate fiction, but by
themselves, they do not rise to the level of proof required to support the desired conclusion. It should be
noted in this regard that while N was the signatory of the loan and the money was delivered to him, the
proceeds of the loan were unquestionably intended for NSI’s proposed business plan. There is no sufficient
evidence in the instant case to justify a piercing, in the absence of proof that the business plan was a fraudulent
scheme geared to secure funds from the respondent for the petitioners’ undisclosed goals. [Saverio v. Puyat,
G.R. No. 186433, November 27, 2013]

33. PTA is a GOCC which administers tourism zones. It allowed PTC Cooperative to operate a restaurant
business in one of its main buildings. In 1993, PTA’s CALABARZON area manager notified PTC to
cease its operations as a result of the rehabilitation of its tourism complex. Thus, PTC Cooperative
filed an action in court to stop PTA from evicting and preventing it from carrying out the restaurant
business in the main building of PTA. Can the area manager be held liable?

No. As a general rule the officer cannot be held personally liable with the corporation, whether civilly or
otherwise, for the consequences of his acts, if acted for and in behalf of the corporation, within the scope of
his authority and in good faith. [Rodolfo Laborte, et al. v. Pagsanjan Tourism Consumers’ Cooperative, et al.,
G.R. No. 183860, January 15, 2014]

34. C was a salesman of A, engaged in the selling of broadcasting equipment. When A created B Corp. C
was made an Assistant Vice President (AVP) for sales, while AA was then appointed as VP for sales.
The By-laws of B Corp. provides for the following corporate officers: the President, Vice-President,
Treasurer and Secretary, but it allows the board to appoint other officers as it may deem necessary.
C accused AA of several irregularities which were made the subject of a memo sent to A. Allegedly,
C was asked by A to tender his resignation, to which he refused. He received a memo, signed by A,
charging him with serious misconduct and willful breach of trust. He was later on barred from
entering company premises, and allegedly suspended. Thus, he filed a complaint for illegal dismissal
before the NLRC against B Corp. and A. Does the labor arbiter of the NLRC have jurisdiction?

Yes. C, although an officer of B Corp. for being its AVP for Sales, was not a "corporate officer" as the term is
defined by law. ‘Corporate officers’ are those officers of the corporation who are given that character by the
Corporation Code or by the corporation’s by-laws. There are three specific officers whom a corporation must
have under Sec. 25 of the Corporation Code. These are the president, secretary and the treasurer. The number
of officers is not limited to these three. A corporation may have such other officers as may be provided for by
its by-laws like, but not limited to, the vice-president, cashier, auditor or general manager. The number of
corporate officers is thus limited by law and by the corporation’s by-laws." It has been held that an "office" is
created by the charter of the corporation and the officer is elected by the directors and stockholders. On the
other hand, an "employee" usually occupies no office and generally is employed not by action of the directors
or stockholders but by the managing officer of the corporation who also determines the compensation to be
paid to such employee.

As may be deduced from the foregoing, there are two circumstances which must concur in order for an
individual to be considered a corporate officer, as against an ordinary employee or officer, namely: (1) the
creation of the position is under the corporation’s charter or by-laws; and (2) the election of the officer is by
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the directors or stockholders. It is only when the officer claiming to have been illegally dismissed is classified
as such corporate officer that the issue is deemed an intra-corporate dispute which falls within the jurisdiction
of the trial courts.

B Corp.’s By-laws only provide the following as corporate officers: the President, Vice-President, Treasurer and
Secretary. Although a blanket authority provides for the Board’s appointment of such other officers as it may
deem necessary and proper, the respondents failed to sufficiently establish that the position of AVP for Sales
was created by virtue of an act of B Corp’s board, and that C was specifically elected or appointed to such
position by the directors. No board resolutions to establish such facts form part of the case records.

An enabling clause in a corporation’s by-laws empowering its board of directors to create additional officers,
even with the subsequent passage of a board resolution to that effect, cannot make such position a corporate
office. The board of directors has no power to create other corporate offices without first amending the
corporate by-laws so as to include therein the newly created corporate office. "To allow the creation of a
corporate officer position by a simple inclusion in the corporate by-laws of an enabling clause empowering
the board of directors to do so can result in the circumvention of that constitutionally well-protected right [of
every employee to security of tenure]."

Likewise, the mere fact that C was a stockholder of B Corp. at the time of the case’s filing did not necessarily
make the action an intra-corporate controversy. "Not all conflicts between the stockholders and the
corporation are classified as intra-corporate. There are other facts to consider in determining whether the
dispute involves corporate matters as to consider them as intra-corporate controversies." In determining the
existence of an intra-corporate dispute, the status or relationship of the parties and the nature of the question
that is the subject of the controversy must be taken into account.

An intra-corporate controversy, which falls within the jurisdiction of regular courts, has been regarded in its
broad sense to pertain to disputes that involve any of the following relationships: (1) between the corporation,
partnership or association and the public; (2) between the corporation, partnership or association and the
state in so far as its franchise, permit or license to operate is concerned; (3) between the corporation,
partnership or association and its stockholders, partners, members or officers; and (4) among the
stockholders, partners or associates, themselves.

Settled jurisprudence, however, qualifies that when the dispute involves a charge of illegal dismissal, the
action may fall under the jurisdiction of the LAs upon whose jurisdiction, as a rule, falls termination disputes
and claims for damages arising from employer-employee relations as provided in Article 217 of the Labor Code.

Considering that the pending dispute particularly relates to C’s rights and obligations as a regular officer of B
Corp., instead of as a stockholder of the corporation, the controversy cannot be deemed intra-corporate. This
is consistent with the "controversy test", which provides that the incidents of that relationship must also be
considered for the purpose of ascertaining whether the controversy itself is intra-corporate. The controversy
must not only be rooted in the existence of an intra-corporate relationship, but must as well pertain to the
enforcement of the parties’ correlative rights and obligations under the Corporation Code and the internal
and intra-corporate regulatory rules of the corporation. If the relationship and its incidents are merely
incidental to the controversy or if there will still be conflict even if the relationship does not exist, then no
intra-corporate controversy exists. [Raul C. Cosare v. Broadcom Asia, Inc., et al., G.R. No. 201298, February 5,
2014]

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A conflict between two stockholders of a corporation does not automatically render their dispute as intra-
corporate. The nature of the controversy must also be examined. [Belo Medical Group, Inc. . Jose L. Santos and
Victoria G. Belo, G.R. No. 185894, August 30, 2017]

35. What are the types of tests to determine whether an intra-corporate dispute exists?

The first is the relationship test, where the relationship of the parties to the dispute will be analyzed. The
types of relationships are as follows: 1) between the corporation, partnership or association and the public;
(2) between the corporation, partnership or association and the state in so far as its franchise, permit or license
to operate is concerned; (3) between the corporation, partnership or association and its stockholders,
partners, members or officers; and (4) among the stockholders, partners or associates, themselves.

The second is the nature of the controversy test. Under this test, it is not just the relationship of the parties
that mattered but also the conflict between them. Currently, the courts now use both the relationship test
and the nature of the controversy test to determine if an intra-corporate controversy is present. [Ibid.]

36. When can a corporate officer claim that he has been illegally dismissed from the corporation, and
thus file a case before the NLRC?

If the said officer is an employee and has been removed as such by the corporation. An employee is one who
usually occupies no office and generally is employed not by action of the directors or stockholders but by the
managing officer of the corporation who also determines the compensation to be paid to such employee. In
order for an individual to be considered a corporate officer, as against an ordinary employee or officer, two
things must concur: 1. the creation of the position is under the corporation's charter or by-laws, and that 2.
the election of the officer is by the directors or stockholders. It is only when the officer claiming to have been
illegally dismissed is classified as a corporate officer that the issue is deemed an intra-corporate dispute which
falls within the jurisdiction of the trial courts. One who is included in the by-laws of a corporation in its roster
of corporate officers is an officer of said corporation, and not a mere employee. [Wesleyan University –
Philippines v. Maglaya, Sr., G.R. No. 212774, January 23, 2017]

37. Why can’t a corporate officer be deemed illegally dismissed if he/she is not an employee, even if
he/she has been arbitrarily removed from the corporation?

A corporate officer's dismissal is always a corporate act, or an intra-corporate controversy which arises
between a stockholder and a corporation, and the nature is not altered by the reason or wisdom with which
the Board of Directors may have in taking such action. The issue of the alleged termination involving a
corporate officer, not a mere employee, is not a simple labor problem but a matter that comes within the area
of corporate affairs and management and is a corporate controversy in contemplation of the Corporation
Code. [Ibid.]

38. The janitors and their supervisors of the maintenance department of PCCr, a non-stock educational
institution, were dismissed from employment as a result of the termination of the contract PCCr
had with their agency. The contract was terminated as a result of the discovery of the revocation of
the certificate of incorporation of the agency. The said dismissed employees executed quitclaims
and waivers in favor of the agency, which was already dissolved. Can the janitors and supervisors
hold its agency liable even if it had already been dissolved? Are the quitclaims and waivers valid
even if executed 6 years after dissolution?

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Yes. The revocation of the certificate of incorporation does not result in the termination of the agency’s
liabilities. Sec. 122 of the Corporation Code provides for a three-year winding up period for a corporation
whose charter is annulled by forfeiture or otherwise to continue as a body corporate for the purpose, among
others, of settling and closing its affairs.

And, even if the quitclaims and waivers were executed 6 years after the dissolution, the same are still valid
and binding upon the parties and the dissolution will not terminate the liabilities incurred by the dissolved
corporation pursuant to Secs. 122 and 145 of the Corporation Code. A corporation is allowed to settle and
close its affairs even after the winding up period of three (3) years. Sec. 145 of the Corporation Code clearly
provides that "no right or remedy in favor of or against any corporation, its stockholders, members, directors,
trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors,
trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation."
Even if no trustee is appointed or designated during the three-year period of the liquidation of the corporation,
it has been held that the board of directors may be permitted to complete the corporate liquidation by
continuing as "trustees" by legal implication. [Vigilla v. College of Criminology, G.R. No. 200094, June 10, 2013]

39. What can be done in case the board refuses to recognize the legitimacy of newly elected board
members?

An intra-corporate dispute may be filed with the regular courts against the outgoing President or the Board
which refuses to recognize the legitimacy of those newly-elected and who continue to exercise their functions.
[SEC OGC Opinion No. 14-09, 2 June 2014]

40. PV Corp had an outstanding capital stock of 200,000 shares, where 3,140 shares of stock were
owned by G, while the remaining 196,860 shares were equally distributed among G’s six children,
namely: CQ, AM, AQ, CY, Ma. CG, and ML. Since G, and some of her children had passed away, the
some shares were transferred to her grandchildren, some of whom received fractional shares. Such
fractional shares were made the subject of a dispute between the heirs filed in the RTC. What should
be the basis in determining a quorum for PV Corp’s annual stockholder’s meeting? If only 98,430
shares are present during the meeting, will there be a quorum?

Unissued stocks may not be voted or considered in determining whether a quorum is present in a stockholders'
for stock corporations, the quorum is based on the number of outstanding voting stocks. The distinction of
undisputed or disputed shares of stocks is not provided for in the law or the jurisprudence. Ubi lex non
distinguit nee nos distinguere debemus -when the law does not distinguish we should not distinguish. Thus,
the 200,000 outstanding capital stocks of PV Corp should be the basis for determining the presence of a
quorum, without any distinction. Therefore, to constitute a quorum, the presence of 100,001 shares of stocks
in PV Corp is necessary. If only 98,430 shares of stocks are present during the stockholders’ meeting, therefore,
no quorum will be established. [Villongco v. Yabut, G.R. Nos. 225022 & 225024, February 5, 2018]

41. What does the term “entitled to vote” mean in determining quorum?

Sec. 24 of the Corporation requires the presence in person or by proxy of “the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote.” The
phrase “entitled to vote” should be interpreted to apply to both stock and non-stock corporations. This does
not include shares under litigation. However, not all shares under litigation cannot vote. For example, stock
owned by the estate of a decedent may be voted by the estate’s executor or administrator. If there is no
executor or administrator, then the shares of a decedent cannot be voted. Also, if there is a dispute as to who
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owns the shares, and thus, who has the right to vote such shares, then the general rule is that “the registered
owner of the shares of the corporation exercises the right and the privilege of voting.” [SEC-OGC Opinion No.
13-11, 20 November 2013]

42. How is quorum determined in non-stock corporations?

The basis in determining the presence of quorum in non-stock corporations is the numerical equivalent of all
members who are entitled to vote, unless some other basis is provided by the By-Laws of the corporation. The
qualification "with voting rights" under Sec. 52 of the Corporation Code simply recognizes the power of a non-
stock corporation to limit or deny the right to vote of any of its members. To include members without voting
rights in the total number of members for purposes of quorum would be superfluous for although they may
attend a particular meeting, they cannot cast their vote on any matter discussed therein. Thus, for non-stock
corporations, only those who are actual, living members with voting rights shall be counted in determining the
existence of a quorum. [Lim v. Moldex Land, Inc., G.R. No. 206038 January 25, 2017]

43. Does cumulative voting apply to election of trustees of a non-stock condominium corporation?

The general rule for the election of trustees of a non-stock corporation is that members may cast as many
votes as there are trustees to be elected but may cast only one vote per candidate. By way of exception, a
non-stock corporation may adopt other modes of casting votes, including, but not limited to, cumulative
voting, if the same is authorized in its articles or by-laws, or the master deed or the declaration of restrictions
(in case of a non-stock condominium corporation). otherwise, the general rule that members may not cast
more than one vote for any candidate will apply. [SEC OGC Opinion No. 14-10, 2 June 2014]

44. What is cumulative voting?

Cumulative voting is a mode of casting votes during the elections of directors in a stock corporation. This is
provided in Sec. 24 of the Corporation Code, which states that every stockholder entitled to vote shall have
the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws,
in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the
election; and said stockholder may vote such number of shares for as many persons as there are directors to
be elected or he may cumulate said shares and give one candidate as many votes as the number of directors
to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same
principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him
shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by
the whole number of directors to be elected.

Under this provision, there are two methods of cumulative voting: Cumulative voting for one candidate, and
cumulative voting by distribution.

Under the first method (cumulative voting for one candidate), a stockholder is allowed to concentrate his
votes and give one candidate as many votes as the number of directors to be elected, multiplied by the number
of his shares shall equal. For example, supposing a stockholder owns 200 shares and there are five directors
to be elected, he is entitled to 1,000 votes, all of which he may cast in favor of one candidate.

Under the second method (cumulative voting by distribution), a stockholder may cumulate his shares by
multiplying also the number of his shares by the number of directors to be elected, and distribute the same
among as many candidates as he shall see fit. For example, a stockholder with 100 shares is entitled to 500
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votes if there are five directors to be elected. He may cast his votes in any combination desired by him,
provided that the total number of votes cast by him does not exceed 500, which is the number of shares
owned by him multiplied by the total number of directors to be elected. [SEC OGC Opinion No. 14-10, 2 June
2014]

45. Can a hold-over director appoint another director to fill a vacancy caused by the resignation of
another hold-over director?

No. A vacancy caused by resignation of a hold-over director or a trustee cannot be filled by the vote of the
directors or trustees, but rather, by the vote of the stockholders or members in a regular or special meeting
called for the purpose, as provided by Sec. 29 of the Corporation Code. Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of term, may be
filled by majority of the remaining directors or trustees, if still constituting a quorum, otherwise, said vacancies
must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee
so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in officer. Thus, in a
situation where directors or trustees are acting in a hold-over capacity, there are actually vacancies caused by
expiration of terms, and the resignation of a hold-over director or trustee cannot change the nature of the
vacancy. [Valle Verde Country Club v. Africa, GR No. 151696, September 4, 2009; SEC-OGC Opinion No. 13-11,
20 November 2013]

46. Can proxies be elected as directors or trustees of a corporation, and subsequently, as corporate
president?

No. The Corporation Code clearly provides that a director or trustee must be a member of record of the
corporation. Further, the power of the proxy is merely to vote. If said proxy is not a member in his own right,
he cannot be elected as a director or trustee. Likewise, Sec. 25 of the Corporation Code mandates that the
President shall be a director. Since a proxy cannot be a director, then he cannot also be elected as president.
[Lim v. Moldex Land, Inc., G.R. No. 206038, January 25, 2017]

47. Is it required that, in order to be elected as a member of the board of trustees of a non-stock
corporation, majority of the votes of the members be obtained?

No. While the Corporation Code requires the presence of at least majority of the members of the non-stock
corporation for the election of its Board, it does not require such number of votes for one to be declared
elected. Under the Code, the candidates receiving the highest number of votes shall be declared elected. Thus,
for a candidate to be elected as trustee, such candidate must be among the group of candidates who received
the highest number of votes. In case the number of candidates does not exceed the number of seats in the
board, said candidates, provided they received votes, can be said to have received the highest number of
votes, as the law requires only plurality of the votes to cast at the election. [SEC OGC Opinion No. 14-09, 2 June
2014]

48. Can stockholders elect less than the number of directors as stated in the articles of incorporation?

Yes. An election of less number of directors than the number which the meeting was called to elect is valid as
to those elected. Thus, the stockholders or members may opt to elect a number of directors/trustees less than
the number of directors/trustees as fixed in the articles of incorporation. Such a situation would merely give
rise to vacancy in the board, which may be later filled up. The power of the board is not suspended by vacancies
in the board unless the number is reduced below a quorum. This is so since the board can only transact
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business if it reaches a quorum, which is at least a majority of the number of trustees as fixed in the articles
of incorporation or by-laws, unless the Articles, by-laws, or Master Deed, in the case of a condominium
corporation provide for a greater number. For decisions of the board to be valid as a corporate act, at least a
majority of such majority or quorum has to concur. However, for the election of officers, the vote of the
majority of all the members of the board as fixed in the articles of incorporation, rather than majority of the
quorum, shall be required. [SEC OGC Opinion No. 14-09, 2 June 2014]

49. Can notices of stockholders’ or directors’ meetings be sent through electronic mail (e-mail)? Are the
resolutions passed during such meetings valid?

Yes. Generally and as a default rule, written notice of the meeting, sent through regular post mail, must be
given to stockholders/directors/ trustees in relation to the holding of meetings within the periods provided in
the Corporation Code. However, Secs. 47(1), (2), and (6) allows the corporation to provide a different mode
of notice in the by-laws. Thus, since the Corporation Code requires notice to be sent “in writing”, an e-mail
notice may be included as a mode of notice in the by-laws of a corporation, since an e-mail is considered “in
writing”. In such a case, the by-laws must, likewise, provide for mechanics of such sending of notices through
e-mail, including indication, recording, changing, and recognition of e-mail addresses of each
stockholder/director. However, it must be stressed that absent such specific provisions on notice
requirements in a corporation’s current and standing by-laws, the general or default rule – written notice sent
through regular postal mail – applies. Since such notice is allowed, provided it is in accordance with a
corporation’s by-laws, then resolutions passed during such meetings are also valid. [SEC OGC Opinion No. 13-
10, 25 October 2013]

50. APO’s by-laws, a non-stock non-profit corporation, provide that its members are those that are
issued certificates of ownership, with only one certificate being issued for one member. The same
by-laws provide that not more than 500 certificates of ownership will be issued. However, its articles
of incorporation provide that members enjoy membership rights, upon payment of a membership
fee, for which they will be issued a membership fee certificate. Such membership fee certificate
should not be issued in excess of 250, with only one certificate being issued per member. What is
the authorized membership of APO, 500 or 250?

The maximum number of members allowed for APO is 250. The question arose from what appears to be a
conflict between the articles and the by-laws. When the by-laws of a corporation are inconsistent with the
articles of incorporation, the latter shall be controlling, as the by-laws are subordinate to, and cannot
contravene, the corporate charter. As provided for in the articles of APO, the maximum permitted number of
Certificates of Membership issued by it is limited to 250, and no member shall be issued more than one
certificate. Hence, the maximum number of members is the maximum number of certificates that may be
issued, that is 250, by virtue of the articles of incorporation, and not 500 as provided by the by-laws. [SEC OGC
Opinion No. 14-25, 4 September 2014]

51. L was hired as a Director of CBB, who was later on appointed as managing director. L was dismissed
from service, and thereafter, CBB was closed by the its President, who later on opened a new
corporation, which continued CBB’s business. Alleging failure to pay a significant portion of his
salary, L filed a complaint for illegal dismissal against CBB and its president. Can CBB’s president be
held liable?

Yes. There is indubitable link between closure of CBB and the incorporation of the new corporation, which was
done to avoid payment of the obligations to L. CBB ceased to exist only in name; it re-emerged in the person
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of the new corporation for an urgent purpose — to avoid payment by CBB of the last two installments of its
monetary obligation to L, as well as its other financial liabilities. Freed of CBB’s liabilities, especially that
owing to L, the new corporation can continue, as it did continue, CBB’s business. Though a corporation, by
legal fiction and convenience, is an entity shielded by a protective mantle and imbued by law with a character
alien to the persons comprising it, nonetheless, the shield is not at all times impenetrable and cannot be
extended to a point beyond its reason and policy. Circumstances might deny a claim for corporate personality,
under the “doctrine of piercing the veil of corporate fiction.”

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the
separate corporate personality of a corporation is abused or used for wrongful purposes. Under the doctrine,
the corporate existence may be disregarded where the entity is formed or used for non–legitimate purposes,
such as to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out
similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the fiction will be
disregarded and the individuals composing it and the two corporations will be treated as identical. Piercing
the corporate veil is clearly applicable in this case. [Eric Godfrey Stanley Livesey v. Binswanger Philippines, Inc.
and Keith Elliot, G.R. No. 177493, March 19, 2014]

52. M was hired by S Tech as the head and manager of one of its units. Subsequently, N was employed
as her manager. M's hard disk crashed causing her to lose files, and she informed N. M’s position
was then downgraded twice, and later on, she was informed that her position was redundant. An
action for illegal dismissal was filed by M against S Tech and its one of its officers. Can the case
prosper against the corporate officer?

No. It is hornbook principle that personal liability of corporate directors, trustees or officers attaches only
when: (a) they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith
or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages
to the corporation, its stockholders or other persons; (b) they consent to the issuance of watered down
stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary
their written objection; (c) they agree to hold themselves personally and solidarily liable with the corporation;
or (d) they are made by specific provision of law personally answerable for their corporate action. In the case
of M, there is no evidence to show that the above-enumerated exceptions when a corporate officer becomes
personally liable for the obligation of a corporation are present in this case. [SPI Technologies, Inc., et al. v.
Victoria K. Mapua, G.R. No. 191154, April 7, 2014]

53. M Corp employed B, who was later on dismissed from employment after having tested positive
during a random drug test conducted in the office. B thus filed an action for illegal dismissal against
M Corp and E, its president. Should the case prosper against E?
No. A corporation has a personality separate and distinct from its officers and board of directors who may only
be held personally liable for damages if it is proven that they acted with malice or bad faith in the dismissal of
an employee. Absent any evidence on record that petitioner E acted maliciously or in bad faith in effecting the
termination of respondent, plus the apparent lack of allegation in the pleadings E acted in such manner, the
doctrine of corporate fiction dictates that only petitioner corporation should be held liable for the illegal
dismissal of respondent. [Mirant (Philippines) Corporation, et al. v. Joselito A. Caro, G.R. No. 181490, April 23,
2014]

54. A mortgaged his property to Bank A, predecessor of Bank B. However, A defaulted in his payments,
so the mortgage was foreclosed and Bank B bought the property. A offered to repurchase the
property, but no agreement was reached. With A insisting that a purchase agreement was reached,
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he sold portions of the property after being subdivided, and offered to pay for the entire property.
Bank B however sold the remaining portions of the property to another person, which prompted A
to cause an annotation of his adverse claim on the title. Thereafter, the property was sold by Bank
B to other persons, without A’s knowledge. Thus, A filed an action for specific performance against
the bank. Was there a perfected repurchase agreement between A and Bank B, even if no
acceptance was made by Bank B’s representatives?

No. No such agreement was reached. Sec. 23 of the Corporation Code expressly provides that the corporate
powers of all corporations shall be exercised by the board of directors. Just as a natural person may authorize
another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some
of its functions to individual officers or agents appointed by it. Thus, contracts or acts of a corporation must
be made either by the board of directors or by a corporate agent duly authorized by the board. Absent such
valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs
of the corporation, but not in the course of, or connected with, the performance of authorized duties of such
director, are held not binding on the corporation. Thus, a corporation can only execute its powers and transact
its business through its Board of Directors and through its officers and agents when authorized by a board
resolution or its by-laws.

In the absence of conformity or acceptance by properly authorized bank officers of A’s offer to buy back the
property, no perfected repurchase contract was born out of the talks or negotiations between A and Bank B’s
representatives. [Heirs of Fausto C. Ignacio v. Home Bankers Savings and Trust Co., et al., G.R. No. 177783.
January 23, 2013]

55. TRB sold to BOC its banking business which was later on approved by the BSP monetary board. Later,
as a result of previous court litigation, TRB was order to pay RPN, IBB and BBC damages, for which
a writ of execution was issued. The said writ included properties by the covered by the sale to BOC.
Was there a valid merger between TRB and BOC, as a result of which BOC may be held liable for the
damages to be paid to RPN, IBB and BBC?

No. No merger occurred, and thus BOC cannot be held liable. Merger is a re-organization of two or more
corporations that results in their consolidating into a single corporation, which is one of the constituent
corporations, one disappearing or dissolving and the other surviving. To put it another way, merger is the
absorption of one or more corporations by another existing corporation, which retains its identity and takes
over the rights, privileges, franchises, properties, claims, liabilities and obligations of the absorbed
corporation(s). The absorbing corporation continues its existence while the life or lives of the other
corporation(s) is or are terminated.

The Corporation Code requires the following steps for merger or consolidation:

(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must include
any amendment, if necessary, to the articles of incorporation of the surviving corporation, or in case
of consolidation, all the statements required in the articles of incorporation of a corporation.

(2) Submission of plan to stockholders or members of each corporation for approval. A meeting must
be called and at least two (2) weeks’ notice must be sent to all stockholders or members, personally
or by registered mail. A summary of the plan must be attached to the notice. Vote of two-thirds of the
members or of stockholders representing two thirds of the outstanding capital stock will be needed.
Appraisal rights, when proper, must be respected.
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(3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by the
corporate officers of each constituent corporation. These take the place of the articles of
incorporation of the consolidated corporation, or amend the articles of incorporation of the surviving
corporation.

(4) Submission of said articles of merger or consolidation to the SEC for approval.

(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks
before.

(6) Issuance of certificate of merger or consolidation.

Indubitably, it is clear that no merger took place between BOC and TRB as the requirements and procedures
for a merger were absent. A merger does not become effective upon the mere agreement of the constituent
corporations. All the requirements specified in the law must be complied with in order for merger to take
effect. Sec. 79 of the Corporation Code further provides that the merger shall be effective only upon the
issuance by the Securities and Exchange Commission (SEC) of a certificate of merger.

Here, BOC and TRB remained separate corporations with distinct corporate personalities. What happened is
that TRB sold and BOC purchased identified recorded assets of TRB. In a strict sense, no merger or
consolidation took place as the records do not show any plan or articles of merger or consolidation. More
importantly, the SEC did not issue any certificate of merger or consolidation. [Bank of Commerce v. Radio
Philippines Network, Inc., et al., G.R. No. 195615, April 21, 2014]

56. B Bank executed a Purchase and Sale Agreement with P Bank, purchasing some of the latter’s
accounts and liabilities. One of the P Bank’s depositors, sought to recover from both banks an
amount withdrawn from him as a result of P Bank’s act of letting an unauthorized person to
withdrawn from his account. He contends that the two banks have merged, and thus, jointly and
severally liable. Is the depositor correct?

No. A merger is the union of two or more existing corporations in which the surviving corporation absorbs the
others and continues the combined business. The merger dissolves the non-surviving corporations, and the
surviving corporation acquires all the rights, properties and liabilities of the dissolved corporations.
Considering that the merger involves fundamental changes in the corporation, as well as in the rights of the
stockholders and the creditors, there must be an express provision of law authorizing the merger. The merger
does not become effective upon the mere agreement of the constituent corporations, but upon the approval
of the articles of merger by the Securities and Exchange Commission issuing the certificate of merger as
required by Section 79 of the Corporation Code. Should any party in the merger be a special corporation
governed by its own charter, the Corporation Code particularly mandates that a favorable recommendation
of the appropriate government agency should first be obtained. It is plain enough, therefore, that there were
several specific facts whose existence must be shown (not assumed) before the merger of two or more
corporations can be declared as established. Among such facts are the plan of merger that includes the terms
and mode of carrying out the merger and the statement of the changes, if any, of the present articles of the
surviving corporation; the approval of the plan of merger by majority vote of each of the boards of directors
of the concerned corporations at separate meetings; the submission of the plan of merger for the approval of
the stockholders or members of each of the corporations at separate corporate meetings duly called for the
purpose; the affirmative vote of 2/3 of the outstanding capital in case of stock corporations, or 2/3 of the
members in case of non-stock corporations; the submission of the approved articles of merger executed by
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each of the constituent corporations to the SEC; and the issuance of the certificate by the SEC on the approval
of the merger. None of such facts exist in the instant case. [Bank of Commerce v. Heirs of Rodolfo Dela Cruz,
G.R. No. 211519, August 14, 2017]

57. A special meeting was held by the stockholders of MSC Corp. where several directors were removed
and some new directors were elected. The meeting was called by MSC Corp.’s management
committee. Is the special meeting valid, and can the elections held during such meeting be
considered as valid? If not, can it be made valid by subsequent ratification by the stockholders?

No. The Corporation Code provides that a special meeting of the stockholders or members of a corporation
for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order
of the president or on the written demand of the stockholders representing or holding at least a majority of
the outstanding capital stock. In this case, the meeting was not called in accordance with the requirements of
the Corporation Code. The board of directors is the directing and controlling body of the corporation. It is a
creation of the stockholders and derives its power to control and direct the affairs of the corporation from
them. The board of directors, in drawing to itself the power of the corporation, occupies a position of
trusteeship in relation to the stockholders, in the sense that the board should exercise not only care and
diligence, but utmost good faith in the management of the corporate affairs. A corporation's board of directors
is understood to be that body which (1) exercises all powers provided for under the Corporation Code; (2)
conducts all business of the corporation; and (3) controls and holds all the property of the corporation. Its
members have been characterized as trustees or directors clothed with fiduciary character. Relative to the
powers of the Board of Directors, nowhere in the Corporation Code or in the MSC by-laws can it be gathered
that the Oversight Committee is authorized to step in wherever there is breach of fiduciary duty and call a
special meeting for the purpose of removing the existing officers and electing their replacements even if such
call was made upon the request of shareholders. Needless to say, the management committee is neither ·
empowered by law nor the MSC by-laws to· call a meeting and any subsequent ratification made by the
stockholders does not cure the substantive infirmity, the defect having set in at the time the void act was
done. The defect goes into the very authority of the persons who made the call for the meeting. It is apt to
recall that illegal acts of a corporation which ·contemplate the doing of an act which is contrary to law, morals
or public order, or contravenes some rules of public policy or public duty, are, like similar transactions between
individuals, void. They cannot serve as basis for a court action, nor acquire validity by performance, ratification
or estoppel. A distinction should be made between corporate acts or contracts . which are illegal and those
which are merely ultra vires. The former contemplates the doing of an act which are contrary to law, morals
or public policy or public duty, and are, like similar transactions between individuals, void: They cannot serve
as basis of a court action nor acquire validity by performance, ratification or estoppel. Mere ultra vires acts,
on the other hand, or those which are not illegal or void ab initio, but are not merely within· the scope of the
articles of incorporation, are merely voidable and ·may become binding and enforceable when ratified by the
stockholders. In this case, the meeting belongs to the category of the latter, that is, it is void ab initio and
cannot be validated. The elected officers are not de facto officers of the corporation and they are without
colorable authority to authorize corporate acts. [Bernas v. Cinco, G.R. No. 163356-57, July 1, 2015]

58. A was the chairman of the Board of Trustees of M University, while B, his wife, was its assistant
corporate treasurer. They established two thrift banks with A as the chairman of both, and president
of one of the banks, while his wife was the president and treasurer of the other. A obtained a
standby letter of credit from BSP for the two banks, evidenced by 3 promissory notes signed by A
and co-signed by his wife, and C, one of the bank’s special assistants to the president. Later on, the
VP of M University executed a deed of real estate mortgage over the properties of the school in
favor of BSP to secure the banks’ loans. The mortgage was evidenced by a secretary’s certificate and
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minutes of a board meeting, which was annotated on the title of the mortgaged properties. The two
banks were merged, but continued to incur losses. Because of this, it was later on liquidated, after
the death of A. BSP sent a letter to M University demanding payment of the unpaid loans obtained
by A, and failure to pay would result in the foreclosure of the mortgage. In response, M University
denied that its properties were mortgaged, and denied receipt of any loan proceeds from BSP. The
university filed a case in court seeking the nullification of the mortgage. Is M University bound by
the real estate mortgage executed by A?

No. Acts of an officer that are not authorized by the board of directors/trustees do not bind the corporation
unless the corporation ratifies the acts or holds the officer out as a person with authority to transact on its
behalf. Corporations are artificial entities granted legal personalities upon their creation by their
incorporators in accordance with law. Unlike natural persons, they have no inherent powers. Third
persons dealing with corporations cannot assume that corporations have powers. It is up to those persons
dealing with corporations to determine their competence as expressly defined by the law and their articles
of incorporation. A corporation may exercise its powers only within those definitions. Corporate acts that are
outside those express definitions under the law or articles of incorporation or those “committed outside the
object for which a corporation is created” are ultra vires. The only exception to this rule is when acts are
necessary and incidental to carry out a corporation’s purposes, and to the exercise of powers conferred
by the Corporation Code and under a corporation’s articles of incorporation. The test to determine if a
corporate act is in accordance with its purposes, is to question if there is a logical relation between the act and
the corporate purpose expressed in the charter of the corporation. If that act is one which is lawful in itself,
and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary
to the promotion of those ends, in a substantial, and not in a remote and fanciful, sense, it may fairly be
considered within charter powers. The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation’s business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has the power to do it; otherwise, not.

As an educational institution, M University does not have the power to mortgage its properties in order to
secure loans of other persons. As an educational institution, it is limited to developing human capital through
formal instruction. It is not a corporation engaged in the business of securing loans of others. ring professors,
instructors, and personnel; acquiring equipment and real estate; establishing housing facilities for personnel
and students; hiring a concessionaire; and other activities that can be directly connected to the operations
and conduct of the education business may constitute the necessary and incidental acts of an educational
institution. Securing the banks’ loans by mortgaging M University’s properties does not appear to have even
the remotest connection to the operations of M University as an educational institution. Securing loans is
not an adjunct of the educational institution’s conduct of business. It does not appear that securing third-party
loans was necessary to maintain its business of providing instruction to individuals. Though the rule is that a
contract executed by a corporation shall be presumed valid, such only applies if on its face its execution was
not beyond the powers of the corporation to do. In this case, the presumption that the execution of mortgage
contracts was within M University’s corporate powers does not apply. Securing third-party loans is not
connected to M University’s purposes as an educational institution.

Unauthorized acts that are merely beyond the powers of the corporation under its articles of incorporation
are not void ab initio. Such may be ultra vires but not void, and such may be the subject of ratification. Thus,
even though a person did not give another person authority to act on his or her behalf, the action may be
enforced against him or her if it is shown that he or she ratified it or allowed the other person to act as if he
or she had full authority to do so. But, in this case, no act by M University can be interpreted as anything
close to ratification. It was not shown that it issued a resolution ratifying the execution of the mortgage
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contracts. It was not shown that it received proceeds of the loans secured by the mortgage contracts. There
was also no showing that it received any consideration for the execution of the mortgage contracts. It even
appears that the school was unaware of the mortgage contracts until BSP notified it of its desire to foreclose
the mortgaged properties. Ratification must be knowingly and voluntarily done. M University’s lack of
knowledge about the mortgage executed in its name precludes an interpretation that there was any
ratification on its part. Though there is a general rule that knowledge of an officer is considered knowledge of
the corporation, such applies only when the officer is acting within the authority given to him or her by the
corporation. [University of Mindanao v. Bangko Sentral Ng Pilipinas, G.R. No. 194964-65, January 11, 2016]

59. KMBI’s by-laws and articles of incorporation provide that its board of trustees shall consist of 9
members to serve for one year. But, due to the resignation of five of them, and the death of another,
only 3 members of the board remain. Can the remaining 3 members continue the regular business
of the corporation and fill up the vacancies in the board?

No. The general rule is that the power of the board is not suspended by vacancies in the board unless the
number is reduced to below a quorum, the rule being that the number necessary to constitute a quorum under
a by-law which provides that a majority of the directors shall be necessary and sufficient to constitute a
quorum, is a majority of the entire board, notwithstanding that there may be vacancies in the board at a time.
In the case of KMBI, the presence of 9 members would be required to constitute a quorum. There being no
quorum with only 3 remaining members of the board, then the board has no authority to transact business.
Also, they do not have authority to fill-up vacancies in the board. Not only is there no quorum, but the
circumstances are not one of those which would allow the remaining directors to fill in a vacancy. Based on
Sec. 29 of the Corporation Code, the remaining directors/trustees can fill-up the vacancies in the board when:
(1) such vacancies were occasioned by reasons other than removal by the stockholders/members or expiration
of term; and (2) such remaining director/trustees still constitute a quorum of the Board. These conditions must
concur; otherwise, the filling-up of vacancies must be done by the stockholders or members in a regular or
special meeting called for the purpose. [SEC OGC Opinion No. 13-06, 6 May 2013]

60. Does the President of a close corporation have the authority to decide on matters concerning the
corporation even without the approval of the Board?

Yes. A close corporation is one where the articles of incorporation provide that: (1) all the corporation’s issued
stocks of all classes, exclusive of treasury shares, shall be held of records by not more than a specified number
of persons, not exceeding 20; (2) all of the issued stocks of all classes shall be subject to restrictions on transfer
permitted by the Corporation Code; and (3) the corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class. The main difference between a close corporation and other
corporations is the identity of stock ownership and active management, that is, all or most of the stockholders
of a close corporation are active in the corporate business either as directors, officers or other key men in
management. Where business associates belong to a small, closely-knit group, they usually prefer to keep the
organization exclusive and would not welcome strangers. Since it is through their efforts and managerial skills
that they expect the business to grow and prosper, it is quite understandable why they would not trust
outsiders to come in and interfere with their management of business, and much less share whatever fortune,
big or small, that the business may bring.

In an ordinary corporation, the President’s power of general control and supervision over the corporate
business grants him an apparent authority to enter into transactions on behalf o the corporation in the
ordinary course of business, unless prohibited by the Articles of Incorporation or the By-laws. The acts, even
if priorly unauthorized, may be later ratified by the Board of Directors or Trustees, which ratification cleanses
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the transaction of defects. In the case of close corporations, the act of the President, who is also a Director,
may not need later ratification of the Board, provided that any of the following conditions are present:

1. Before the action is taken, written consent thereto is signed by all the directors;
2. All the stockholders have actual or implied knowledge of the action and make no prompt
objection thereto in writing;
3. The directors are accustomed to take informal action with the express or implied
acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question and none of
them makes prompt objection thereto in writing.

[SEC OGC Opinion No. 14-23, 26 August 2014]

61. What is the current limit on the shareholdings of an Independent Director?

Paragraphs 2 and 6, Rule 38 of the Amended IRR of the Securities Regulation Code are the controlling
provisions on the definition, qualification and disqualification of an independent director. In other words, a
person is qualified to be elected as an independent director provided he is independent of management and
free from any business or other relationship which could, or could reasonably be perceived to, materially
interfere with his exercise of independent judgment in carrying out his responsibilities as a director in any
covered company, and includes, among others, any person who does not own more than 2% of the shares of
the covered company and/or its related companies or any of its substantial shareholders. The 10% limit on
beneficial ownership in the covered company's equity security in which an independent director is to be
elected no longer holds true. [SEC OGC Opinion No. 13-04, 18 April 2013; Emphasis supplied]

62. M Corp. was engaged in the business of selling medical equipment, and has A as one of its directors.
A had a daughter, B, who owns 80% of E Corp., also engaged in the selling of medical equipment.
Some of the clients of M Corp. stopped doing business with it, allegedly due to the intervention of
A, who funneled the clients to E Corp. Is there a conflict of interest on the part of A, which would
disqualify him from continuing to be a director in M Corp?

If the by-laws of M Corp. provides as a qualification for directors that “a director shall not be the immediate
member of the family of any stockholder in any other firm, company, or association which competes with the
subject corporation”, then A can be disqualified. Every corporation has the inherent power to adopt by-laws
for its internal government, and to regulate the conduct and prescribe the rights of its members towards itself
and among themselves in reference to the management of its affairs. Thus, under Sec. 47(5) of the Corporation
Code, a corporation may prescribe in its by-laws the qualifications of its directors, officers, and employees.
The qualification that “a director shall not be the immediate member of the family of any stockholder in any
other firm, company, or association which competes with the subject corporation” is a qualificational by-law
provision which may be added to those specified in the Corporation Code (Secs. 23 and 27), pursuant to the
case of Gokongwei v. SEC (GR No. L-45911, 11 April 1979). Thus, corporations have the power to make by-laws
declaring a person employed in the service of a rival company to be ineligible for the Corporation’s Board of
Directors and a provision which renders ineligible, or if elected, subjects to removal, a directors if he be also a
director in a corporation whose business is in competition with or is antagonistic to the other corporation is
valid. However, these qualifications become effective only when the by-laws expressly provide for the same.

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Despite this, A may be held liable for damages for bad faith in directing the affairs of the corporation, under
Sec. 31 of the Corporation Code, or to account for any profit obtained to the prejudice of the corporation by
acquiring business opportunity which should have belonged to the corporation, pursuant to Section 34 of the
Corporation Code. [SEC OGC Opinion No. 14-04, 21 April 2014]

63. M Corp, T Corp and N Corp applied for Mineral Production Sharing Agreements (MPSA) with the
DENR. This was opposed by R Corp because it alleged that at least 60% of the capital stock of the
corporations are owned and controlled by MBMI, a 100% Canadian corporation. R Corp reasoned
that since MBMI is a considerable stockholder of the said corporation, it was the driving force
behind the applications for MPSAs since it knows that it can only participate in mining activities
through corporations which are deemed Filipino citizens. It further argued that given that the 3
corporations’ capital stocks were mostly owned by MBMI, they were likewise disqualified from
engaging in mining activities through MPSAs, which are reserved only for Filipino citizens. Decide.

It is quite safe to say that petitioners M Corp, T Corp and N Corp are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests.

How was this determined? Basically, there are two acknowledged tests in determining the nationality of a
corporation: the control test and the grandfather rule.

Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the controlling interests in enterprises engaged
in the exploitation of natural resources owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which


is owned by Filipino citizens shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or partnership is less than 60%,
only the number of shares corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered in the name of a
corporation or partnership at least 60% of the capital stock or capital, respectively, of
which belong to Filipino citizens, all of the shares shall be recorded as owned by
Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000
shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded
as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships
at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine
nationality," pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ
Opinion which provides, "if the percentage of the Filipino ownership in the corporation or partnership is less
than 60%, only the number of shares corresponding to such percentage shall be counted as Philippine
nationality," pertains to the stricter, more stringent grandfather rule.

Thus, are two cases in determining the nationality of an Investee Corporation. The first case is the ‘liberal
rule’, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the portion which
states, ‘(s)hares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality.’ Under the liberal Control Test, there is no

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need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation
since a corporation which is at least 60% Filipino-owned is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph
7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as
of Philippine nationality." Under the Strict Rule or Grandfather Rule Proper, the combined totals in the
Investing Corporation and the Investee Corporation must be traced (i.e., "grandfathered") to determine the
total percentage of Filipino ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing
Corporation and added to the shares directly owned in the Investee Corporation.

In other words, based on the said SEC Rules and DOJ Opinion, the Grandfather Rule or the second part of the
SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the
joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or
59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino).
Stated differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule
will not apply.

The “control test” is still the prevailing mode of determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines. When in the mind of the Court there
is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership
in the corporation, then it may apply the “grandfather rule.”

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the
grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate
ownership of petitioners. Here, doubt is present in the 60-40 Filipino equity ownership the corporations, since
their common investor, the 100% Canadian corporation––MBMI, funded them. [Narra Nickel Mining and
Development Corp., et al. v. Redmont Consolidated Mines, G.R. No. 195580, April 21, 2014]

Thus, in determining nationality of a corporation:

Primarily, it is the incorporation test which should be applied in determining the nationality of a corporation.
"Under Philippine jurisdiction, the primary test is always the Place of Incorporation Test since we adhere to
the doctrine that a corporation is a creature of the State whose laws it has been created. A corporation
organized under the laws of a foreign country, irrespective of the nationality of the persons who control it is
necessarily a foreign corporation. The control test and the principal place of business test (siege social), are
merely adjunct tests, when the place of incorporation test indicates that the subject corporation is organized
under Philippine laws.” However, based upon the foregoing, while the incorporation test serves as the
primary test under Philippine jurisdiction, other tests such as the control test must be used for purposes of
compliance with the provisions of the Constitution and of other laws on nationality requirements. Even if
the corporation is a creature of the State, there is a need to further safeguard/regulate certain areas of
investment and activities for the protection of the interests of Filipinos. For instance, the control test is used
to determine the eligibility of a corporation, which has foreign equity participation in its ownership structure,
to engage in nationalized or partly nationalized activities. [SEC-OGC Opinion No. 11-42, 12 October 2011;
Underscoring supplied]
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The Grandfather Rule is used as a “supplement” to the Control Test so that the intent underlying the averted
Sec. 2, Art. XII of the Constitution be given effect. The use of the Grandfather Rule as a “supplement” to the
Control Test is not proscribed by the Constitution or the Philippine Mining Act of 1995. To reiterate, Sec. 2,
Art. XII of the Constitution reserves the exploration, development, and utilization of natural resources to
Filipino citizens and “corporations or associations at least sixty per centum of whose capital is owned by such
citizens.” Similarly, Section 3(aq) of the Philippine Mining Act of 1995 considers a “corporation x x x registered
in accordance with law at least sixty per cent of the capital of which is owned by citizens of the Philippines” as
a person qualified to undertake a mining operation. Consistent with this objective, the Grandfather Rule was
originally conceived to look into the citizenship of the individuals who ultimately own and control the shares
of stock of a corporation for purposes of determining compliance with the constitutional requirement of
Filipino ownership. It cannot, therefore, be denied that the framers of the Constitution have not foreclosed
the Grandfather Rule as a tool in verifying the nationality of corporations for purposes of ascertaining their
right to participate in nationalized or partly nationalized activities.

Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining compliance
with the minimum Filipino equity requirement vis-à-vis the Control Test. This confusion springs from the
erroneous assumption that the use of one method forecloses the use of the other.

The Control Test can be, as it has been, applied jointly with the Grandfather Rule to determine the observance
of foreign ownership restriction in nationalized economic activities. The Control Test and the Grandfather
Rule are not, as it were, incompatible ownership-determinant methods that can only be applied alternative
to each other. Rather, these methods can, if appropriate, be used cumulatively in the determination of the
ownership and control of corporations engaged in fully or partly nationalized activities, as the mining
operation involved in this case or the operation of public utilities as in Gamboa or Bayantel.

The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in
a corporation, as it could result in an otherwise foreign corporation rendered qualified to perform nationalized
or partly nationalized activities. Hence, it is only when the Control Test is first complied with that the
Grandfather Rule may be applied. Put in another manner, if the subject corporation’s Filipino equity falls
below the threshold 60%, the corporation is immediately considered foreign-owned, in which case, the need
to resort to the Grandfather Rule disappears.

On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement can be
considered a Filipino corporation if there is no doubt as to who has the “beneficial ownership” and “control”
of the corporation. In that instance, there is no need for a dissection or further inquiry on the ownership of
the corporate shareholders in both the investing and investee corporation or the application of the
Grandfather Rule. As a corollary rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by the
subject or investee corporation, a resort to the Grandfather Rule is necessary if doubt exists as to the locus of
the “beneficial ownership” and “control.” In this case, a further investigation as to the nationality of the
personalities with the beneficial ownership and control of the corporate shareholders in both the investing
and investee corporations is necessary.

The “doubt” that demands the application of the Grandfather Rule in addition to or in tandem with the Control
Test is not confined to, or more bluntly, does not refer to the fact that the apparent Filipino ownership of the
corporation’s equity falls below the 60% threshold. Rather, “doubt” refers to various indicia that the
“beneficial ownership” and “control” of the corporation do not in fact reside in Filipino shareholders but in
foreign stakeholders. As provided in DOJ Opinion No. 165, Series of 1984, which applied the pertinent
provisions of the Anti-Dummy Law in relation to the minimum Filipino equity requirement in the Constitution,
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“significant indicators of the dummy status” have been recognized in view of reports “that some Filipino
investors or businessmen are being utilized or [are] allowing themselves to be used as dummies by foreign
investors” specifically in joint ventures for national resource exploitation. These indicators are:

1. That the foreign investors provide practically all the funds for the joint investment undertaken
by these Filipino businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically all the technological support for
the joint venture;
3. That the foreign investors, while being minority stockholders, manage the company and
prepare all economic viability studies.

(However) Suffice it to say in this regard that, while the Grandfather Rule was originally intended to trace the
shareholdings to the point where natural persons hold the shares, the SEC had already set up a limit as to the
number of corporate layers the attribution of the nationality of the corporate shareholders may be applied.

In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels of
corporate relations for publicly-held corporations or where the shares are traded in the stock exchanges,
and to three (3) levels for closely held corporations or the shares of which are not traded in the stock
exchanges. These limits comply with the requirement in Palting v. San Jose Petroleum , Inc. that the application
of the Grandfather Rule cannot go beyond the level of what is reasonable. [Narra Nickel Mining and
Development Corp. v. Redmont Consolidated, GR No. 195580, January 28, 2015]

64. Are Investment Houses required to comply with the rule laid down in Gamboa v. Teves that to
determine the observance of foreign ownership restriction in nationalized economic activities, what
should be taken into account is both the total number of outstanding shares of stock entitled to
vote in the elections of directors and the total number of outstanding shares of stock, whether or
not entitled to vote (i.e. both voting shares and non-voting or beneficial shares)?

No. The Investment Houses Law, as amended by RA No. 8366, provides for a different citizenship requirement
for Investment Houses. It only requires that at least 40% of the VOTING STOCK of investment houses be owned
by citizens of the Philippines. Thus, in determining compliance with nationality requirements, the basis is only
the voting stock, and not the two-tiered test in Gamboa. Corporations covered by special laws which provide
specific citizenship requirements shall comply with the provisions of said law.[SEC-OGC Opinion No. 18-17,
September 5, 2018]

NOTE: Thus, it should be noted that even if a corporation is engaged in nationalized or partly nationalized
activities, the dual requirements of beneficial ownership and control laid down in Gamboa need not apply if
the special law governing the type of corporation provides for a different criteria for determination of
compliance with nationality rules.

Keep in mind that the above discussion on investment houses covered matters which occurred prior to the
passage of R.A. No. 10881 (lapsed into law on July 17, 2018), wherein investment restrictions for Lending
Companies, Financing Companies, and Investment Houses were amended. Now, Investment Companies may
be owned up to 100% by foreign nationals, who may now become members of the board to the extent of their
foreign participation in the company’s equity. The same is true for lending companies, which may be owned
up to 100% by foreign nationals, however when their loans are secured by lands, they may only take part in
the sale thereof in case of foreclosure for eventual sale to Philippine nationals, which should be done within 5
years, and the title to the land cannot be transferred to them. Lastly, Financing Companies, may be 100%
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foreign owned, but they should have a capital of not less than Php10,000,000.00 if they are located in Metro
Manila and other first class cities, or Php5,000,000.00 if located in other cities, or Php2,500,000.00 if located
in municipalities.

65. For purposes of determining compliance with ownership requirements under the Constitution and
existing laws, such as for corporations engaged in areas of activities or enterprises specifically
reserved to Philippine Nationals, what should be considered?

For this purpose, ‘capital’ under Section 11, Article XII of the 1987 Constitution refers to shares of stock entitled
to vote in the election of directors. [Heirs of Gamboa v. Teves, G.R.No.176579, October 9, 2012] Thus, for
purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied
to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND
(b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.
[SEC Memorandum Circular no. 8, series of 2013]

Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a
corporation is a “Philippine national.” [Heirs of Gamboa v. Teves, G.R.No.176579, October 9, 2012]

66. How do you determine beneficial ownership of specific stocks in a specific corporations?

What should be considered is who has voting power, or who has investment power, or both. Thus, if a Filipino
has the voting power of the "specific stock", i.e., he can vote the stock or direct another to vote for him, or
the Filipino has the investment power over the "specific stock", i.e., he can dispose of the stock or direct
another to dispose of it for him, or both, i.e., he can vote and dispose of that "specific stock" or direct another
to vote or dispose it for him, then such Filipino is the "beneficial owner" of that "specific stock." Being
considered Filipino, that "specific stock" is then to be counted as part of the 60% Filipino ownership
requirement under the Constitution. The right to the dividends, jus fruendi -a right emanating from ownership
of that "specific stock" necessarily accrues to its Filipino "beneficial owner." [Roy v. Chairperson Teresita
Herbosa, G.R. No. 207246, April 2017]

67. Y was the newly elected president of S Corp. who, during a meeting, demanded the turnover of the
corporate records from Q. The said records, however, were with C, the corporate accountant, who
kept them for Q. Later on, C and Q caused the removal of the corporate records from the company
premises. B, the corporate secretary, also demanded for the turnover of the stock and transfer book
from P. P however said it will be deposited in a safety deposit but with E Bank. But, this was also
taken by Q. Q brought the book to the company office and demanded that entries be made therein.
A court had already ordered that the said entries be deleted, but Q refused to do so, and he still
kept custody of the corporate records. Thus, a criminal complaint was filed against C, Q, and P.
Should the case be dismissed?

Yes. A criminal action based on the violation of a stockholder's right to examine or inspect the corporate
records and the stock and transfer book of a corporation under the second and fourth paragraphs of Sec. 74
of the Corporation Code -such as this criminal case- can only be maintained against corporate officers or any
other persons acting on behalf of such corporation. However, the instant case clearly suggest that Q and P are
neither in relation to S Corp. While Sec. 74 of the Corporation Code expressly mentions the application of Sec.
144 only in relation to the act of "refus[ing] to allow any director, trustees, stockholder or member of the
corporation to examine and copy excerpts from [the corporation's] records or minutes," the same does not
mean that the latter section no longer applies to any other possible violations of the former section.
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It must be emphasized that Sec. 144 already purports to penalize "[v]iolations" of "any provision" of the
Corporation Code "not otherwise specifically penalized therein." It is inconsequential the fact that that Sec. 74
expressly mentions the application of Section 144 only to a specific act, but not with respect to the other
possible violations of the former section.

There is no cogent reason why Sec. 144 of the Corporation Code cannot be made to apply to violations of the
right of a stockholder to inspect the stock and transfer book of a corporation under Sec. 74(4) given the already
unequivocal intent of the legislature to penalize violations of a parallel right, i.e., the right of a stockholder or
member to examine the other records and minutes of a corporation under Sec. 74(2). Certainly, all the rights
guaranteed to corporators under Sec. 74 of the Corporation Code are mandatory for the corporation to
respect. All such rights are just the same underpinned by the same policy consideration of keeping public
confidence in the corporate vehicle thru an assurance of transparency in the corporation's operations.

Refusing to allow inspection of the stock and transfer book when done in violation of Sec. 74(4) of the
Corporation Code, properly falls within the purview of Sec. 144 of the same code and thus may be penalized
as an offense.

A criminal action based on the violation of a stockholder's right to examine or inspect the corporate records
and the stock and transfer hook of a corporation under the second and fourth paragraphs of Section 74 of the
Corporation Code can only he maintained against corporate officers or any other persons acting on behalf of
such corporation.

The second and fourth paragraphs of Sec. 74 obligates a corporation: they prescribe what books or records a
corporation is required to keep; where the corporation shall keep them; and what are the other obligations of
the corporation to its stockholders or members in relation to such books and records. Hence, by parity of
reasoning, the second and fourth paragraphs of Sec. 74, including the first paragraph of the same section, can
only be violated by a corporation. It is clear then that a criminal action based on the violation of the second or
fourth paragraphs of Sec. 74 can only be maintained against corporate officers or such other persons that are
acting on behalf of the corporation. Violations of the second and fourth paragraphs of Sec. 74 contemplates a
situation wherein a corporation, acting thru one of its officers or agents, denies the right of any of its
stockholders to inspect the records, minutes and the stock and transfer book of such corporation.

However, based on the facts presented, it was not shown that C, Q, and P acted on behalf of S Corp. Quite
the contrary, what was shown is that they were merely outgoing officers of S Corp who, for some reason,
withheld and refused to tum-over the company records of S Corp. It does not appear that the case was filed
to invoke the right to inspect the records and the stock and transfer book of S Corp under the second and
fourth paragraphs of Sec. 74. The case was brought to enforce the proprietary right of S Corp to be in
possession of such records and book. Such right, though certainly legally enforceable by other means, cannot
be enforced by a criminal prosecution based on a violation of the second and fourth paragraphs of Sec. 74.
That is simply not the situation contemplated by the second and fourth paragraphs of Sec. 74 of the
Corporation Code. [Aderito Z. Yujuico and Bonifacio C. Sumbilla v. Cezar T. Quiambao and Eric C. Pilapil, G.R.
No. 180416, June 2, 2014]

68. Can a corporation prevent a stockholder from inspecting corporate books on the ground that she
only holds 0.001% of the shares of the said corporation?

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No. The Corporation Code has granted to all stockholders the right to inspect the corporate books and records,
and in so doing has not required any specific amount of interest for the exercise of the right to inspect. Ubi lex
non distinguit nec nos distinguere debemos. When the law has made no distinction, we ought not to recognize
any distinction. Under Section 74, third paragraph, of the Corporation Code, the only time when the demand
to examine and copy the corporation’s records and minutes could be refused is when the corporation puts up
as a defense to any action that “the person demanding” had “improperly used any information secured
through any prior examination of the records or minutes of such corporation or of any other corporation, or
was not acting in good faith or for a legitimate purpose in making his demand.” The right of the shareholder
to inspect the books and records of the petitioner should not be made subject to the condition of a showing
of any particular dispute or of proving any mismanagement or other occasion rendering an examination
proper, but if the right is to be denied, the burden of proof is upon the corporation to show that the purpose
of the shareholder is improper, by way of defense. [Terelay Investment and Development Corporation v. Yulo,
G.R. No. 160924, August 5, 2015]

69. Which court has jurisdiction over a stockholders’ suit to enforce the right of inspection under Sec.
74 of the Corporation Code, and an election contest in the same corporation, when the corporation
involved is a sequestered corporation under the PCGG, and majority of its directors are now PCGG
nominees?

It is the RTC and not the Sandiganbayan has jurisdiction over cases which do not involve a sequestration-
related incident but an intra-corporate controversy. Originally, Sec. 5 of Presidential Decree (P.D.) No. 902-A
vested the original and exclusive jurisdiction over intra-corporate disputes.

However, upon the enactment of The Securities Regulation Code, effective on August 8, 2000, the jurisdiction
of the SEC over intra-corporate controversies and the other cases enumerated in Section 5 of P.D. No. 902-A
was transferred to the Regional Trial Court pursuant to Sec. 5.2 of the law. To implement the said law, the
Supreme Court promulgated its resolution of November 21, 2000 in A.M. No. 00-11-03-SC designating certain
branches of the RTC to try and decide the cases enumerated in Sec. 5 of P.D. No. 902-A. On March 13, 2001,
the Supreme Court adopted and approved the Interim Rules of Procedure for Intra-Corporate Controversies
under Republic Act No. 8799 in A.M. No. 01-2-04-SC, effective on April 1, 2001, whose Secs. 1 and Section 2,
Rule 6 state, that the same applies to election contests in both stock and non-stock corporation. It further
defines and election contest as “any controversy or dispute involving title or claim to any elective office in a
stock or non-stock corporation, the validation of proxies, the manner and validity of elections, and the
qualifications of candidates, including the proclamation of winners, to the office of director, trustee or other
officer directly elected by the stockholders in a close corporation or by members of a non-stock corporation
where the articles of incorporation or by-laws so provide.”

Conformably with the above, the RTC has the authority to hear and decide the election contest in the
sequestered corporation. There should be no disagreement that jurisdiction over the subject matter of an
action, being conferred by law, could neither be altered nor conveniently set aside by the courts and the
parties. Moreover, the jurisdiction of the Sandiganbayan has been held not to extend even to a case involving
a sequestered company notwithstanding that the majority of the members of the board of directors were
PCGG nominees. [Abad et al. v. Philippine Communications Satellite Corporation, G.R. No. 200620, March 18,
2015]

70. What happens when an intra-corporate dispute has been properly filed in the official station of the
designated Special Commercial Court but is, however, later wrongly assigned by raffle to a regular
branch of that station?
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The erroneous raffling to a regular branch instead of to a Special Commercial Court is only a matter of
procedure – that is, an incident related to the exercise of jurisdiction – and, thus, should not negate the
jurisdiction which the RTC had already acquired. In such a scenario, the proper course of action is not for the
commercial case to be dismissed; instead, the branch where the case is raffled should first refer the case to
the Executive Judge for re-docketing as a commercial case; thereafter, the Executive Judge should then assign
said case to the only designated Special Commercial Court in the station. Note that the procedure would
be different where the RTC acquiring jurisdiction over the case has multiple special commercial court
branches; in such a scenario, the Executive Judge, after re-docketing the same as a commercial case, should
proceed to order its re-raffling among the said special branches. Meanwhile, if the RTC acquiring jurisdiction
has no branch designated as a Special Commercial Court, then it should refer the case to the nearest RTC with
a designated Special Commercial Court branch within the judicial region. Upon referral, the RTC to which the
case was referred should re-docket the case as a commercial case, and then: (a) if the said RTC has only one
branch designated as a Special Commercial Court, assign the case to the sole special branch; or (b) if the said
RTC has multiple branches designated as Special Commercial Courts, raffle off the case among those
special branches. In all the above-mentioned scenarios, any difference regarding the applicable docket fees
should be duly accounted for. On the other hand, all docket fees already paid shall be duly credited, and any
excess, refunded. [Gonzales v. GJH Land, Inc., G.R. No. 202664, November 10, 2015]

71. Can the remedy of annulment of judgment under Rule 47 of the Rules of Court be used to set aside
a judgment in an intra-corporate dispute?

It depends on when the intra-corporate dispute was filed. If the dispute was filed when the SEC still had
jurisdiction over such disputes, then annulment of judgment cannot be used. Annulment of judgment is a
remedy applicable only to judgments rendered by Regional Trial Courts. However, upon effectivity of the
Securities Regulation Code of 2000 (RA No. 8799), annulment of judgment is now a proper remedy since the
law transferred the jurisdiction of intra-corporate disputes to regional trial courts designated as commercial
courts. As to the latter, Rule 47 clearly applies. [Imperial v. Armes, G.R. No. 178842, Cruz v. Imperial, G.R. No.
195509, January 30, 2017]

72. A complaint for injunction and damages was filed by ADC Corp against AHV Association and its
president. This arose as ADC alleged that AHV Association constructed a multi-purpose hall and
swimming pool on one of the parcels of land owned by ADC which were to be sold without its
consent and approval. However, its SEC registration had been revoked more than three years prior
to the institution of the action. Can it still file the instant case?

No. It is to be noted that the time during which the corporation, through its own officers, may conduct the
liquidation of its assets and sue and be sued as a corporation is limited to three years from the time the period
of dissolution commences; but there is no time limit within which the trustees must complete a liquidation
placed in their hands. It is provided only that the conveyance to the trustees must be made within the three-
year period. It may be found impossible to complete the work of liquidation within the three-year period or
to reduce disputed claims to judgment. Suits by or against a corporation abate when it ceased to be an entity
capable of suing or being sued; but trustees to whom the corporate assets have been conveyed pursuant to
the authority of Sec. 122 may sue and be sued as such in all matters connected with the liquidation. Still in the
absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not
only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make
proper representations with the SEC, which has primary and sufficiently broad jurisdiction in matters of this
nature, for working out a final settlement of the corporate concerns. The trustee of a corporation may
continue to prosecute a case commenced by the corporation within three years from its dissolution until
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rendition of the final judgment, even if such judgment is rendered beyond the three-year period allowed by
Sec. 122 of the Corporation Code. However, there is no prohibition against an already defunct corporation to
initiate a suit after the lapse of the said three-year period. [Alabang Development Corporation v. Alabang Hills
Village Association and Rafael Tinio, G.R. No. 187456, June 2, 2014]

73. R, president of BMTODA, an association duly registered with the SEC, and S, the corporate secretary,
were sued by O, one of its members, for refusal to furnish him copies of the records of the said
association. It was found during trial that the SEC registration of BMTODA was revoked on
September 30, 2003, but such revocation was lifted on August 30, 2004. The letter of O requesting
for inspection of corporate records was received by S on September 23, 2004. Can the case proceed
against R and S?

Yes. It is clearly stated that O was a member of the association at the time of his request, and thus had a right
to examine the records and documents pertaining to the association. Likewise, the request was received by S
after the revocation of BMTODA’s registration was lifted. In any case, the revocation of a corporation's
Certificate of Registration does automatically warrant the extinction of the corporation itself such that its
rights and liabilities are likewise altogether extinguished. The termination of the life of a juridical entity does
not, by itself, cause the extinction or diminution of the rights and liabilities of such entity nor those of its
owners and creditors. Thus, the revocation of BMTODA's registration does not automatically strip off O of his
right to examine pertinent documents and records relating to such association.

To prove violation of Sec. 74 on refusal to allow inspection of corporate records, it is necessary that: (1) a
director, trustee, stockholder or member has made a prior demand in writing for a copy of excerpts from the
corporations records or minutes; (2) any officer or agent of the concerned corporation shall refuse to allow
the said director, trustee, stockholder or member of the corporation to examine and copy said excerpts; (3) if
such refusal is made pursuapt to a resolution or order of the board of directors or trustees, the liability under
this section for such action spall be imposed upon the directors or trustees who voted for such refusal;· and (
4) where the officer or agent of the corporation sets up the defense that the person demanding to examine
and copy excerpts from the corporation's records and minutes has improperly used any information secured
through any prior examination of the records or minutes of such corporation or of any other corporation, or
was not acting in good faith or for a legitimate purpose in making his demand, the contrary must be shown or
proved. All such requisites are present in the instant case. [Roque v. People, G.R. No. 211108, June 7, 2017]

74. Can a corporation, which has defaulted on its debts, still file a petition for rehabilitation under the
Interim Rules of Procedure on Corporate Rehabilitation?

Yes. A corporation that may seek corporate rehabilitation is characterized not by its debt but by its capacity
to pay this debt. The purpose of rehabilitation, which is to provide meritorious corporations an opportunity
for recovery. There is no reason why corporations with debts that may have already matured should not be
given the opportunity to recover and pay their debtors in an orderly fashion. The opportunity to rehabilitate
the affairs of an economic entity, regardless of the status of its debts, redounds to the benefit of its creditors,
owners, and to the economy in general. Rehabilitation, rather than collection of debts from a company already
near bankruptcy, is a better use of judicial rewards. The condition that triggers rehabilitation proceedings is
not the maturation of a corporation's debts but the inability of the debtor to pay these. [Metropolitan Bank
and Trust Company v. Liberty Corrugated Boxes, G.R. No. 184317, January 25, 2017]

75. INC, a religious corporation, had been in existence since 1914. Has its corporate term expired in line
with the provisions of the Corporation Code?
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No. Religious corporations may be allowed to exist perpetually. While the Corporation Code has specific
provisions for religious corporations, set out in Title XIII on Special Corporations, particularly Secs. 110 and
116, both of which do not provide for a term of existence for religious corporations, whether classified as a
corporation sole or religious society. The law never intended to limit the corporate life of religious
corporations, hence, they may be allowed to exist perpetually. Religious corporations may limit their corporate
term by providing a specific term in their articles of incorporation. However, absent such specification, it shall
be understood that the corporation intended to exist for an indefinite period. [SEC OGC Opinion No. 14-18, 10
July 2014]

76. What is the corporate term of an educational institution incorporated under the Corporation Code?

The corporate terms of such should also be 50 years in accordance with the provisions of the Corporation
Code. However, if the corporation was incorporated under the older Corporation Law, which did not require
a maximum corporate term for corporations, then they should amend their articles of incorporation to comply
with the applicable provisions of the Corporation Code on or before May 1, 1982, the expiry date of the two
(2) year period granted to such corporations to amend their articles, the SEC will consider the provisions of
the latter law as written into the articles of incorporation as of May 1, 1980, the date of effectivity of the
Corporation Code." Hence, the 50-year period should be counted from 01 May 1980, in accordance with the
Corporation Code. The 50-year period should not be counted from the date of registration as this would
adversely affect the operations of pre-war schools which were established more than 50 years from the date
of effectivity of the Corporation Code since it would result in the dissolution of said corporations as the 50-
year period had already lapsed. [SEC-OGC Opinion No. 13-05, 24 April 2013]

Thus, in case an affected educational corporation fails to amend its articles of incorporation to comply with
the applicable provisions of the Corporation Code on or before May 1, 1982, the expiry date of the two (2)
year period mentioned in Sec. 148, the respective provisions will be considered written into the articles of
incorporation as of the date of the effectivity of the Corporation Code, or on May 1, 1980. [SEC OGC Opinion
No. 16-24, October 13, 2016; SEC OGC Opinion No. 13-01, March 21, 2013; SEC Opinion No. 04-03, February
14, 2003; SEC Opinion dated September 25, 1990]

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SECURITIES REGULATION CODE (R.A. NO. 8799)

1. A complaint was filed by joint account holders, G, T, and L, against Citibank NA and its officials for
violation of the Revised Securities Act (RSA) and the Securities Regulation Code. It was alleged that
G, T, and L were induced by the bank’s VP and Director to sign a subscription agreement to purchase
income notes. Later on, they were again made to purchase other income notes. They found out that
the investments declined and that the notes were not registered with the SEC in accordance with
the law. Citibank and its officials alleged that the action had already prescribed. What is the
prescriptive period applicable in the instant case?

The SRC does not provide for a prescriptive period for the enforcement of criminal liability, thus, RA 3362
would come into play. Under Sec. 73 of the SRC, violation of its provisions or the rules and regulations is
punishable with imprisonment of not less than seven (7) years nor more than twenty-one (21) years. Applying
Sec. 1 of RA No.3326, a criminal prosecution for violations of the SRC shall, therefore, prescribe in twelve (12)
years.

Hand in hand with Sec. 1, Sec. 2 of RA No. 3326 states that "prescription shall begin to run from the day of the
commission of the violation of the law, and if the same be not known at the time, from the discovery thereof
and the institution of judicial proceedings for its investigation and punishment." [Citibank N.A. v. Tanco-
Gabaldon, G.R. No. 198444, September 4, 2013]

2. What is the nature of the power of the SEC to revoke registration of securities and to allow them to
be sold to the public under the SRC?

The revocation of registration of securities and permit to sell them to the public is not an exercise of the SEC's
quasi-judicial power, but of its regulatory power. A "quasi-judicial function" is a term which applies to the
action, discretion, etc., of public administrative officers or bodies, who are required to investigate facts, or
ascertain the existence of facts, hold hearings, and draw conclusions from them, as a basis for their official
action and to exercise discretion of a judicial nature. Although the SRC requires due notice and hearing before
issuing an order of revocation, the SEC does not perform such quasi-judicial functions and exercise discretion
of a judicial nature in the exercise of such regulatory power. It neither settles actual controversies involving
rights which are legally demandable and enforceable, nor adjudicates private rights and obligations in cases
of adversarial nature. Rather, when the SEC exercises its incidental power to conduct administrative hearings
and make decisions, it does so in the course of the performance of its regulatory and law enforcement
function. [SEC v. Universal Rightfield Property Holdings, G.R. No. 181381, July 20, 2015]

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TRANSPORTATION LAWS

1. M. Corp. and MT Corp. entered into an agreement whereby the latter bought several buses from
the former, but M Corp. would retain ownership of the buses until certain conditions are met.
Meanwhile MT Corp. would operate the buses in Metro Manila. One of the buses however met an
accident causing damage and injury to R and J. R and J sued M Corp. for damages. M Corp. denied
liability alleging that though it is still the owner of the bus, the actual operator and employer of the
bus driver involved in the accident was that of MT Corp. Who should be held liable?

M Corp. cannot escape liability. This is because of the registered-owner rule, whereby the registered owner
of the motor vehicle involved in a vehicular accident could be held liable for the consequences. The
registered-owner rule has remained good law in this jurisdiction. But, although the registered-owner rule
might seem to be unjust towards M Corp., the law did not leave it without any remedy or recourse. M Corp.
could recover from MT Corp, the actual employer of the negligent driver, under the principle of unjust
enrichment, by means of a cross-claim seeking reimbursement of all the amounts that it could be required to
pay as damages arising from the driver’s negligence. A cross-claim is a claim by one party against a co-party
arising out of the transaction or occurrence that is the subject matter either of the original action or of a
counterclaim therein, and may include a claim that the party against whom it is asserted is or may be liable to
the cross-claimant for all or part of a claim asserted in the action against the cross-claimant. [Metro Manila
Transit Corporation v. Cuevas, G.R. No. 167797, June 15, 2015]

2. What is a Transportation Network Company (TNC)?

A transportation network company (TNC) is an organization, whether a corporation, partnership, or sole


proprietor, that provides pre-arranged transportation services for compensation using an internet-based
technology application or digital platform technology to connect passengers with drivers using their personal
vehicles. They are treated as transport providers, provising transportation network vehicle services (TNVS). A
Certificate of TNC Accreditation, valid for 2 years from issuance, will be issued by the LTFRB to TNCs. [LTFRB
Memorandum Circular No. 2015-015-A, October 23, 2017; DOTr Department Order No. 2015-011, May 8, 2015;
California Public Utilities Commission definition]

They may then apply for a Certificate of Public Convenience (CPC) to operate a TNVS with the LTFRB, which,
when issued, will be valid for 2 years,. Note that one of the terms and conditions attached to the CPC is “the
accountability of the TNVS, as a common carrier, attaches from the time the TNVS is online and offers its
services to the riding public.” The operator of the vehicle should always remain in good standing with the TNC,
since the CPC may be revoked if the operator’s accreditation with the TNC is revoked, or when if the Certificate
of Accreditation of the TNC is revoked by the LTRFB. [LTFRB Memorandum Circular No. 2015-018-A, October
23, 2017]

A TNC is a pool of land transportation vehicles whose accessibility to the riding public is facilitated through the
use of a common point of contact which may be in the form of text, telephone, and/or cellular calls, email,
mobile applications or other means. The payment of fares by the passenger/s may be made through the same
platform or may be made to the driver of the vehicle directly and may be paid for in cash, debit card, credit
card, mobile payment, or any other mode of payment. The vehicles used in transporting passenger and/or
goods in the TNC may be owned by other people and/or entities other than the TNC, and shall be referred to
as “Partners.” Payments between and among their partners, may take the form of either (1) the TNC paying
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its Partner/s a portion of the proceeds it receives from its customers, or (2) the Partner/s paying the TNC an
amount out of each contract of carriage received from its customers, in accordance with the rate agreed upon
between the TNC and the Partner. The vehicles in the pool may either be owner-driven or driven by employees
of the owner/partner. [Revenue Memorandum Circular No. 70-2015, October 29, 2015]

3. What is the degree of diligence required of TNCs?

TNCs shall exercise due diligence of a good father of a family in accrediting and supervising drivers. The TNC
shall be held liable for acts or omissions committed by its TNVS while online, except if the same is beyond the
TNC’s control. [LTFRB Memorandum Circular No. 2015-018-A, October 23, 2017]

4. What is a Bus Rapid transit (BRT)?

Bus Rapid Transit (BRT) is a high quality bus-based public transport system that is able to achieve shorter travel
times and high passenger volume, based on use of segregated public transport lanes, electronic fare payment
systems, and stations and vehicles designed for fast boarding and alighting. [DOTr Department Order No. 2015-
011, May 8, 2015]

5. N Corp. shipped goods to UMC from Japan to Manila. The goods were insured by P Insurance against
all risks. When they arrived in Manila, it was found that one package was in bad order. UMC declared
the damaged goods as a total loss. P insurance paid UMC for the loss, and filed a complaint against
N Corp. and the brokers. The goods were delivered to UMC on May 12, 1995, and it filed a bad order
survey on that same day. P then filed an action to claim damages for the loss of the goods on January
18, 1996. Has the action prescribed?

No. The prescriptive period for filing an action for the loss or damage of the goods under the COGSA is found
in paragraph (6), Sec. 3. Under the said provision, notice of loss or damage should first be given in writing to
the carrier or his agent at the port of discharge before or at the time of the removal of the goods for delivery
to the person entitled to the said delivery under the contract of carriage. If the loss or damage is not apparent,
the notice must be given within three days from the delivery. But, the notice in writing need not be given if
the state of the goods has at the time of their receipt been the subject of joint survey or inspection. To hold
the carrier and ship liable for the loss or damage, action must be commenced with in the prescriptive period
of one year after delivery of the goods or the date when the goods should have been delivered. The same
provision however provides that lack of notice of loss or damage does not affect or prejudice the right of the
shipper to bring suit within one year after the delivery of the goods or the date when the goods should have
been delivered.

In the instant case, N Corp. is the seller while UMC is the buyer. Hence, the latter, as the buyer of the goods,
should be regarded as the person entitled to delivery of the goods. Accordingly, for purposes of reckoning
when notice of loss or damage should be given to the carrier or its agent, the date of delivery to UMC is
controlling.

A request for, and the result of a bad order examination, done within the reglementary period for furnishing
notice of loss or damage to the carrier or its agent, serves the purpose of a claim. A claim is required to be
filed within the reglementary period to afford the carrier or depositary reasonable opportunity and facilities
to check the validity of the claims while facts are still fresh in the minds of the persons who took part in the
transaction and documents are still available. Here, UMC filed a request for bad order survey on May 12, 1995,
even before all the packages could be unloaded to its warehouse.
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Moreover, paragraph (6), Sec. 3 of the COGSA clearly states that failure to comply with the notice requirement
shall not affect or prejudice the right of the shipper to bring suit within one year after delivery of the goods.
The insurer, as subrogee of UMC, filed the Complaint for damages on January 18, 1996, just a little over eight
months after all the packages were delivered to its possession on May 12, 1995. Evidently, the action was
seasonably filed. [Asian Terminals, Inc. v. Philam Insurance Co., Inc. (now Chartis Philippines Insurance Inc.)/
Philam Insurance Co., Inc. (now Chartis Philippines Insurance Inc.) v. Westwind Shipping Corporation and Asian
Terminals, Inc./ Westwind Shipping Corporation v. Philam Insurance Co., Inc. and Asian Terminals, Inc., G.R.
Nos. 181163/181262/181319, July 24, 2013]

6. Are insurer-subrogees bound by prescriptive periods fixed by Management Contracts and Gate
Passes of the arrastre operators?

Yes. The fact that the insurer-subrogee is not a party to the Gate Pass and the Management Contract does not
mean that it cannot be bound by their provisions. The insurer is subrogated to the rights of the consignee
simply upon its payment of the insurance claim. As subrogee, the insurer may only exercise those rights that
the consignee may have against the wrongdoer who caused the damage. It can recover only the amount that
is recoverable by the assured. And since the right of action of the consignee is subject to a precedent condition
stipulated in the Gate Pass, which includes by reference the terms of the Management Contract, necessarily a
suit by the insurer is subject to the same precedent condition. [Oriental Assurance Corporation v. Manuel Ong,
G.R. No. 189524, October 11, 2017]

7. S Corp. shipped goods on board a vessel owned by E Shipping, to be delivered to the consignee, C
Steel. The goods were insured by MS Insurance. The shipment arrived in Manila, but it was found
that some of the goods were in bad condition. When delivered to C Steel, the latter rejected the
goods as being unfit for their intended purpose. S Corp thereafter shipped another batch of goods
under similar circumstances, which, upon arrival in Manila, were also found to be in bad order.
Again, C Steel rejected the goods. C Steel was paid by MS Insurance for the damage to the goods,
and thus, MS Insurance filed an action for damages against E Shipping and the stevedore. Can E
Shipping be held liable?

Yes. It is settled in maritime law jurisprudence that cargoes while being unloaded generally remain under the
custody of the carrier. Based on the facts presented, the goods were damaged while in the custody of E
shipping. Thus, it bears stressing unto E Shipping that common carriers, from the nature of their business and
for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods
transported by them. Subject to certain exceptions enumerated under Article 1734 of the Civil Code, common
carriers are responsible for the loss, destruction, or deterioration of the goods. The extraordinary
responsibility of the common carrier lasts from the time the goods are unconditionally placed in the possession
of, and received by the carrier for transportation until the same are delivered, actually or constructively, by
the carrier to the consignee, or to the person who has a right to receive them. Owing to this high degree of
diligence required of them, common carriers, as a general rule, are presumed to have been at fault or negligent
if the goods they transported deteriorated or got lost or destroyed. That is, unless they prove that they
exercised extraordinary diligence in transporting the goods. In order to avoid responsibility for any loss or
damage, therefore, they have the burden of proving that they observed such high level of diligence. In this
case, E Shipping failed to hurdle such burden. [Eastern Shipping Lines v. BPI/MS Insurance Corporation, G.R.
No. 193986, 15 January 2014]

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8. L and E sent several checks to their cousin in New York, through FedEx. However, their cousin never
received their checks. Since the checks were sent to pay for the real estate taxes on their condo unit
in New York, the said unit was foreclosed because of non-payment of taxes. Upon inquiry of L and
E, FedEx said that the checks were delivered to their cousin’s neighbor, but no signed receipt of
deliver could be presented. They thus demanded payment of damages in writing from FedEx, but
the same was refused. This prompted them to file an action in court to seek payment of damages.
FedEx claims that L and E cannot seek payment as they failed to comply with a provision in their
contract of carriage that claimants should first file a written notice of claim for non-delivery or
misdelivery within 45 days from acceptance of delivery, and thereafter, court action should be filed
within 2 years from date of delivery. Can FedEx be held liable?

Yes. There was substantial compliance with the requirements under the contract of carriage. Part of the
extraordinary responsibility of common carriers is the duty to ensure that shipments are received by none but
the person who has a right to receive them. Failing to deliver shipment to the designated recipient amounts
to a failure to deliver. The shipment shall then be considered lost, and liability for this loss ensues. FedEx is
unable to prove that it exercise extraordinary diligene in ensuring delivery of the package to its designated
consignee. It claims to have made delivery but it even admits that it was not to the designated consignee. It
asserts instead that it was authorized to release the package without the signature of the designated recipient
and that the neighbor of the consignee, received it. Thus, it failed to exercise the due diligence required of it
for which it may be held liable. [Federal Corporation v. Luwalhati Antonio, G.R. No. 199455, June 27, 2018]

9. A shipped soybean meal on board a chartered vessel M/V C to consignees in the Philippines. While
the soybean meal was being unloaded, the unloader hit a steel bar in the middle of the soybean,
causing two of the screws of the unloader to break off. The arrastre operator, owner of the
unloader, claimed for damages from the ship owner and the shipping agent, but was rejected. This
being the case, the claim was brought to court. Can they be held liable by the arrastre operator for
the damage sustained by the unloader?

Yes. The ship owner and the ship agent are liable to the arrastre operator on the basis of quasi-delict, and not
breach of contract, there being no contractual relation between them. The arrastre operator’s contractual
relation is not with the ship owner and ship agent, but with the consignee of the goods shipped and with the
Philippine Ports Authority (PPA). They may be held liable in view of Article 2176 of the Civil Code, which
provides “[w]hoever by act or omission causes damage to another, there being fault or negligence, is obliged
to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between
the parties, is called a quasi-delict and is governed by the provisions of this Chapter.” And, by the failure of the
ship owner and the ship agent to explain the circumstances that attended the accident, when knowledge of
such circumstances is accessible only to them, they failed to overcome the prima facie presumption that the
accident arose from or was caused by their negligence or want of care. The res ipsa loquitur doctrine is based
in part upon the theory that the defendant in charge of the instrumentality which causes the injury either
knows the cause of the accident or has the best opportunity of ascertaining it and that the plaintiff has no
such knowledge, and therefore is compelled to allege negligence in general terms and to rely upon the proof
of the happening of the accident in order to establish negligence. The prima facie evidence of the ship owner
and ship agent’s negligence, being unexplained and uncontroverted, is sufficient to maintain the proposition
affirmed. Hence, the negligence of the Master of the Vessel is conclusively presumed to be the proximate
cause of the damage sustained by the unloader. Moreover, since the Master’s liability is ultimately that of the
shipowner because he is the representative of the shipowner, the shipowner and its agents are solidarily liable
to pay the arrastre operator the amount of damages actually proved. [Unknown Owner of M/V China Joy v.
Asian Terminals, G.R. No. 195661, March 11, 2015]
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10. S Corp. shipped steel sheets to Manila for CS, the consignee, on board E’s vessel. The steel sheets
arrived in Manila, and were turned over to the arrastre operator for safe keeping, but when
withdrawn, they were found to have been damaged, prompting the consignee to reject the entire
shipment. Another shipment of steel was made by S Corp. for the same consignee on board another
vessel owned by E. but, when the sheets arrived in Manila, they were damaged, and sustained
further damage upon discharge from vessel. Thus, the consignee again rejected them. The consignee
was able to recover from the cargo insurers, who then sought to recover damages from the E. E
argued that as the carrier, his liability was limited to $500.00 per package, since the bills of lading
covering the damaged goods did not state the value of the cargo, but only made reference to
invoices. The invoices, in turn, specified the value of the cargoes and bore the notation “Freight
Prepaid” and “As Arranged.” Is E correct?

No. Both Bills of Lading complied with the requirements provided by the COGSA. The bills of lading represent
the formal expression of the parties’ rights, duties and obligations. It is the best evidence of the intention of
the parties which is to be deciphered from the language used in the contract, not from the unilateral post
facto assertions of one of the parties, or of third parties who are strangers to the contract. Thus, when the
terms of an agreement have been reduced to writing, it is deemed to contain all the terms agreed upon and
there can be, between the parties and their successors in interest, no evidence of such terms other than the
contents of the written agreement.

The declaration requirement does not require that all the details must be written down on the very bill of
lading itself. It must be emphasized that all the needed details are in the invoice, which “contains the itemized
list of goods shipped to a buyer, stating quantities, prices, shipping charges,” and other details which may
contain numerous sheets. Compliance can be attained by incorporating the invoice, by way of reference, to
the bill of lading provided that the former containing the description of the nature, value and/or payment of
freight charges is as in this case duly admitted as evidence. [Eastern Shipping Lines v. BPI/MS Insurance Corp.,
G.R. No. 182864, January 12, 2015]

11. Chillies Export House turned over to APL Co. 250 bags of chili pepper to be shipped from India to
Manila, the consignee being BSFIL, and were insured with P Insurance. he shipment arrived at the
port of Manila and was temporarily stored at North Harbor, Manila. Upon arrival in Manila, the bags
of chili were withdrawn and delivered to BSFIL. Upon receipt thereof, it discovered that 76 bags
were wet and heavily infested with molds. The shipment was declared unfit for human consumption
and was eventually declared as a total loss. As a result, BSFIL made a formal claim against APL and
P Insurance. The latter hired an independent insurance adjuster, which found that the shipment
was wet because of the water which seeped inside the container van APL provided. P Insurance thus
paid BSFIL P195,505.65 after evaluating the claim. Having been subrogated to all the rights and
cause of action of BSFIL, P Insurance sought payment from APL, but the latter refused. This
prompted P Insurance to file a complaint for sum of money against APL. APL contends that the Bill
of Lading states that suit should be brought in case of damage to the goods within 9 months from
delivery, and since the case was brought beyond the said period, it claims that it can no longer be
held liable. But the Bill of lading states that the period applies, unless there is a law to the contrary.
Is the claim barred by the 9-month period provided in the Bill of Lading?

No. A reading of the Bill of Lading between the parties reveals that the nine-month prescriptive period is not
applicable in all actions or claims. As an exception, the nine-month period is inapplicable when there is a
different period provided by a law for a particular claim or action. Thus, it is readily apparent that the exception
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under the Bill of Lading became operative because there was a compulsory law applicable which provides for
a different prescriptive period. The present case involves lost or damaged cargo. It has long been settled that
in case of loss or damage of cargoes, the one-year prescriptive period under the COGSA applies. Hence, strictly
applying the terms of the Bill of Lading, the one-year prescriptive period under the COGSA should govern
because the present case involves loss of goods or cargo. [Pioneer Insurance and Surety Corporation v. APL Co.
Pte. Ltd., G.R. No. 226345, August 2, 2017]

12. In actions involving insurance claims filed by insurance companies as subrogees, should the
insurance policy be presented in evidence?

Yes. As a general rule, the marine insurance policy needs to be presented in evidence before the insurer may
recover the insured value of the lost/damaged cargo in the exercise of its subrogatory right. The presentation
of the contract constitutive of the insurance relationship between the consignee and insurer is critical because
it is the legal basis of the latter's right to subrogation. Nevertheless, the rule is not inflexible. In certain
instances, the Court has admitted exceptions by declaring that a marine insurance policy is dispensable
evidence in reimbursement claims instituted by the insurer. For one, in case of subrogation, the subrogation
receipt may be presented, which, by itself, has been held sufficient to establish not only the relationship
between the insurer and consignee, but also the amount paid to settle the insurance claim. [Asian Terminals
v. First Lepanto-Taisho, G.R. No. 85964, 16 June 2014; Equitable Insurance Corporation v. Transmodal
International Inc., G.R. No. 223592, August 7, 2017]

13. What is the effect of a time charter entered into by a carrier who also does business as a common
carrier?

If the intent of the parties to the time charter, as evidenced by their agreement itself, appears to be that they
had intended that they enter into a bareboat agreement, such that control not only of the ship but also of the
entire crew is transferred, then the common carrier would be converted into a private carrier. [Federal Phoenix
Assurance v. Fortune Sea Carrier, G.R. No. 188118, November 23, 2015]

14. DBI is a local company producing housewares and handicraft items for export. A Corp., a foreign
company, ordered 223 cartons of assorted wooden items from DBI, worth $12,590.87. It designated
ACCLI as the forwarding agent that will ship out its order from the Philippines to the US. ACCLI is a
domestic corporation acting as agent of ASTI, a US based corporation engaged in carrier transport
business, in the Philippines. Due to A Corp.’s order, DBI delivered the goods to ACCLI for sea
transport from Manila for delivery in the US, with ACCLI issuing a bill of lading to DBI. The Bill of
Lading contained a provision which states: “if required by the Carrier this Bill of Lading duly
endorsed must be surrendered in exchange for the Goods of delivery order.” The original copies
of the bill of lading were kept by DBI pending payment from A Corp. A Corp and ASTI then entered
into an indemnity agreement whereby A Corp. obligated ASTI to deliver the shipment to it or to its
order “without the surrender of the relevant bill(s) of lading due to the non-arrival or loss
thereof.” In exchange, A Corp. undertook to indemnify and hold ASTI and its agent free from any
liability as a result of the release of the shipment. Thereafter, ASTI released the shipment to A Corp.
without the knowledge of DBI, and without it receiving payment for the total cost of the shipment.
DBI then made several demands for payment of the goods, but A Corp. failed to pay, causing DBI to
file a case against ASTI, ACCLI, and ACCLI’s incorporators-stockholders for payment of the sum
corresponding to the value of the goods. Can ASTI and ACCLI may be held solidarily liable to DBI for
the value of the shipment?

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No, since only A Corp., as the buyer of the goods, has the obligation to pay for their value. Under the Bill of
Lading and the pertinent law and jurisprudence, ASTI and ACCLI are not liable to DBI. A bill of lading is
defined as “a written acknowledgment of the receipt of goods and an agreement to transport and to deliver
them at a specified place to a person named or on his order.” It may also be defined as “an instrument in
writing, signed by a carrier or his agent, describing the freight so as to identify it, stating the name of the
consignor, the terms of the contract of carriage, and agreeing or directing that the freight be delivered to
bearer, to order or to a specified person at a specified place. Under Article 350 of the Code of Commerce, “the
shipper as well as the carrier of the merchandise or goods may mutually demand that a bill of lading be made.”
A bill of lading, when issued by the carrier to the shipper, is the legal evidence of the contract of carriage
between the former and the latter. It defines the rights and liabilities of the parties in reference to the contract
of carriage. The stipulations in the bill of lading are valid and binding unless they are contrary to law, morals,
customs, public order or public policy. In this case, ACCLI issued the Bill of Lading as agent of ASTI, which bill
governs the rights, obligations, and liabilities of DBI and ASTI. And, the language of the bill of lading shows no
requirement that the Bill of Lading must first be produced before delivery to consignee. There is no obligation,
therefore, on the part of ASTI and ACCLI to release the goods only upon the surrender of the original bill of
lading. Further, a carrier is allowed by law to release the goods to the consignee even without the latter’s
surrender of the bill of lading. Though the general rule is that upon receipt of the goods, the consignee
surrenders the bill of lading to the carrier and their respective obligations are considered canceled, the law,
however, provides two exceptions where the goods may be released without the surrender of the bill of lading
because the consignee can no longer return it. These exceptions are when the bill of lading gets lost or for
other cause. In either case, the consignee must issue a receipt to the carrier upon the release of the
goods. Such receipt shall produce the same effect as the surrender of the bill of lading. Non-surrender of the
original bill of lading does not violate the carrier’s duty of extraordinary diligence over the goods. Here, A Corp.
could not produce the bill of lading covering the shipment not because it was lost, but for another cause: the
bill of lading was retained by DBI pending A Corp.’s full payment of the shipment. A Corp. and ASTI then
entered into an Indemnity Agreement, wherein the former asked the latter to release the shipment even
without the surrender of the bill of lading. The execution of this Agreement, and the undisputed fact that the
shipment was released to A Corp. pursuant to it, operates as a receipt in substantial compliance with the last
paragraph of Article 353 of the Code of Commerce. The contract between DBI and ASTI is a contract of
carriage of goods; hence, ASTI’s liability should be pursuant to that contract and the law on transportation of
goods. Not being a party to the contract of sale between DBI and A Corp., ASTI cannot be held liable for the
payment of the value of the goods sold. And since ACCLI is merely an agent of ASTI, it likewise cannot be
held liable. [Designer Baskets v. Air Sea Transport, G.R. No. 184513, March 9, 2016]

15. R made travel reservations with S Travel for his family’s trip to Australia. Upon booking and
confirmation of his flight schedule, R paid the airfare and was issued Cathay Pacific round-trip plane
tickets for Manila-HongKong-Adelaide-HongKong-Manila. Their flight to Australia went smoothly.
Before the flight back to Manila, R called the airline to the reconfirm his booking, during which call
he was told that the reservation was still OK as scheduled. When R and his family were at the airport
to catch the flight back to Manila, they were informed by S Travel that they did not have confirmed
reservations. Cathay, however, said that S Travel failed to input the ticket numbers of R, and made
fictitious bookings for the other members of R’s family. Thus, they were not allowed to board the
plane, and they were forced to take another flight the next day. Upon finally arriving in Manila, R
was informed that it was Cathay that cancelled the bookings. A complaint for damages was filed
against Cathay and S Travel. Can Cathay and S Travel be held liable?

Yes, both may be held liable. To determine whether an award of damages is correct depends on the nature of
R’s contractual relations with Cathay Pacific and S Travel. The cause of action against Cathay Pacific stemmed
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from a breach of contract of carriage. A contract of carriage is defined as one whereby a certain person or
association of persons obligate themselves to transport persons, things, or news from one place to another
for a fixed price. Under Art. 1732 of the Civil Code, this "persons, corporations, firms, or associations engaged
in the business of carrying or transporting passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public" is called a common carrier.

R and his family entered into a contract of carriage with Cathay Pacific. As far as R and his family are concerned,
they were holding valid and confirmed airplane tickets. The ticket in itself is a valid written contract of carriage
whereby for a consideration, Cathay Pacific undertook to carry respondents in its airplane for a round-trip
flight from Manila to Adelaide, Australia and then back to Manila. In fact, R called the Cathay Pacific office
before his return flight to re-confirm his booking, and was assured that the “reservation was OK as scheduled.”
Cathay Pacific breached its contract of carriage with R and his family when it disallowed them to board the
plane to go back to Manila on the date reflected on their tickets. Thus, Cathay Pacific opened itself to claims
for compensatory, actual, moral and exemplary damages, attorney’s fees and costs of suit.

In contrast, the contractual relation between S Travel and R is a contract for services. The object of the contract
is arranging and facilitating the latter’s booking and ticketing. It was even S Travel which issued the tickets.
Since the contract between the parties is an ordinary one for services, the standard of care required of
respondent is that of a good father of a family under Art. 1173 of the Civil Code. This connotes reasonable care
consistent with that which an ordinarily prudent person would have observed when confronted with a similar
situation. The test to determine whether negligence attended the performance of an obligation is: did the
defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent
person would have used in the same situation? If not, then he is guilty of negligence. There was indeed failure
on the part of S Travel to exercise due diligence in performing its obligations under the contract of services. It
was established by Cathay Pacific, that S Travel failed to input the correct ticket number for R’s ticket. Cathay
Pacific even asserted that S Travel made two fictitious bookings for the members of R’s family. The negligence
of S Travel renders it also liable for damages. [Cathay Pacific Airways v. Juanita Reyes, et al., G.R. No. 185891,
June 26, 2013]

16. J purchased several roundtrip Manila-Palawan tickets from Cebu Pac for himself and his relatives.
He specified a specific time and date for departure from Manila and for departure from Palawan.
After paying, he received the tickets consisting of 3 pages, and he was only able to check the first
page which contained the appropriate time and date of departure from Manila. J and his relatives
were able to leave Manila, but upon their return, 9 of their companions were not allowed to board
the plane for Manila since they were scheduled for a flight earlier that day. Upon checking the
tickets, they learned that only the first 2 pages had the schedule J specified. They then learned
that their return tickets had been purchased as part of the promo sales of the airline, and the cost
to rebook the flight would be ₱7,000.00 more expensive than the promo tickets. The sum of
the new tickets amounted to ₱65,000.00. for which they tried to pay in US dollars via their US issued
credit card but were told they could only pay in Philippine pesos and in cash. Eventually they were
able to pool together enough cash to pay for 5 tickets, while the other 4 companions were left in
Palawan, all of whom had to wait for J to arrive in Manila to purchase them new tickets. J sent
demand letters to Cebu Pac, but was told that ticketing agents recap the flight details to the
purchaser to avoid erroneous bookings. The recap is given one other time by the cashier. Cebu Pac
stated that according to its records, J was given a full recap and was made aware of the flight
restriction of promo tickets, “which included [the] promo fare being non-refundable.. Not satisfied
J filed a case against Cebu Pac for payment of damages. Can Cebu Pac be held liable?

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No. J’s flight information was not written in fine print. It was clearly stated on the left portion of the ticket
above the passengers’ names. If he had exercised even the slightest bit of prudence, he would have been able
to remedy any erroneous booking. In failing to exercise the necessary care in the conduct of his affairs, J was
without a doubt negligent. Thus, he is not entitled to damages. Section 4 of Department of Transportation
and Communications-Department of Trade and Industry Joint Administrative Order No. 1, Series of 2012,
otherwise known as the Air Passenger Bill of Rights requires airlines to provide the passenger with accurate
information before the purchase of the ticket. The Air Passenger Bill of Rights recognizes that a contract of
carriage is a contract of adhesion, and thus, all conditions and restrictions must be fully explained to the
passenger before the purchase of the ticket. Section 4.4 of the Air Passenger Bill of Rights requires that
“all rebooking, refunding, baggage allowance and check-in policies” must be stated in the tickets. The Air
Passenger Bill of Rights acknowledges that “while a passenger has the option to buy or not to buy the
service, the decision of the passenger to buy the ticket binds such passenger[.]” Thus, the airline is mandated
to place in writing all the conditions it will impose on the passenger. However, the duty of an airline
to disclose all the necessary information in the contract of carriage does not remove the correlative
obligation of the passenger to exercise ordinary diligence in the conduct of his or her affairs. The passenger is
still expected to read through the flight information in the contract of carriage before making his or her
purchase. If he or she fails to exercise the ordinary diligence expected of passengers, any resulting damage
should be borne by the passenger. [Alfredo Manay Jr. v. Cebu Air Inc., G.R. No. 210261, April 4, 2016]

17. F is a frequent flyer of NW Airlines. He flew to LA when, upon arrival, US immigration officers told
him that his return ticket should be validated since there is a discrepancy in the return date. He then
tried to verify the same with the NW Airlines counter, but the person manning the same did not
even look at the ticket, and merely stated that the same had already been used. Refusing to check
even F’s frequent flyer card details, the airline personnel informed the immigration officer that the
return ticket is not valid, thus resulting in F’s 2-hour interrogation by the INS. Because of the
incident, the INS only granted him a 12-day stay in the US instead of his usual 6-month stay. On his
return to Manila, F was able to successfully check in his luggage at the airport, and was given
boarding passes for business class seats and claim stubs for his luggage. Upon reaching the boarding
gate, a NW airlines supervisor stopped him from boarding and insisted on the presentation of a
coupon type paper ticket. F said that he was only issued an electronic ticket which was attached to
his boarding pass, and showed the same to the supervisor. The supervisor refused to acknowledge
the same, and pulled him away from the boarding gate. He was told that if he wanted to board the
plane, he should get his credit card and pay for new tickets, otherwise, his luggage will be off loaded
from the plane. F was then forced to rush to the airline counter to confirm his ticket. Upon reaching
the said desk, he was issued a printed coupon ticket, which he rushed back to the boarding gate to
show the airline supervisor. But, upon reaching the gate, the plane had already left, forcing F to fly
back to Manila the next day. Can the NW airlines be held liable for breach of contract of carriage?

Yes. The actuations of the airline personnel are constitutive of bad faith. They exhibited an indifferent attitude
without due regard for the inconvenience and anxiety F might have experienced. Passengers do not contract
merely for transportation. They have a right to be treated by the carrier's employees with kindness, respect,
courtesy and due consideration. They are entitled to be protected against personal misconduct, injurious
language, indignities and abuses from such employees. So it is, that any rule or discourteous conduct on the
part of employees towards a passenger gives the latter an action for damages against the carrier. [Fernando
v. Northwest Airlines, G.R. No. 212038 & 212043, February 8, 2017]

18. H was the owner-driver of a passenger jeepney which collided with a passenger bus owned by T
Travel and driven by E. Both vehicles were travelling in the same direction when the bus bumped
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the left rear portion of the jeep causing it to ram into an acacia tree, resulting in the death of C, and
serious physical injuries to M. H, M and the heirs of C filed an action for damages against T Travel.
T Travel claimed that it exercised the diligence of a good father of a family in the selection and
supervision of its employee E and further argued that it was H who was driving his passenger
jeepney in a reckless and imprudent manner by suddenly entering the lane of the bus without seeing
to it that the road was clear. In addition, it was alleged that at the time of the incident, H violated
his franchise by travelling along an unauthorized and that the jeepney was overloaded with
passengers, and the deceased, C, was clinging on the back railing of the jeep. The Court found that
both vehicles were not in their authorized routes at the time of the incident, and the bus veered
away from it route as testified to by its conductor. Can T Travel be held liable for damages?

Yes, T Travel should be held liable for damages. “Away from the usual route" is different from being "out of
line." A public utility vehicle can and may veer away from its usual route as long as it does not go beyond its
allowed route in its franchise. Therefore, the bus cannot be considered to have violated the contents of its
franchise. On the other hand, it is indisputable that the jeepney was traversing a road out of its allowed route.
Necessarily, this case is not that of "in pari delicto" because only one party has violated a traffic regulation.
Thus, the presumption arises that a person driving a motor vehicle has been negligent if at the time of the
mishap, he was violating any traffic regulation. However, such may be overturned by evidence to the contrary.
In this case, the proximate cause of the collision is the negligence of the driver of T Travel’s bus. The jeepney
was bumped at the left rear portion. Thus, the ruling, that drivers of vehicles who bump the rear of another
vehicle are presumed to be the cause of the accident, unless contradicted by other evidence, can be applied.
The rationale behind the presumption is that the driver of the rear vehicle has full control of the situation as
he is in a position to observe the vehicle in front of him. Thus, being the owner of the bus and the employer
of the driver, E, T Travel cannot escape liability. Art. 2180, in relation to Art. 2176, of the Civil Code provides
that the employer of a negligent employee is liable for the damages caused by the latter. When an injury is
caused by the negligence of an employee there instantly arises a presumption of the law that there was
negligence on the part of the employer either in the selection of his employee or in the supervision over him
after such selection. The presumption, however, may be rebutted by a clear showing on the part of the
employer that it had exercised the care and diligence of a good father of a family in the selection and
supervision of his employee. Hence, to escape solidary liability for quasi-delict committed by an employee,
the employer must adduce sufficient proof that it exercised such degree of care. In this case, T Travel failed to
do so.

In the selection of prospective employees, employers are required to examine them as to their qualifications,
experience, and service records. On the other hand, due diligence in the supervision of employees includes
the formulation of suitable rules and regulations for the guidance of employees, the issuance of proper
instructions intended for the protection of the public and persons with whom the employer has relations
through his or its employees and the imposition of necessary disciplinary measures upon employees in case
of breach or as may be warranted to ensure the performance of acts indispensable to the business of and
beneficial to their employer. To this, must be added that actual implementation and monitoring of consistent
compliance with said rules should be the constant concern of the employer, acting through dependable
supervisors who should regularly report on their supervisory functions.20 In this case, as shown by the above
findings of the RTC, petitioner was not able to prove that it exercised the required diligence needed in the
selection and supervision of its employee. But, since at the time of the vehicular accident, the jeepney in
violation of its allowed route, hence, the owner and driver of the jeepney likewise, are guilty of negligence.
Thus, T Travel and E, its driver, are liable for 50% of the award of damages, while H is liable for the other 50%.
[Travel & Tours Advisers v. Alberto Cruz, Sr., G.R. No. 199282, March 14, 2016]

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19. C and her daughter were paying passengers on board a jeepney operated by S, and driven by P. She
claimed she was made to sit on an empty beer case at the edge of the rear entrance/exit of the
jeepney with her sleeping child on her lap. And, at an uphill incline in the road, the jeepney slid
backwards because it did not have the power to reach the top. C pushed both her feet against the
step board to prevent herself and her child from being thrown out of the exit, but because the step
board was wet, her left foot slipped and got crushed between the step board and a coconut tree
which the jeepney bumped, causing the jeepney to stop its backward movement. C’s leg was badly
injured and was eventually amputated. C then filed a complaint for breach of contract and damages
against S and P, and prayed for actual damages, loss of income, moral damages, exemplary
damages, and attorney's fees. Can both S and P be held liable?

No. Since, the cause of action is based on a breach of a contract of carriage, the liability of S is direct as the
contract is between him and C. P, being merely the driver of S’s jeepney, cannot be made liable as he is not a
party to the contract of carriage. P was a mere employee of S, who was the operator and owner of the jeepney.
The obligation to carry C safely to her destination was with S. In fact, the elements of a contract of carriage
exited between C and S: consent, as shown when P, as employee of S, accepted C as a passenger when he
allowed C to board the jeepney, and as to C, when she boarded the jeepney; cause or consideration, when C,
for her part, paid her fare; and, object, the transportation of C from the place of departure to the place of
destination. And S, as operator and owner of a common carrier, was required to observe extraordinary
diligence in safely transporting C. When C’s leg was injured while she was a passenger in S’s jeepney, the
presumption of fault or negligence on S’s part arose and he had the burden to prove that he exercised the
extraordinary diligence required of him. This, he failed to do, as it was apparent that the jeepney lacked power
to traverse the inclined route, and C was only given an extension seat, which was not even bolted down to
ensure safety. [Jose Sanico v. Weherlina Colipano, G.R. No. G.R. No. 209969, September 27, 2017]

20. A entered a youth marathon organized and conducted by B, which was manned by volunteers.
During the race and while running the route designated by the organizers, he was ran over by a
passenger jeepney driven by C, as the said route was located beside moving vehicular traffic. A died
as a result of the mishap, prompting his parents to file a case against the organizer and sponsors of
the marathon. Can they be held liable?

Only the organizer, B, can be held liable but not the sponsor of the event. B had a choice on where to stage
the marathon, including the choice of location. Likewise there was patent inadequacy of its personnel to man
the route. In fact, it had no personnel of its own and relied exclusively on mere volunteers. While the level of
trust it had on its volunteers was admirable, the coordination among the cooperating agencies was predicated
on circumstances unilaterally assumed by it. It was obvious that its inaction had been impelled by its belief
that it did not need any action plan because it had been dealing with people who had been manning similar
races for a long period of time. The circumstances of the persons, time and place required far more than what
it undertook in staging the race. Due diligence would have made a reasonably prudent organizer of the race
participated in by young, inexperienced or beginner runners to conduct the race in a route suitably blocked
off from vehicular traffic for the safety and security not only of the participants but the motoring public as
well. Since the marathon would be run alongside moving vehicular traffic, at the very least, B ought to have
seen to the constant and closer coordination among the personnel manning the route to prevent the foreseen
risks from befalling the participants. But this it sadly failed to do. Thus, it was the negligence of B that caused
the death of A despite the intervening negligence of the jeepney driver, C. The negligence of the jeepney
driver, albeit an intervening cause, was not efficient enough to break the chain of connection between the
negligence of the organizer and the injurious consequence suffered by A. An intervening cause, to be
considered efficient, must be "one not produced by a wrongful act or omission, but independent of it, and
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adequate to bring the injurious results. Any cause intervening between the first wrongful cause and the final
injury which might reasonably have been foreseen or anticipated by the original wrongdoer is not such an
efficient intervening cause as will relieve the original wrong of its character as the proximate cause of the final
injury.” A could not be said to have assumed any risk in entering the race, since he could not have appreciated
the risk of being fatally struck by any moving vehicle while running the race. Instead, he had every reason to
believe that the organizer had taken adequate measures to guard all participants against any danger from the
fact that he was participating in an organized marathon. Without question, a marathon route safe and free
from foreseeable risks was the reasonable expectation of every runner participating in an organized running
event.

As to the sponsor, its sponsorship of the marathon was limited to financing the race. As such sponsor, it did
nothing beyond that, and did not involve itself at all in the preparations for the actual conduct of the race,
which was entirely in the hands of the organizer. Thus, it cannot be held liable. [Abrogar v. Cosmos Bottling,
G.R. No. 164749, March 15, 2017]

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INSURANCE CODE
1. In a CBA, it was provided that the employer will shoulder hospitalization expenses of the
dependents of covered employees subject to certain limitations and restrictions. Accordingly,
covered employees pay part of the hospitalization insurance premium through monthly salary
deductions while the company, upon hospitalization of the covered employees' dependents, shall
pay the hospitalization expenses incurred for the same. The conflict arose when a portion of the
hospitalization expenses of the covered employees' dependents were paid/shouldered by the
dependent's own health insurance. While the company refused to pay the portion of the hospital
expenses already shouldered by the dependents' own health insurance, the union insists that the
covered employees are entitled to the whole and undiminished amount of said hospital expenses.
Decide.

The covered employees are not entitled to full payment of the hospital expenses incurred by their dependents,
including the amounts already paid by other health insurance companies based on the theory of collateral
source rule.

As part of American personal injury law, the collateral source rule was originally applied to tort cases wherein
the defendant is prevented from benefiting from the plaintiff’s receipt of money from other sources. Under
this rule, if an injured person receives compensation for his injuries from a source wholly independent of the
tortfeasor, the payment should not be deducted from the damages which he would otherwise collect from
the tortfeasor. In a recent Decision by the Illinois Supreme Court, the rule has been described as “an
established exception to the general rule that damages in negligence actions must be compensatory.” The
Court went on to explain that although the rule appears to allow a double recovery, the collateral source will
have a lien or subrogation right to prevent such a double recovery.

The collateral source rule applies in order to place the responsibility for losses on the party causing them. Its
application is justified so that “the wrongdoer should not benefit from the expenditures made by the injured
party or take advantage of contracts or other relations that may exist between the injured party and third
persons.” Thus, it finds no application to cases involving no-fault insurances under which the insured is
indemnified for losses by insurance companies, regardless of who was at fault in the incident generating the
losses. Here, it is clear that the employer is a no-fault insurer. Hence, it cannot be obliged to pay the
hospitalization expenses of the dependents of its employees which had already been paid by separate health
insurance providers of said dependents. [Mitsubishi Motors Philippines Salaried Employees Union v. Mitsubishi
Motors Philippines Corporation, G.R. No. 175773, June 17, 2013]

2. What is an HMO?

A Health Maintenance Organization (HMO) refers to a juridical entity legally organized to provide or arrange
health care services to its enrolled members for a fixed pre-paid fee for a specified period of time. The power
to regulate and supervise the establishment, operations, and financial activities of such entities is now held by
the Insurance Commission, but previously it was held by the Department of Health. [Executive Order No. 192,
s. 2015November 12, 2015]

3. Are punitive exemplary damages insurable under Philippine laws?

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No. In the absence of any precedents or legislation on the matter, exemplary damages, regardless of the
nature of the proceedings where the same are awarded, are not insurable under Philippine laws on the ground
that the same is against public policy. An insurance which provides cover for exemplary damages which may
be adjudged against a policyholder undermines the deterrent value of exemplary damages. Public policy
justification outweighs the freedom of parties to contractually agree upon the terms of the insurance
coverage. This type of damages is imposed with a clear purpose to punish or deter particular acts. This
objective mandates that damages rest ultimately as well as nominally on the party actually responsible for the
wrong. If the said person were to shift the burden to an insurance company, exemplary damages would serve
no purpose. Allowing coverage would place the burden of the punitive levy not on the insurer, but on the
insured public as a whole, since the punitive amount would be passed along to insured persons in larger
premiums. But, this should not occur, because, in effect, society would be punishing itself for the wrong
committed by the insured. [Insurance Commission Legal Opinion No. LO-2017-05, July 1, 2017]

4. Can a company primarily engaged in automotive dealership apply for a license to act as an insurance
agent without amending its articles of incorporation?

No. When there is nothing in the articles of incorporation expressly allowing the corporation to engage such
a business, or which may be considered as an implied power, the said corporation, if it engages in the business
of an insurance agent, would be considered as having acted ultra vires. Thus, before applying for a license, the
company should first amend its articles of incorporation to include as one of its purpose the power to act as
insurance agent for any insurance company, as authorized by the Insurance Commission, and to enter into any
agreement for such purpose with any insurance company. [Insurance Commission Legal Opinion No. LO-2017-
07, September 15, 2017]

5. Is an existing variable life insurance product exempt from garnishment and/or execution?

Yes. A variable contract is defined as any policy or contract on either a group or an individual basis issued by
an insurance company providing for benefits or other contractual payments or values thereunder to vary so
as to reflect investment results of any segregated portfolio of investments. A life insurance company may be
authorized to issue, deliver, sell, or use variable contracts. In which case, a variable life insurance exists. In this
type of insurance, a policyholder is allowed to allocate a portion of the premiums to an investment component
after deducting some charges. The death benefit and cash surrender value of a variable life insurance contract
increases or decreases based on the performance of the investment component. In case the investment
performs poorly and the value falls below the original premium payment, the insurance company is still bound
to pay the minimum guaranteed death benefit, which cannot be lower than the amount stipulated in the
contract, and which is normally a multiple of the premium payment. With respect to the non-guaranteed
benefits, the same are derived from the remaining value of the segregated investment portfolio after the cost
of the insurance and investment expenses have been deducted. From the foregoing, it shows that a variable
life insurance contains both an insurance component and an investment component. Despite the existence of
2 components, a variable life insurance should be taken as a single life insurance contract and not a bundling
of 2 independent contracts since both components are indivisible from one another. Notwithstanding such
inseperability, a variable life insurance is still considered as a life insurance since, first, it provides for the
protection of the policyholder or beneficiaries, and second, it is a life insurance within the meaning of the law,
since it still depends on the life of the insured. The investment component only determines the potential
benefits under the policy and not the risk insured against, which is still loss of life. It clearly falls within the
definition of life insurance, which is an insurance on human lives and insurance appertaining thereto or
connected therewith made payable on the death of the insured, or on his surviving a specified period, or
otherwise contingently on the continuance or cessation of his life. Since it is a life insurance, a variable life
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insurance product is within the exemption provided under the Rules of Court. All its proceeds, including the
investment proceeds, are protected from creditors’ claims since they are monies, benefits, privileges, or
annuities accruing or in any manner growing out of any life insurance. [Insurance Commission Legal Opinion
No. LO-2017-03, June 15, 2017]

6. Can a foreign insurance company transact any insurance activity or business in the Philippines, or
act as an insurance agent therein by offering or proposing to make an insurance contract in the
Philippines, without a license issued by the Insurance Commissioner if the insurance policy will be
issued in a foreign country?

No. It is imperative that before a foreign insurance company transacts any insurance activity or business in the
Philippines, a license or certificate of authority duly issued by the Insurance Commission must first be secure.
Also, before a person may act as an insurance agent, he/she must have a license issued by the same
commission. Failure to secure such license constitutes doing insurance business, which is a clear violation of
the Insurance Code. This is so even if the transaction is an isolated one, since the law does not distinguish
between insurance activities carried out in the regular course of business or one that was just a mere isolated
transaction. The making or proposing or offering to make an insurance contract in the Philippines, without a
license, even if payment or issuance of the contract will be done outside the Philippines, is unlawful. [Insurance
Commission Legal Opinion No. 2018-03, January 30, 2018]

7. A and B were lovers. A thus designated B as his beneficiary in his life insurance policy. However,
during that time, he was still married to C, but later on, C passed away, at which time, A and B got
married. A passed away not long after. Can B, the second wife, receive the proceeds from A’s life
insurance policy?

No. Article 2012 of the Civil Code provides that any person who is forbidden from receiving any donation under
Article 739 of the same code cannot be named beneficiary of a life insurance policy by the person who cannot
make a donation to him. Article 739, on the other hand, provides that donations made between persons who
were guilty of adultery or concubinage at the time of the donation, are void. In this case, A and B were guilty
of adultery or concubinage at the time A designated B as his beneficiary in his life insurance policy. thus, B
cannot receive the benefits under A’s life insurance policy as she is legally proscribed from being a beneficiary
thereof. [Insurance Commission Legal Opinion No. LO-2018-12, May 17, 2018]

8. M Insurer insured PAP’s machineries and equipment against fire, for a period of one year, for the
amount of 15 million pesos. This was procured by PAP for its mortgagee, RCBC. The insurance policy
was renewed before the lapse of one year, on an ‘as is’ basis, and it was agreed that the things
insured will not be moved to another location, without the consent of M insurer. The machineries
and equipment were thereafter lost in a fire, which prompted PAP to claim from M insurer. The
claim was denied on the ground that the things insured were transferred to a different location from
that indicated in the policy. Can M insurer be held liable for the loss?

No. Here, by the clear and express condition in the renewal policy, the removal of the insured property to any
building or place required the consent of the insurer. Any transfer effected by the insured, without the
insurer’s consent, would free the latter from any liability. Considering that the original policy was renewed on
an “as is basis,” it follows that the renewal policy carried with it the same stipulations and limitations. The
terms and conditions in the renewal policy provided, among others, that the location of the risk insured against
is at PAP’s factory. The subject insured properties, however, were totally burned at another factory. Although
it was also located in the same area, the other factory was not the location stipulated in the renewal policy.
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There being an unconsented removal, the transfer was at PAP’s own risk. Consequently, it must suffer the
consequences of the fire. Thus, the Court agrees with the report of an international loss adjuster which
investigated the fire incident at the other factory, which opined that “[g]iven that the location of risk covered
under the policy is not the location affected, the policy will, therefore, not respond to this loss/claim.” It can
also be said that with the transfer of the location of the subject properties, without notice and without M
insurer’s consent, after the renewal of the policy, PAP clearly committed concealment, misrepresentation and
a breach of a material warranty.

Accordingly, an insurer can exercise its right to rescind an insurance contract when the following conditions
are present, to wit:

1) the policy limits the use or condition of the thing insured;


2) there is an alteration in said use or condition;
3) the alteration is without the consent of the insurer;
4) the alteration is made by means within the insured’s control; and
5) the alteration increases the risk of loss.

In the case at bars, all these circumstances are present. It was clearly established that the renewal policy
stipulated that the insured properties were located at PAP’s factory; that PAP removed the properties without
the consent of M insurer; and that the alteration of the location increased the risk of loss. [Malayan Insurance
Company, Inc. v. PAP co., Ltd. (Philippine Branch), G.R. No. 200784, August 7, 2013]

9. M Insurance issued a life insurance policy covering the life of S, with A as beneficiary. Almost three
years after the insurance was issued, S died, thus, A filed a claim for the proceeds. The claim was
denied because the claim was spurious, as it appeared after its investigation by M Insurance that S
did not actually apply for insurance coverage, was unlettered, sickly, and had no visible source of
income to pay for the insurance premiums; and that A was an impostor, posing as S and fraudulently
obtaining insurance in the latter’s name without her knowledge and consent. Can M Insurance deny
the claim?

No. "Fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract." In the absence of proof of such fraudulent intent, no right to rescind arises. There being no evidence
that there was indeed fraud, except for the self-serving result of M Insurance’s investigation, then the claim
cannot be denied.

Also, Sec. 48 of the Insurance Code will prevent the insurer from barring the claim. The results and conclusions
arrived at during the investigation conducted unilaterally by the insurer after the claim was filed may simply
be dismissed as self-serving and may not form the basis of a cause of action given the existence and application
of Sec. 48, which provides that if the life insurance policy has been in force for at least two years from its date
of issuance, the insurer cannot deny the claim on the ground of concealment or misrepresentation by the
insured. After the two-year period lapses, or when the insured dies within the period, the insurer must make
good on the policy, even though the policy was obtained by fraud, concealment, or misrepresentation. This is
not to say that insurance fraud must be rewarded, but that insurers who recklessly and indiscriminately solicit
and obtain business must be penalized, for such recklessness and lack of discrimination ultimately work to the
detriment of bona fide takers of insurance and the public in general.

Sec. 48 prevents a situation where the insurer knowingly continues to accept annual premium payments on
life insurance, only to later on deny a claim on the policy on specious claims of fraudulent concealment and
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misrepresentation, such as what obtains in the instant case. Thus, instead of conducting at the first instance
an investigation into the circumstances surrounding the issuance of the subject insurance policy which would
have timely exposed the supposed flaws and irregularities attending it as it now professes, M Insurance
appears to have turned a blind eye and opted instead to continue collecting the premiums on the policy. For
nearly three years, the insurer collected the premiums and devoted the same to its own profit. It cannot now
deny the claim when it is called to account. Sec. 48 must be applied to it with full force and effect. [Manila
Bankers v. Crisencia Aban, G.R. No. 175666, July 29, 2013]

10. V Corp operated a tanker which was chartered by C Inc. to transport petroleum. The petroleum was
insured by AHA Co. During the course of the voyage, the tanker collided with another vessel and
sank along with the petroleum. AHA Co. indemnified C Inc. for the loss, and later sued V Corp for
reimbursement. What is the prescriptive period for filing an action for reimbursement by the insurer
as a result of subrogation?

The cause of action of the insurer is one which arose out of subrogation by virtue of Art. 2207 of the Civil Code,
which is based upon an obligation created by law. It comes under Art. 1194(2) of the Civil Code and prescribes
in ten years. [Vector Shipping v. American Home Insurance, GR No. 159213, 3 July 2013]

N.B. If there is a period within which the insured can file a claim with the wrongdoer, the subrogated insurance
company is also bound by such period. The subrogated insurance company stands in the place and in
substitution of the consignee. [Federal Express v. American Home Assurance, G.R. No. 150094, August 18,
2004]

11. R insured her car with P Insurer in case of loss or damage thereto. The car was to be taken to an
auto shop by R’s driver, but the driver no longer returned. After efforts to find the car failed, R
notified the insurer of the loss. The claim of R against the insurer was denied because of a provision
in the policy which exempts the insurer from liability in case malicious damage to the car was caused
by the employee of the insured. Can the insurer deny R’s claim on such ground?

No. The driver of R did not commit malicious damage to the car so as to exempt P Insurer from liability. The
words "loss" and "damage" mean different things in common ordinary usage. The word "loss" refers to the
act or fact of losing, or failure to keep possession, while the word "damage" means deterioration or injury to
property. Therefore, the insurer cannot exclude the loss of vehicle under the exceptions in the insurance
policy since the same refers only to "malicious damage," or more specifically, "injury" to the motor vehicle
caused by a person under the insured’s service. It clearly does not contemplate "loss of property," as what
happened in the instant case.
"Malicious damage," as provided for in the subject policy as one of the exceptions from coverage, is the
damage that is the direct result from the deliberate or willful act of the insured, members of his family, and
any person in the insured’s service, whose clear plan or purpose was to cause damage to the insured vehicle
for purposes of defrauding the insurer.

Theft perpetrated by a driver of the insured is not an exception to the coverage from the insurance policy
subject of this case. This is evident from the very provision of the insurance policy. The insurance company,
subject to the limits of liability, is obligated to indemnify the insured against theft. Said provision does not
qualify as to who would commit the theft. Thus, even if the same is committed by the driver of the insured,
there being no categorical declaration of exception, the same must be covered. "(A)n insurance contract
should be interpreted as to carry out the purpose for which the parties entered into the contract which is to
insure against risks of loss or damage to the goods. Such interpretation should result from the natural and
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reasonable meaning of language in the policy. Where restrictive provisions are open to two interpretations,
that which is most favorable to the insured is adopted." However, if the theft was committed by the insured
himself, the same would be an exception to the coverage since in that case there would be fraud on the part
of the insured or breach of material warranty under Sec. 69 of the Insurance Code.
Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any
ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A contract
of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against
the insurer; in other words, it should be construed liberally in favor of the insured and strictly against the
insurer. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way
as to preclude the insurer from non-compliance with its obligations. [Alpha Insurance and Surety Co. v. Arsenia
Sonia Castor, G.R. No. 198174, September 2, 2013]

12. A obtained insurance policies for 3 of his vehicles. One of the cars was subsequently stolen. Not
knowing of such incident, the insurer picked up the check from A covering the insurance proceeds.
The check was then deposited with the bank, and for which, the insurer issued an official receipt. A
then filed a claim with the insurer for the loss of his vehicle. The insurer denied the claim. Is the
denial of the claim valid?

Yes. The general rule in insurance law is that unless the premium is paid, the insurance policy is not valid and
binding. However, there are exceptions to this rule, which are as follows:

1. In case of life or industrial life policy, whenever the grace period provision applies;
2. Where the insurer acknowledged in the policy or contract of insurance itself the receipt of the
premium, even if the premium has not been actually paid;
3. Where the parties agreed that premium payment shall be in installments and partial payment has
been made at the time of the loss;
4. Where the insurer granted the insured a credit term for the payment of the premium, and the loss
occurs before the expiration of the term; and
5. Where the insurer is estopped as when it has consistently granted a 60 to 90-day credit term for the
payment of the premiums.

In the instant case, the above exceptions are not present. Thus, since at the time of the loss, there was no
payment yet of the premiums, insurance policy was not effective, and therefore, A’s claim may be validly
denied. However, to prevent unjust enrichment, A is entitled to recover the amount of premium paid through
check which has been credited to the insurer’s bank account. [Gaisano v. Development Insurance and Surety,
G.R. No. 190702, February 27, 2017]

13. A was a health insurance policy holder of M Inc. He underwent emergency medical appendectomy
causing him to incur medical expenses while in the US. However, M Inc. only approved
reimbursement of a portion of the expenses, which was based on the average cost of the procedure
if done in Manila. With the denial of his claim for reimbursement, A filed a complaint for breach of
contract against M Inc. Should the action prosper?

Yes. M Inc.’s liability to A under the subject Health Care Contract should be based on the expenses for hospital
and professional fees which he actually incurred, and should not be limited by the amount that he would have
incurred had his emergency treatment been performed in an accredited hospital in the Philippines. For
purposes of determining the liability of a health care provider to its members, jurisprudence holds that a
health care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity.
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Once the member incurs hospital, medical or any other expense arising from sickness, injury or other
stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the
contract. that a health care agreement is in the nature of a non-life insurance. It is an established rule in
insurance contracts that when their terms contain limitations on liability, they should be construed strictly
against the insurer. These are contracts of adhesion the terms of which must be interpreted and enforced
stringently against the insurer which prepared the contract. This doctrine is equally applicable to health care
agreements. L]imitations of liability on the part of the insurer or health care provider must be construed in
such a way as to preclude it from evading its obligations. Accordingly, they should be scrutinized by the courts
with "extreme jealousy" and "care" and with a "jaundiced eye. [Fortune Medicare, Inc. v. David Robert U.
Amorin, G.R. No. 195872, March 12, 2014]

14. Can the security deposit of an insurance company under Section 203 of the insurance Code be levied
upon by a judgment creditor? Can the Insurance Commissioner bar or prevent such levy?

The text of Sec. 203 indicates that the security deposit is exempt from levy by a judgment or any other
claimant. As worded, the law clearly states that the security deposit shall be (1) answerable for all the
obligations of the depositing insurer under its insurance' contracts; (2) at all times free from any liens or
encumbrance; and (3) exempt from levy by any claimant. A single claimant cannot proceed independently
against the security deposit of an insurance company, since to do so would not only prejudice the policy
holders and their beneficiaries, but would also annul the very reason for which the law required the security
deposit. Under Secs. 191 and 203 of the Insurance Code, the Insurance Commissioner has the specific legal
duty to hold the security deposits for the benefit of all policy holders. Undeniably, the Insurance Commissioner
has been given a wide latitude of discretion to regulate the insurance industry so as to protect the insuring
public. The law specifically confers custody over the securities upon the Commissioner, with whom these
investments are required to be deposited. An implied trust is created by the law for the benefit of all claimants
under subsisting insurance contracts issued by the insurance company. As the officer vested with custody of
the security deposit, the Insurance Commissioner is in the best position to determine if and when it may be
released without prejudicing the right of other policy holders. Before allowing the withdrawal or the release
of the deposit, the Commissioner must be satisfied that the conditions contemplated by the law are met and
all policy holders protected. [Capital Insurance and Surety Co., Inc. v. Del Monte Motor Works, Inc., G.R. No.
159979, December 9, 2015]

15. K applied for life insurance with I Life, for which he was given medical questionnaire to answer. In
response to one of the questions, he stated therein that he does not have any illness or adverse
medical condition. Thereafter, the life insurance policy was issued, but lapsed due to non-payment
of premium. K applied for reinstatement of the policy and paid for his premium. I Life informed K
that they will only reinstate the policy if K agreed to certain conditions such as payment of additional
premium and the cancellation of the riders pertaining to premium waiver and accidental death
benefits, to which he agreed to by signing a letter of acceptance effective June 22, 1999. I Life issued
an indorsement letter dated January 7, 2000 stating that the reinstatement of the policy has been
approved, subject to changes in premium payment, and the riders on accidental health benefit and
waiver of premium disability were deleted. K paid the annual premiums for the years 2000 to 2002.
K then died on September 22, 2001 due to renal failure caused by congestive heart failure brought
about by diabetes. His heirs tried to claim the benefits of his life insurance policy from I Life, which
was denied for the reason that it had been rescinded due to concealment and misrepresentation. Is
the reinstated insurance policy of K already incontestable at the time of his death?

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Yes. Reinstatement of an insurance policy should be reckoned from the date when the same was approved by
the insurer. The insurance policy was reinstated on June 22, 1999, since any ambiguity in a contract of
insurance should be resolved strictly against the insurer upon the principle that an insurance contract is a
contract of adhesion. More than two years had lapsed from the time the subject insurance policy was
reinstated on June 22, 1999 vis-a-vis K’s death on September 22, 2001. As such, the subject insurance policy
has already become incontestable at the time of K’s death. [The Insular Life Assurance Company v. Paz Y. Khu,
G.R. No. 195176, April 18, 2016]

16. What is a contract of reinsurance?

A contract of reinsurance is one by which an insurer (the "direct insurer" or "cedant") procures a third person
(the "reinsurer") to insure him against loss or liability by reason of such original insurance. It is a separate and
distinct arrangement from the original contract of insurance, whose contracted risk is insured in the
reinsurance agreement. The reinsurer's contractual relationship is with the direct insurer, not the original
insured, and the latter has no interest in and is generally not privy to the contract of reinsurance. Put simply,
reinsurance is the "insurance of an insurance." By its nature, reinsurance contracts are issued in favor of the
direct insurer because the subject of such contracts is the direct insurer's risk, and not the risk assumed under
the original policy. [Communication and Information Systems Corporation v. Mark Sensing Australia Pty. Ltd.,
G.R. No. 192159, January 25, 2017]

17. Can a civil case filed before the regular trial court involving recovery of payment of the insured's
insurance claim plus damages, proceed simultaneously with an administrative case for unfair claims
settlement practices before the Insurance Commission?

Yes. The findings of the trial court will not necessarily foreclose the administrative case before the IC, or vice
versa. True, the parties are the same, and both actions predicated on the same set of facts, and will require
identical evidence, but the issues to be resolved, the quantum of evidence, the procedure to be followed, and
the reliefs to be adjudged by the two bodies are different. In the civil case, the issue is whether the petitioner
is entitled to the insurance claims, while the issue before the IC is whether there is unreasonable delay or
denial in of the claims, and if in the affirmative, whether or not that would justify the suspension or revocation
of the insurers' licenses. In the civil case, the degree of proof is preponderance of evidence, while in the
administrative case, the degree of proof is substantial evidence. The procedure to be followed by the trial
court is governed by the Rules of Court. while the IC has its own set of rules and it is not bound by the rigidities
of technical rules of procedure. These two bodies conduct independent means of ascertaining the ultimate
facts of their respective cases that will serve as basis for their respective decisions. If, for example, the trial
court finds that there was no unreasonable delay or denial of her claims, it does not automatically mean that
there was in fact no such unreasonable delay or denial that would justify the revocation or suspension of the
licenses of the concerned insurance companies. It only means that petitioner failed to prove by preponderance
of evidence that she is entitled to damages. Such finding would not restrain the IC, in the exercise of its
regulatory power, from making its own finding of unreasonable delay or denial as long as it is supported by
substantial evidence. While the possibility that these two bodies will come up with conflicting resolutions on
the same issue is not far-fetched, the finding or conclusion of one would not necessarily be binding on the
other given the difference in the issues involved, the quantum of evidence required m1d the procedure to be
followed. public interest and public policy demand the speedy and inexpensive disposition of administrative
cases. And when an aggrieved insured party files both cases at the same time, he/she is not guilty of forum
shopping. [Malayan Insurance Co. v. Lin, G.R. No. 207277, January 16, 2017]

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INTELLECTUAL PROPERTY CODE

1. “HIPOLITO & SEA HORSE & TRIANGULAR DEVICE," "FAMA," and other related marks were owned
by CH S.A. of Portugal to designate kerosene burners. L claimed that the true owner of the marks,
G corp., assigned them to him. He further claimed that he bought kerosene burners from W Corp.
with the subject marks, and stated thereon were the words “made in Portugal”. He thus filed a
complaint against W Corp. and its officers for false designation of origin. During trial, it was found
that the burners sold by W Corp. were locally made, and without the knowledge of CH S.A., though
it had previous dealings with the said company. Can W Corp. be held liable?

Yes. W Corp. did not have authority from CH S.A. to place the words “Made in Portugal” and “Original Portugal”
with the trademarks on the burners produced in the Philippines. W Corp. placed the words "Made in Portugal"
and "Original Portugal" with the disputed marks knowing fully well — because of their previous dealings with
the Portuguese company — that these were the marks used in the products of CH S.A. Portugal. More
importantly, the products that W Corp. sold were admittedly produced in the Philippines, with no authority
CH S.A. Portugal. The law on trademarks and trade names precisely precludes a person from profiting from
the business reputation built by another and from deceiving the public as to the origins of products. [Uyco v.
Lo, G.R. No. 202423, January 28, 2013]

2. Levi’s Inc. was a licensee of Levi’s, a US Corporation, and owner of trademarks and designs of Levi’s
Jeans. It received information that D was selling counterfeit Levi’s jeans. With the help of the NBI,
several fake Levi’s jeans, with the trademark “LS JEANS TAILORING” were seized from D’s tailoring
shop. D was then charged with the crime of trademark infringement. Is D guilty of infringement?

No. The elements of the offense of trademark infringement under the Intellectual Property Code are the
following:

1. The trademark being infringed is registered in the Intellectual Property Office;


2. The trademark is reproduced, counterfeited, copied, or colorably imitated by the infringer;
3. The infringing mark is used in connection with the sale, offering for sale, or advertising of any
goods, business or services; or the infringing mark is applied to labels, signs, prints, packages,
wrappers, receptacles or advertisements intended to be used upon or in connection with such goods,
business or services;
4. The use or application of the infringing mark is likely to cause confusion or mistake or to
deceive purchasers or others as to the goods or services themselves or as to the source or origin of
such goods or services or the identity of such business; and
5. The use or application of the infringing mark is without the consent of the trademark owner
or the assignee thereof.

The gravamen of the offense is the likelihood of confusion. There are two tests to determine likelihood of
confusion, namely: the dominancy test, and the holistic test. The holistic test is applicable here considering
that the herein criminal cases also involved trademark infringement in relation to jeans products. Accordingly,
the jeans trademarks of Levi’s and D must be considered as a whole in determining the likelihood of confusion
between them. The jeans made and sold by Levi’s, were very popular in the Philippines. The consuming public
knew that the original Levi’s jeans were under a foreign brand and quite expensive. Such jeans could be
purchased only in malls or boutiques as ready-to-wear items, and were not available in tailoring shops like
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those of D’s as well as not acquired on a “made-to-order” basis. Under the circumstances, the consuming
public could easily discern if the jeans were original or fake Levi’s jeans, or were manufactured by other brands
of jeans. D used the trademark “LS JEANS TAILORING” for the jeans he produced and sold in his tailoring shops.
His trademark was visually and aurally different from the trademark “LEVI STRAUSS & CO” appearing on the
patch of original jeans under the trademark LEVI’S. The word “LS” could not be confused as a derivative from
“LEVI STRAUSS” by virtue of the “LS” being connected to the word “TAILORING”, thereby openly suggesting
that the jeans bearing the trademark “LS JEANS TAILORING” came or were bought from the tailoring shops of
D, not from the malls or boutiques selling original Levi’s jeans to the consuming public. [Diaz v. People, G.R.
No. 180677, 18 February 2013]

3. FMC, a domestic corporation, sells DAGETA cigarette packs in octagonal packaging, with black and
red covering, the tape tear for its seal being silver, and stated thereon are the words: “Made in
Germany under license of DAGETA & TOBACCO LT.” JTI and DEC, foreign companies, on the other
hand, are owners of trademarks used on DAVIDOFF cigarette packs, which have the same packaging,
and bear the words “Made in Germany Reemtsman under license of Davidoff & CIE SA, Geneva.”
They learned of the DAGETA packs being sold by FMC, which lead them to obtain a search warrant
from the court to search FMC premises, where they found the DAGETA cigarette packs, along with
machines for manufacturing of cigarettes. They claim now that FMC is guilty of trademark
infringement and false designation of origin. Is there probable cause to charge FMC of the said
crimes?

Yes. The similarities between the authentic cigarette packs and the DAGETA packs show that there is confusing
similarity between them. Though no confusion is created insofar as the names "DAVIDOFF and "DAGETA" are
concerned, the same cannot be said with respect to the cigarettes' packaging. Indeed there might be
differences when the two are compared. It must be noted that defendants in cases of infringement do not
normally copy but only make colorable changes. The most successful form of copying is to employ enough
points of similarity to confuse the public, with enough points of difference to confuse the courts. There is thus
probable cause to charge FMC of trademark infringement.

As to the crime of false designation of origin, the fact that machines for manufacturing and cigarette packs
bearing “Made in Germany” were found in FMC’s premises are enough to excite the belief that indeed FMC
was manufacturing cigarettes in their warehouse here in the Philippines but misrepresenting the cigarettes'
origin to be Germany. This is in fact the essence of the said crime. [Forietrans Manufacturing v. Davidoff Et.
CIE SA, G.R. No. 197482, March 6, 2017]

4. F Manufacturing filed a case against Harvard U, an educational corporation in the US, for the
cancellation of its registration of trademark. F Manufacturing alleged that since 1995, it had used
the trademark “Harvard” for its goods, for which its predecessor had secured a certificate of
registration with the IPO. Can the action prosper?

No. The registration by the predecessor of F Manufacturing of the mark "Harvard" should not have been
allowed. The Philippines and the United States of America are both signatories to the Paris Convention for the
Protection of Industrial Property (Paris Convention). The Philippines became a signatory to the Paris
Convention on 27 September 1965. The Philippines is obligated to assure nationals of countries of the Paris
Convention that they are afforded an effective protection against violation of their intellectual property rights
in the Philippines in the same way that their own countries are obligated to accord similar protection to
Philippine nationals. Thus, under Philippine law, a trade name of a national of a State that is a party to the

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Paris Convention, whether or not the trade name forms part of a trademark, is protected "without the
obligation of filing or registration."

Indeed, Sec. 123.1(e) of R.A. No. 8293 now categorically states that "a mark which is considered by the
competent authority of the Philippines to be well-known internationally and in the Philippines, whether or not
it is registered here," cannot be registered by another in the Philippines. Sec. 123.1(e) does not require that
the well-known mark be used in commerce in the Philippines but only that it be well-known in the Philippines.

In determining whether a mark is well-known, the following criteria or any combination thereof may be taken
into account:

(a) the duration, extent and geographical area of any use of the mark, in particular, the duration,
extent and geographical area of any promotion of the mark, including advertising or publicity and the
presentation, at fairs or exhibitions, of the goods and/or services to which the mark applies;
(b) the market share, in the Philippines and in other countries, of the goods and/or services to
which the mark applies;
(c) the degree of the inherent or acquired distinction of the mark;
(d) the quality-image or reputation acquired by the mark;
(e) the extent to which the mark has been registered in the world;
(f) the exclusivity of registration attained by the mark in the world;
(g) the extent to which the mark has been used in the world;
(h) the exclusivity of use attained by the mark in the world;
(i) the commercial value attributed to the mark in the world;
(j) the record of successful protection of the rights in the mark;
(k) the outcome of litigations dealing with the issue of whether the mark is a well-known mark;
and
(l) the presence or absence of identical or similar marks validly registered for or used on identical
or similar goods or services and owned by persons other than the person claiming that his mark is a
well-known mark.

Since "any combination" of the foregoing criteria is sufficient to determine that a mark is well-known, it is
clearly not necessary that the mark be used in commerce in the Philippines. Thus, while under the territoriality
principle, a mark must be used in commerce in the Philippines to be entitled to protection, internationally
well-known marks are the exceptions to this rule.
Thus, the trademark of Harvard U, even if not registered here, is still entitled to protection. "Harvard" is the
trade name of the world famous Harvard University, and it is also a trademark of Harvard U. Under Art. 8 of
the Paris Convention, Harvard U is entitled to protection in the Philippines of its trade name "Harvard" even
without registration of such trade name in the Philippines. This means that no educational entity in the
Philippines can use the trade name "Harvard" without the consent of Harvard University. Likewise, no entity
in the Philippines can claim, expressly or impliedly through the use of the name and mark "Harvard," that its
products or services are authorized, approved, or licensed by, or sourced from, Harvard U without the latter's
consent. [Fredco Manufacturing v. President and Fellows of Harvard College, GR No. 185917, 1 June, 2011]

5. A French partnership filed with the IPO a trademark application for the mark "LE CORDON BLEU &
DEVICE". This was opposed by Ecole alleging that it was the owner of the mark "LE CORDON BLEU,
ECOLE DE CUISINE MANILLE," which it has been using since 1948 in cooking and other culinary
activities, including in its restaurant business, it has earned immense and invaluable goodwill such
that the French partnership’s use of the subject mark will actually create confusion, mistake, and
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deception to the buying public as to the origin and sponsorship of the goods, and cause great and
irreparable injury and damage to Ecole’s business reputation and goodwill as a senior user of the
same. Can the said mark of the French partnership be registered?

Yes. Foreign marks, though not registered, are still accorded protection against infringement and/or unfair
competition. Under the Paris Convention, the Philippines is obligated to assure nationals of the signatory-
countries that they are afforded an effective protection against violations of their intellectual property rights
in the Philippines in the same way that their own countries are obligated to accord similar protection to
Philippine nationals. “Thus, under Philippine law, a trade name of a national of a State that is a party to the
Paris Convention, whether or not the trade name forms part of a trademark, is protected “without the
obligation of filing or registration.”

The Intellectual Property Code of the Philippines, as amended, has already dispensed with the requirement of
prior actual use at the time of registration. Thus, there is more reason to allow the registration of the subject
mark under the name of the French partnership as its true and lawful owner, even if it has not used the same
in the Philippines.

The function of a trademark is to point out distinctly the origin or ownership of the goods (or services) to which
it is affixed; to secure to him, who has been instrumental in bringing into the market a superior article of
merchandise, the fruit of his industry and skill; to assure the public that they are procuring the genuine article;
to prevent fraud and imposition; and to protect the manufacturer against substitution and sale of an inferior
and different article as his product. As such, courts will protect trade names or marks, although not registered
or properly selected as trademarks, on the broad ground of enforcing justice and protecting one in the fruits
of his toil. [Ecole De Cuisine Manille (Cordon Bleu of the Philippines), Inc. v. Renaud Cointreau & CIE and Le
Condron Bleu Int’l., B.V., G.R. No. 185830, June 5, 2013]

6. B Corp. was a German company who applied for various trademark registrations with the IPO, which
included the mark “Birkenstock”. However, registration proceedings were halted because the IPO
found an existing registration for the mark “Birkenstock and Device,” under the name of S Corp.,
predecessor of PS Marketing. It was proven, however that BIRKENSTOCK" was first adopted in
Europe in 1774 by its inventor, Johann Birkenstock, a shoemaker, on his shoes, and was passed on
from generation to generation in his family, until the business was passed on to B Corp. which now
has certificates of registration in various countries for the said mark. But, PS Marketing did not file
a declaration of actual use (DAU) of the said marks. Should the IPO allow the application for
registration filed by B corp?

Yes. The law requires the filing of a DAU on specified periods, and failure to file the DAU within the requisite
period results in the automatic cancellation of registration of a trademark. In turn, such failure is tantamount
to the abandonment or withdrawal of any right or interest the registrant has over his trademark. Also, it must
be emphasized that registration of a trademark, by itself, is not a mode of acquiring ownership. If the applicant
is not the owner of the trademark, he has no right to apply for its registration. Registration merely creates a
prima facie presumption of the validity of the registration, of the registrant’s ownership of the trademark, and
of the exclusive right to the use thereof. Such presumption, just like the presumptive regularity in the
performance of official functions, is rebuttable and must give way to evidence to the contrary.
Clearly, it is not the application or registration of a trademark that vests ownership thereof, but it is the
ownership of a trademark that confers the right to register the same. A trademark is an industrial property
over which its owner is entitled to property rights which cannot be appropriated by unscrupulous entities that,
in one way or another, happen to register such trademark ahead of its true and lawful owner. The presumption
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of ownership accorded to a registrant must then necessarily yield to superior evidence of actual and real
ownership of a trademark.

In the instant case, B Corp. is the owner of the mark "BIRKENSTOCK." There is evidence relating to the origin
and history of "BIRKENSTOCK" and its use in commerce long before PS Corp., through S Corp., was able to
register the same here in the Philippines. It has been sufficiently proven that "BIRKENSTOCK" was first adopted
in Europe in 1774 by its inventor, Johann Birkenstock, a shoemaker, on his line of quality footwear and
thereafter, numerous generations of his kin continuously engaged in the manufacture and sale of shoes and
sandals bearing the mark "BIRKENSTOCK" until it became the entity now known as B Corp.. B Corp also
submitted various certificates of registration of the mark "BIRKENSTOCK" in various countries and that it has
used such mark in different countries worldwide, including the Philippines. This being the case, B Corp. is the
true and lawful owner of the mark "BIRKENSTOCK" and entitled to its registration, and that PS Marketing was
in bad faith in having it registered in its name. [Birkenstock Orthopaedie GMBH and Co. KG v. Philippine Shoe
Expo Maarketing, G.R. No. 194307, November 20, 2013]

7. PHILITES filed a trademark application for the mark “PHILITES” with the IPO fluorescent bulb,
incandescent light, starter and ballast. After publication, KPE opposed the application alleging that
the registration would weaken the unique and distinctive significance of its mark “PHILIPS” and will
tarnish, degrade or dilute the distinctive quality of the PHILIPS trademark and resulting in the
gradual attenuation or whittling away of the value of the same, in violation of its proprietary rights.
Should the registration be granted?

No. First, KPE’s mark, PHILIPS, is already a registered and well-known mark in the Philippines. A mark which is
considered by the competent authority of the Philippines to be well-known internationally and in the
Philippines, whether or not it is registered here,' cannot be registered by another in the Philippines. Rule
100(a) of the Rules and Regulations on Trademarks, Service Marks, Tradenames and Marked or Stamped
Containers defines "competent authority" as “the Court, the Director General, the Director of the Bureau of
Legal Affairs, or any administrative agency or office vested with quasi-judicial or judicial jurisdiction to hear
and adjudicate any action to enforce the rights to a mark.” And, the Supreme Court, in Philips Export v. CA,
has held that is a trademark or trade name which was registered as far back as 1922, and has acquired the
status of a well-known mark in the Philippines and internationally as well.

There is likewise confusing similarity between the two marks, which further supports the non-registration. An
examination of the trademarks shows that their dominant or prevalent feature is the five-letter "PHILI",
"PHILIPS" for KPE, and "PHILITES" for PHILITES. They are thus confusingly similar such that an ordinary
purchaser can conclude an association or relation between the marks. [Dy v. Koninklijke Philips, G.R. No.
186088, March 22, 2017]

8. Nestle SA, a Swiss corporation, opposed the application for registration of mark filed by Puregold.
The Mark sought to be registered was the trademark "COFFEE MATCH," which Puregold wished to
use for coffee, tea, cocoa, sugar, artificial coffee, flour and preparations made from cereals, bread,
pastry and confectionery, and honey under Class 30 of the International Classification of Goods. The
opposition alleged that Nestle SA is the registered owner of the "COFFEE-MATE" trademark and that
there is confusing similarity between the "COFFEE-MATE" trademark and Puregold's "COFFEE
MATCH" application.9 Nestle alleged that "COFFEE-MATE" has been declared an internationally
well-known mark and Puregold's use of "COFFEE MATCH" would indicate a connection with the
goods covered in Nestle's "COFFEE-MATE" mark because of its distinct similarity. Nestle claimed
that it would suffer damages if the application were granted since Puregold's "COFFEE MATCH"
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would likely mislead the public that the mark originated from Nestle. Can Puregold register the
“COFEE MATCH” mark?

Yes. In determining similarity or likelihood of confusion, our jurisprudence has developed two tests: the
dominancy test and the holistic test. The dominancy test, incorporated in Sec. 155.1 of the Code, focuses on
the similarity of the prevalent features of the competing trademarks that might cause confusion and
deception. If the competing trademark contains the main, essential, and dominant features of another, and
confusion or deception is likely to result, likelihood of confusion exists. The question is whether the use of the
marks involved is likely to cause confusion or mistake in the mind of the public or to deceive consumers. In
contrast, the holistic test entails a consideration of the entirety of the marks as applied to the products,
including the labels and packaging, in determining confusing similarity. The discerning eye of the observer
must focus not only on the predominant words but also on the other features appearing on both marks in
order that the observer may draw his conclusion whether one is confusingly similar to the other.

In the instant case, the word "COFFEE" is the common dominant feature between Nestle's mark "COFFEE-
MATE" and Puregold's mark "COFFEE MATCH." However, following the law, which prohibits exclusive
registration of generic marks, the word "COFFEE" cannot be exclusively appropriated by either Nestle or
Puregold since it is generic or descriptive of the goods they seek to identify. Generic or descriptive words are
not subject to registration and belong to the public domain. Consequently, the word or words paired with the
generic or descriptive word, in this particular case "-MATE" for Nestle's mark and "MATCH" for Puregold's
mark, must be taken into account in determining the distinctiveness and registrability of Puregold's mark
"COFFEE MATCH." The distinctive features of both marks are sufficient to warn the purchasing public which
are Nestle's products and which are Puregold's products. While both "-MATE" and "MATCH" contain the same
first three letters, the last two letters in Puregold's mark, "C" and "H," rendered a visual and aural character
that made it easily distinguishable from Nestle's mark. Also, the distinctiveness of Puregold's mark with two
separate words with capital letters "C" and "M" made it distinguishable from Nestle's mark which is one word
with a hyphenated small letter "-m" in its mark. In addition, there is a phonetic difference in pronunciation
between Nestle's "-MATE" and Puregold's "MATCH." As a result, the eyes and ears of the consumer would not
mistake Nestle's product for Puregold's product. Thus, registration should be allowed. [Societes Des Produits,
Nestle, S.A. v. Puregold Price Club, G.R. No. 217194, September 6, 2017]

9. In 2005, Starwood filed an application for registration of the trademark "W" for Classes 436 and 447
of the International Classification of Goods and Services for the Purposes of the Registration of
Marks (Nice Classification). In 2007, Starwood' s application was granted and thus, the "W" mark
was registered in its name. However, in 2006, W Land applied for the registration of its own "W"
mark for Class 36, 12 which thereby prompted Starwood to oppose the same. In a Decision dated
April 23, 2008, the BLA of the IPO found merit in Starwood's opposition, and ruled that W Land's
"W" mark is confusingly similar with Starwood's mark, which had an earlier filing date. W Land’s
motion for reconsideration was denied by the BLA, thus, on May 29, 2009, W Land filed a Petition
for Cancellation of Starwood's mark for non-use under Section 151.119 of Intellectual Property
Code, claiming that Starwood has failed to use its mark in the Philippines because it has no hotel or
establishment in the Philippines rendering the services covered by its registration; and that
Starwood' s "W" mark application and registration barred its own '"W" mark application and
registration for use on real estate. However, it appears that the mark was used by Starwood in its
interactive hotel reservation online website, using its Philippine registered domain names,
providing for a local phone number and prices which may be converted to Philippine pesos. Should
Starwood’s “W” marked be cancelled?

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No, as it appears that Starwood has used the said mark within the contemplation of the law. prima facie
presumption brought about by the registration of a mark may be challenged and overcome, in an appropriate
action, by proof off, among others,] non-use of the mark, except when excused. The actual use of the mark
representing the goods or services introduced and transacted in commerce over a period of time creates that
goodwill which the law seeks to protect. For this reason, the IP Code, under Section 124.2,54 requires the
registrant or owner of a registered mark to declare "actual use of the mark" (DAU) and present evidence of
such use within the prescribed period. Failing in which, the IPO DG may cause the motu propio removal from
the register of the mark's registration. Also, any person, believing that "he or she will be damaged by the
registration of a mark," which has not been used within the Philippines, may file a petition for cancellation.
Following the basic rule that he who alleges must prove his case,57 the burden lies on the petitioner to show
damage and non-use.

The IP Code and Trademark Regulations have not specifically defined "use." However, it is understood that
the "use" which the law requires to maintain the registration of a mark must be genuine, and not merely
token. Based on foreign authorities, genuine use may be characterized as a bona fide use which results or
tends to result, in one way or another, into a commercial interaction or transaction "in the ordinary course of
trade." Based on the amended Trademark Regulations, it is apparent that the IPO has now given due regard
to the advent of commerce on the internet. Specifically, it now recognizes, among others, "downloaded pages
from the website of the applicant or registrant clearly showing that the goods are being sold or the services
are being rendered in the Philippines," as well as "for online sale, receipts of sale of the goods or services
rendered or other similar evidence of use, showing that the goods are placed on the market or the services
are available in the Philippines or that the transaction took place in the Philippines," as acceptable proof of
actual use. Thus, the use of a registered mark representing the owner's goods or services by means of an
interactive website may constitute proof of actual use that is sufficient to maintain the registration of the
same, but it must be shown that the owner has actually transacted, or at the very least, intentionally targeted
customers of a particular jurisdiction in order to be considered as having used the trade mark in the ordinary
course of his trade in that country. A showing of an actual commercial link to the country is therefore
imperative. Otherwise, an unscrupulous registrant would be able to maintain his mark by the mere expedient
of setting up a website, or by posting his goods or services on another's site, although no commercial activity
is intended to be pursued in the Philippines. This type of token use renders inutile the commercial purpose of
the mark, and hence, negates the reason to keep its registration active. As the IP Code expressly requires, the
use of the mark must be "within the Philippines." The use of the mark on an interactive website, for instance,
may be said to target local customers when they contain specific details regarding or pertaining to the target
State, sufficiently showing an intent towards realizing a within-State commercial activity or interaction. These
details may constitute a local contact phone number, specific reference being available to local customers, a
specific local webpage, whether domestic language and currency is used on the website, and/or whether
domestic payment methods are accepted. Considering the way its website is set up and the details provided
thereon, it clearly appears that Starwood intended to produce a discernable commercial effect or activity
within the Philippines, or at the very least, seeks to establish commercial interaction with local consumers.
Accordingly, Starwood's use of the "W" mark in its reservation services through its website constitutes use of
the mark sufficient to keep its registration in force. [W Land Holdings, Inc. v. Starwood Hotels and Resorts
Worldwide, Inc., G.R. No. 222366, December 4, 2017]

10. After several attempts, Uni-line’s filed an application for trademark registration of the mark
“SAKURA” for amplifier, speaker, cassette, cassette disk, video cassette disk, car stereo, television,
digital video disk, mini component, tape deck, compact disk charger, VHS, and tape rewinder falling
under Class 9 of the Nice International Classification of Goods, and SAKURA & FLOWER DESIGN" for
use on recordable compact disk (CD-R) computer, computer parts and accessories, also falling under
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Class 9, were cancelled by the IPO, due to Kensonic’s opposition. The IPO found that Kensonic was
the first to adopt and use the mark SAKURA since 1994, and that Uni-Line's goods are related to
Kensonic's goods and that the latter was the first user of the mark SAKURA used on products under
Class 9. On its third attempt, Uni-Line again filed an application for registration of the trademark
SAKURA for use on the following products: Washing machines, high pressure washers, vacuum
cleaners, floor polishers, blender, electric mixer, electrical juicer (Class 07), Television sets, stereo
components, DVD/VCD players, voltage regulators, portable generators, switch breakers, fuse (Class
09), and Refrigerators, air conditioners, oven toaster, turbo broiler, rice cooker, microwave oven,
coffee maker, sandwich/waffle maker, electric stove, electric fan, hot & cold water dispenser,
airpot, electric griller and electric hot pot (Class 11). After publication, the said application was
granted. On September 7, 2006, Kensonic filed a petition to cancel Uni-line’s registration, alleging
that in October 1994, it introduced the marketing of SAKURA products in the Philippines and that it
owned said SAKURA products and was the first to use, introduce and distribute said products.
Kensonic also alleged that in IPC 1, it opposed Uni-Line's application to register SAKURA and was
already sustained by the IPO, which Decision is now final and executory. Kensonic further alleged
that it is the owner of a copyright for SAKURA and that since 1994, has maintained and established
a good name and goodwill over the SAKURA products. Resolve the following issues:

A. Is the SAKURA mark capable of appropriation?


B. Are Kensonic's goods falling under Class 09 related to Uni-Line's goods falling under Class 07
and Class 11?
C. Are Uni-Line's goods falling under Class 9, namely: voltage regulators, portable generators,
switch breakers and fuses, related to Kensonic' s goods falling under Class 9?

A. The SAKURA mark can be appropriated. The word sakura refers to the Japanese flowering cherry and
is, therefore, of a generic nature, such mark did not identify Kensonic' s goods. Kensonic’s DVD or VCD
players and other products could not be identified with cherry blossoms. Hence, the mark can be
appropriated.
B. Uni-line’s goods classified under Class 07 and Class 11 are not related to Kensonic's goods registered
under Class 09. The goods of Uni-Line are not related to the goods of Kensonic by virtue of their
differences in class, the descriptive attributes, the purposes and the conditions of the goods. The
prohibition under Sec. 123 of the Intellectual Property Code extends to goods that are related to the
registered goods, not to goods that the registrant may produce in the future. To allow the expansion
of coverage is to prevent future registrants of goods from securing a trademark on the basis of mere
possibilities and conjectures that may or may not occur at all. Surely, the right to a trademark should
not be made to depend on mere possibilities and conjectures.
C. Kensonic’s goods are unrelated to the goods of Uni-line although both belonging to Class 9. There are
other sub-classifications present even if the goods are classified under Class 09. For one, Kensonic's
goods belonged to the information technology and audiovisual equipment sub-class, but Uni-Line's
goods pertained to the apparatus and devices for controlling the distribution of electricity sub-class.
Also, the Class 09 goods of Kensonic were final products but Uni-Line's Class 09 products were spare
parts. In view of these distinctions, the Court agrees with Uni-Line that its Class 09 goods were
unrelated to the Class 09 goods of Kensonic. [Kensonic, Inc. v. Uni-Line, G.R. Nos. 211820-21, June 6,
2018]

11. Citystate Savings Bank applied for registration of its trademark "CITY CASH WITH GOLDEN LION'S
HEAD" with the IPO. Citigroup, US corporation which owns Citibank, opposed Citystate’s
application. Citigroup claimed that the "CITY CASH WITH GOLDEN LION'S HEAD" mark is confusingly
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similar to its own "CITI" marks. After an exchange of pleadings, the IPO rendered a Decision
concluding that the dominant features of the marks were the words "CITI" and "CITY," which were
almost the same in all aspects. It further ratiocinated that Citigroup had the better right over the
mark, considering that its "CITI" and "CITI"-related marks have been registered with the IPO, as well
as with the United States Patent and Trademark Office, covering "financial services" under Class 36
of the International Classification of Goods. Thus, applying the dominancy test and considering that
Citystate's dominant feature of the applicant's mark was identical or confusingly similar to a
registered trademark, the IPO ruled that approving it would be contrary to Section 138 of the
Intellectual Property Code and Citigroup's exclusive right to use its marks. Is the IPO correct?

Yes. Under the dominancy test, the main, essential, and dominant features of the marks in this case, as well
as the contexts in which the marks are to be used. The use of the "CITY CASH WITH GOLDEN LION'S HEAD"
mark will not result in the likelihood of confusion in the minds of customers since the most noticeable part
thereof is the golden lion’s head, after this is noticed, the words “City” and Cash” are equally prominent. On
the other hand, Citibank’s marks are best described as consisting the prefix “CITI” added to words. Thus, the
prevalent feature in Citystate’s marks is not present in any of Citibank’s marks. The only similar feature
between Citystate’s mark and Citibank’s collection of marks is the word "CITY" in the former, and the "CITI"
prefix found in the latter. This similarity alone is not enough to create a likelihood of confusion. [Citigroup, Inc.
v. Citystate Savings Bank, G.R. No. 205409, June 13, 2018]

12. ABS-CBN filed an application for registration of trademark with the IPO in 2004, for its trademark
“METRO” under class 16 of the Nice classification, with specific reference to "magazines.” The case
was assigned to Examiner Icban, who, after a judicious examination of the application, refused the
applicant mark's registration. According to Examiner Icban, the applicant mark is identical with
three other cited marks, and is therefore unregistrable according to Section 123.1 ( d) of the
Intellectual Property Code. The cited marks were identified as (1) "Metro" (word) by applicant
Metro International S.A. with Application No. 42000002584,6 (2) "Metro" (logo) also by applicant
Metro International S.A. with Application No. 42000002585,7 and (3) "Inquirer Metro" by applicant
Philippine Daily Inquirer, Inc. with Application No. 42000003811. Is examiner Icban correct?

Yes. There is confusing similarity between, if not the total identity of, the applicant and cited marks. Examiner
Icban, in reiterating with finality her earlier findings, said that the applicant and cited marks are "the same in
sound, spelling, meaning, overall commercial impression, covers substantially the same goods and flows
through the same channel of trade," which leads to no other conclusion than that "confusion as to the source
of origin is likely to occur. Absolute certainty of confusion or even actual confusion is not required to refuse
registration. Indeed, it is the mere likelihood of confusion that provides the impetus to accord protection to
trademarks already registered with the IPO. The cited marks "METRO" (word) and "METRO" (logo) are identical
with the registrant mark "METRO" both in spelling and in sound. In fact, it is the same exact word. Considering
that both marks are used in goods which are classified as magazines, it requires no stretch of imagination that
a likelihood of confusion may occur. [ABS-CBN Publishing v. Director of Bureau of Trademarks, G.R. No. 217916,
June 20, 2018]

13. Mr. J claimed that he began using the name and mark "Lavandera Ko" in his laundry business on
July 4, 1994. He then opened his laundry store at No. 119 Alfaro St., Salcedo St., Makati City in 1995.
Thereafter, on March 17, 1997, the National Library issued to him a certificate of copyright over said
name and mark. Over the years, the laundry business expanded with numerous franchise outlets in
Metro Manila and other provinces. Respondent Roberto then formed a corporation to handle the
said business, hence, Laundromatic Corporation (Laundromatic) was incorporated in 1997, while
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"Lavandera Ko" was registered as a business name on November 13, 1998 with the DTI. Thereafter,
Mr. J discovered that his brother, Mr. F, was able to register the name and mark "Lavandera Ko"
with the IPO on October 18, 2001, the registration of which was filed on June 5, 1995. He also alleges
that a certain Mr. N had been writing the franchisees of the former threatening them with criminal
and civil cases if they did not stop using the mark and name "Lavandera Ko." It was found out by
Mr. J that Mr. F had been selling his own franchises. Mr. J thus filed a petition for injunction, unfair
competition, infringement of copyright, cancellation of trademark and name with/and prayer for
TRO and Preliminary Injunction with the court. The lower court dismissed the case, ruling that
neither party was entitled to the mark. The lower court reasoned that "Lavandera Ko" is protected
by a copyright, being the title of a song composed by Mr. Suarez, based on an article it found in a
website online. Is the RTC correct?

No. In this case, "Lavandera Ko," the mark in question, is being used as a trade name or specifically, a service
name since the business in which it pertains involves the rendering of laundry services. Under Section 121.1
of R.A. No. 8293, "mark" is defined as any visible sign capable of distinguishing the goods (trademark) or
services (service mark) of an enterprise and shall include a stamped or marked container of goods. As such,
the basic contention of the parties is, who has the better right to use "Lavandera Ko" as a service name because
Section 165.2 of the said law, guarantees the protection of trade names and business names even prior to or
without registration, against any unlawful act committed by third parties. A cause of action arises when the
subsequent use of any third party of such trade name or business name would likely mislead the public as such
act is considered unlawful. Hence, the RTC erred in denying the parties the proper determination as to who
has the ultimate right to use the said trade name by ruling that neither of them has the right or a cause of
action since "Lavandera Ko" is protected by a copyright. By their very definitions, copyright and trade or service
name are different. Copyright is the right of literary property as recognized and sanctioned by positive law. An
intangible, incorporeal right granted by statute to the author or originator of certain literary or artistic
productions, whereby he is invested, for a limited period, with the sole and exclusive privilege of multiplying
copies of the same and publishing and selling them. Trade name, on the other hand, is any designation which
(a) is adopted and used by person to denominate goods which he markets, or services which he renders, or
business which he conducts, or has come to be so used by other, and (b) through its association with such
goods, services or business, has acquired a special significance as the name thereof, and (c) the use of which
for the purpose stated in (a) is prohibited neither by legislative enactment nor by otherwise defined public
policy. One of the original intellectual creations in the literary and artistic domain that are protected from the
moment of their creation are musical compositions, with or without words. The RTC should have considered
other evidence in determining who has the better right to use the trade/business/service name, and not just
outright dismiss the case based on an online article. [Fernando Juan v. Roberto Juan, G.R. No. 221732, August
23, 2017]

14. P Corp and S Corp supply and produce LPG in the Philippines. P Corp is the registered owner of the
trademarks “Gasul” and Gasul cylinders, while S Corp was the authorized user of “Shellane” and
Shellane cylinders in the Philippines. With the help of the NBI, it was found that R Corp was engaged
in the refilling and sale of LPG cylinders bearing the registered marks of the two corporations
without authority from the latter. Can R Corp be held liable for infringement of trademark and unfair
competition?

Yes. The mere unauthorized use of a container bearing a registered trademark in connection with the sale,
distribution or advertising of goods or services which is likely to cause confusion, mistake or deception among
the buyers or consumers can be considered as trademark infringement. In the instant case, R Corp committed
trademark infringement when they refilled, without the consent of P Corp and S Corp, the LPG containers
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bearing the latter’s registered marks. R Corp’s acts will inevitably confuse the consuming public, since they
have no way of knowing that the gas contained in the LPG tanks bearing the marks of P Corp and S Corp is in
reality not the latter’s LPG product after the same had been illegally refilled. The public will then be led to
believe that R Corp are authorized refillers and distributors of the LPG products, considering that they are
accepting empty containers P Corp and S Corp, and refilling them for resale.

Unfair competition has been defined as the passing off (or palming off) or attempting to pass off upon the
public of the goods or business of one person as the goods or business of another with the end and probable
effect of deceiving the public. Passing off (or palming off) takes place where the defendant, by imitative
devices on the general appearance of the goods, misleads prospective purchasers into buying his merchandise
under the impression that they are buying that of his competitors. In other words, there is unfair competition
when the defendant gives his goods the general appearance of the goods of his competitor with the intention
of deceiving the public that the goods are those of his competitor. In the present case, P Corp and S Corp
pertinently observed that by refilling and selling LPG cylinders bearing their registered marks, R Corp was
selling goods by giving them the general appearance of goods of another manufacturer. There is a showing
that the consumers may be misled into believing that the LPGs contained in the cylinders bearing the marks
"GASUL" and "SHELLANE" are those goods or products of the P Corp and S Corps when, in fact, they are not.
Obviously, the mere use of those LPG cylinders bearing the trademarks "GASUL" and "SHELLANE" will give the
LPGs sold by R Corp the general appearance of the products of the P Corp and S Corp. [Republic Gas
Corporation v. Petron Corporation and Plipinas Shell, G.R. No. 194062, June 17, 2013]

15. SMPFCI owns the trademark "PUREFOODS FIESTA HAM" while Foodsphere, Inc. products bear the
"CDO" brand. They are both engaged in the manufacture, sale and distribution of food products. On
November 4, 2010, SMPFCI filed a Complaint for trademark infringement and unfair competition
with prayer for preliminary injunction and temporary restraining order against Foodsphere before
the IPO for using, in commerce, a colorable imitation of its registered trademark in connection with
the sale, offering for sale, and advertising of goods that are confusingly similar to that of its
registered trademark. In its complaint, SMPFCI alleged that its "FIESTA" ham, first introduced in
1980, has been sold in countless supermarkets in the country with an average annual sales of
P10,791,537.25 and is, therefore, a popular fixture in dining tables during the Christmas season. Its
registered "FIESTA" mark has acquired goodwill to mean sumptuous ham of great taste, superior
quality, and food safety, and its trade dress "FIESTA" combined with a figure of a partly sliced ham
served on a plate with fruits on the side had likewise earned goodwill. Notwithstanding such
tremendous goodwill already earned by its mark, SMPFCI continues to invest considerable resources
to promote the FIESTA ham. Sometime in 2006, however, Foodsphere introduced its "PISTA" ham
and aggressively promoted it in 2007, claiming the same to be the real premium ham. In 2008,
SMPFCI launched its "Dapat ganito ka-espesyal" campaign, utilizing the promotional material
showing a picture of a whole meat ham served on a plate with fresh fruits on the side. The ham is
being sliced with a knife and the other portion, held in place by a serving fork. But in the same year,
Foodsphere launched its "Christmas Ham with Taste" campaign featuring a similar picture.
Moreover, in 2009, Foodsphere launched its "Make Christmas even more special" campaign, directly
copying SMPFCI's "Dapat ganito ka-espesyal" campaign. Also in 2009, Foodsphere introduced its
paper ham bag, no longer using its box packaging, the layout and design of which looked
significantly similar to SMPFCI' s own paper ham bag and its trade dress and its use of the word
"PISTA" in its packages. Thus, according to SMPFCI, the striking similarities between the marks and
products of Foodsphere with those of SMPFCI warrant its claim of trademark infringement on the
ground of likelihood of confusion as to origin, and being the owner of "FIESTA," it has the right to
prevent Foodsphere from the unauthorized use of a deceptively similar mark. SMPFCI also alleged
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that the word "PISTA" in Foodsphere's mark means "fiesta," "feast," or "festival" and connotes the
same meaning or commercial impression to the buying public of SMPFCI's "FIESTA" trademark. Can
Foodsphere be held liable for unfair competition?

Yes. Unfair competition consists of the passing off (or palming off) or attempting to pass off upon the public
of the goods or business of one person as the. goods or business of another with the end and probable effect
of deceiving the public. Passing off (or palming off) takes place where the defendant, by imitative devices on
the general appearance of the goods, misleads prospective purchasers into buying his merchandise under the
impression that they are buying that of his competitors. In other words, the defendant gives his goods the
general appearance of the goods of his competitor with the intention of deceiving the public that the goods
are those of his competitor. The "true test," therefore, of unfair competition has thus been "whether the acts
of the defendant have the intent of deceiving or are calculated to deceive the ordinary buyer making his
purchases under the ordinary conditions of the particular trade to which the controversy relates. " Thus, the
essential elements of an action for unfair competition are: (1) confusing similarity in the general appearance
of the goods; and (2) intent to deceive the public and defraud a competitor. The confusing similarity may or
may not result from similarity in the marks, but may result from other external factors in the packaging or
presentation of the goods. The intent to deceive and defraud may be inferred from the similarity of the
appearance of the goods as offered for sale to the public. Actual fraudulent intent need not be shown. And
based on the facts provided above, all these elements are present in the instant case.

First, there exists a substantial and. confusing similarity in the packaging of Foodsphere' s product with that of
SMPECI, which, as the records reveal, was changed by Foodsphere from a paper box· to· a paper ham bag that
is significantly similar to SMPFCI's paper ham bag. Second, Foodsphere's intent to deceive the public, to
defraud its competitor, and to ride on the goodwill of SMPFCI' s products is evidenced by the fact that not only
did Foodsphere switch from its old box packaging to the same paper ham bag packaging as that used.by
SMPFCI, it also used the same layout design printed on the same. Of the millions of terms and letters, designs,
and packaging available, Foodsphere had to choose those so closely similar to SMPFCI' s if there was no intent
to pass off upon the public the ham of SMPFCI as its own with the end and probable effect of deceiving the
public. [San Miguel Pure Foods v. Foodsphere, Inc., G.R. Nos. 217781 & 217788, June 20, 2018]

16. TK filed with the IPO an application for trademark registration of “KOLIN” to be used for a
combination of goods, such as colored televisions, refrigerators, window-type and split-type air
conditioners, electric fans and water dispensers. Said goods allegedly fall under Classes 9, 11, and
21 of the Nice Classification (NCL). The application was opposed by KE, saying that the trademark
being registered by TK is identical, if not confusingly similar, with its previously registered “KOLIN”
mark, covering the following products under Class 9 of the NCL: automatic voltage regulator,
converter, recharger, stereo booster, AC-DC regulated power supply, step-down transformer, and
PA amplified AC-DC. Should TK be allowed to register its trademark?

Yes. Mere uniformity in categorization, by itself, does not automatically preclude the registration of what
appears to be an identical mark, if that be the case. Whether or not the products covered by the trademark
sought to be registered by TK, on the one hand, and those covered by the prior issued certificate of registration
in favor of KE on the other, fall under the same categories in the NCL is not the sole and decisive factor in
determining a possible violation of KE’s intellectual property right should TK’s application be granted. It is a
hornbook doctrine that emphasis should be on the similarity of the products involved and not on the arbitrary
classification or general description of their properties or characteristics. The mere fact that one person has
adopted and used a trademark on his goods would not, without more, prevent the adoption and use of the

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same trademark by others on unrelated articles of a different kind. And in the case of TK and KE’s products,
they are unrelated, and the ordinary buyer would not likely be confused thereby.
A certificate of trademark registration confers upon the trademark owner the exclusive right to sue those who
have adopted a similar mark not only in connection with the goods or services specified in the certificate, but
also with those that are related thereto.

In resolving one of the pivotal issues in this case––whether or not the products of the parties involved are
related––the doctrine in Mighty Corporation is authoritative. There, the Court held that the goods should be
tested against several factors before arriving at a sound conclusion on the question of relatedness. Among
these are:

(a) the business (and its location) to which the goods belong;
(b) the class of product to which the goods belong;
(c) the product’s quality, quantity, or size, including the nature of the package, wrapper or
container;
(d) the nature and cost of the articles;
(e) the descriptive properties, physical attributes or essential characteristics with reference to
their form, composition, texture or quality;
(f) the purpose of the goods;
(g) whether the article is bought for immediate consumption, that is, day-to-day household
items;
(h) the fields of manufacture;
(i) the conditions under which the article is usually purchased; and
(j) the channels of trade through which the goods flow, how they are distributed, marketed,
displayed and sold.

As mentioned, the classification of the products under the NCL is merely part and parcel of the factors to be
considered in ascertaining whether the goods are related. It is not sufficient to state that the goods involved
herein are electronic products under Class 9 in order to establish relatedness between the goods, for this only
accounts for one of many considerations enumerated in Mighty Corporation. In this case, credence is accorded
to TK’s assertions that:

a. TK’s goods are classified as home appliances as opposed to KE’s goods which are power supply
and audio equipment accessories;
b. TK’s television sets and DVD players perform distinct function and purpose from KE’s power
supply and audio equipment; and
c. TK sells and distributes its various home appliance products on wholesale and to accredited
dealers, whereas KE’s goods are sold and flow through electrical and hardware stores.

Clearly then, it cannot be concluded that all electronic products are related and that the coverage of one
electronic product necessarily precludes the registration of a similar mark over another. In this digital age
wherein electronic products have not only diversified by leaps and bounds, and are geared towards
interoperability, it is difficult to assert readily, as respondent simplistically did, that all devices that require
plugging into sockets are necessarily related goods.

It bears to stress at this point that the list of products included in Class 9 can be sub-categorized into five (5)
classifications, namely: (1) apparatus and instruments for scientific or research purposes, (2) information
technology and audiovisual equipment, (3) apparatus and devices for controlling the distribution and use of
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electricity, (4) optical apparatus and instruments, and (5) safety equipment. From this sub-classification, it
becomes apparent that TK’s products, i.e., televisions and DVD players, belong to audiovisiual equipment,
while that of KE, consisting of automatic voltage regulator, converter, recharger, stereo booster, AC-DC
regulated power supply, step-down transformer, and PA amplified AC-DC, generally fall under devices for
controlling the distribution and use of electricity. This being the case, their products are not related. [Taiwan
Kolin v. Kolin Electronics, G.R. No. 209843, March 25, 2015]

17. SS filed an application with the IPO for registration of the mark “LOLANE” for personal care products.
This was opposed by OSA since it alleged that the mark is similar to its mark “ORLANE” in
presentation, general appearance and pronunciation, and thus registration of “LOLANE” amounts
to an infringement of its mark. It further alleged that it had been using “ORLANE” as its mark since
1948, and has registered the same in 1967, whereas SS first used its mark only in 2003. Is there
confusing similarity between “ORLANE” and “LOLANE” which would bar the registration of
“LOLANE” before the IPO?

No. There is no colorable imitation between the marks LOLANE and ORLANE which would lead to any likelihood
of confusion to the ordinary purchasers. In determining the likelihood of confusion, the Court must consider:
[a] the resemblance between the trademarks; [b] the similarity of the goods to which the trademarks are
attached; [c] the likely effect on the purchaser and [d] the registrant's express or implied consent and other
fair and equitable considerations. While there are four requirements, the most essential requirement, to our
mind, for the determination of likelihood of confusion is the existence of resemblance between the
trademarks, i.e., colorable imitation. Absent any finding of its existence, there can be no likelihood of
confusion. In determining colorable imitation, we have used either the dominancy test or the holistic or totality
test. The dominancy test considers the similarity of the prevalent or dominant features of the competing
trademarks that might cause confusion, mistake, and deception in the mind of the purchasing public. More
consideration is given on the aural and visual impressions created by the marks on the buyers of goods, giving
little weight to factors like process, quality, sales outlets, and market segments. On the other hand, the holistic
test considers the entirety of the marks as applied to the products, including the labels and packaging, in
determining confusing similarity. The focus is not only on the predominant words but also on the other
features appearing on the labels.

While there are no set rules as what constitutes a dominant feature with respect to trademarks applied for
registration, usually, what are taken into account are signs, color, design, peculiar shape or name, or some
special, easily remembered earmarks of the brand that readily attracts and catches the attention of the
ordinary consumer. What is considered as the dominant feature of the mark is the first word/figure that
catches the eyes or that part which appears prominently to the eyes and ears. In the instant case, based on
the distinct visual and aural differences between LOLANE and ORLANE, there is no confusing similarity
between the two marks. The suffix LANE is not the dominant feature of petitioner's mark. Neither can it be
considered as the dominant feature of ORLANE which would make the two marks confusingly similar. As to
the aural aspect of the marks, LOLANE .and ORLANE do not sound alike. The first syllables of each mark, i.e.,
OR and LO do not sound alike, while the proper pronunciation of the last syllable LANE-"LEYN" for LOLANE and
"LAN" for ORLANE, being of French origin, also differ. [Seri Somboonsakdikul v. Orlane, S.A., G.R. No. 188996,
February 1, 2017]

18. S Corp. filed an application for the issuance of a search warrant to search a warehouse of IPI, alleging
that the latter engaged in infringement of trademark. Upon implementation of the warrant, it was
found that there were more than 6,000 pairs of shoes bearing S Corp’s registered trademark
(stylized S with an oval design). Was there infringement?
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Yes. There is colorable imitation between the shoes of IPI and S Corp. The essential element of infringement
under R.A. No. 8293 is that the infringing mark is likely to cause confusion. In determining similarity and
likelihood of confusion, jurisprudence has developed tests: the Dominancy Test and the Holistic or Totality
Test.

The Dominancy Test focuses on the similarity of the prevalent or dominant features of the competing
trademarks that might cause confusion, mistake, and deception in the mind of the purchasing public.
Duplication or imitation is not necessary; neither is it required that the mark sought to be registered suggests
an effort to imitate. Given more consideration are the aural and visual impressions created by the marks on
the buyers of goods, giving little weight to factors like prices, quality, sales outlets, and market segments.

In contrast, the Holistic or Totality Test necessitates a consideration of the entirety of the marks as applied to
the products, including the labels and packaging, in determining confusing similarity. The discerning eye of the
observer must focus not only on the predominant words, but also on the other features appearing on both
labels so that the observer may draw conclusion on whether one is confusingly similar to the other.

Relative to the question on confusion of marks and trade names, jurisprudence has noted two (2) types of
confusion, viz.: (1) confusion of goods (product confusion), where the ordinarily prudent purchaser would be
induced to purchase one product in the belief that he was purchasing the other; and (2) confusion of business
(source or origin confusion), where, although the goods of the parties are different, the product, the mark of
which registration is applied for by one party, is such as might reasonably be assumed to originate with the
registrant of an earlier product, and the public would then be deceived either into that belief or into the belief
that there is some connection between the two parties, though inexistent.

Applying the Dominancy Test to the case at bar, this Court finds that the use of the stylized "S" by IPI in its
shoes infringes on the mark already registered by S Corp. with the IPO. While it is undisputed that S Corp.’s
stylized "S" is within an oval design, to this Court's mind, the dominant feature of the trademark is the stylized
"S," as it is precisely the stylized "S" which catches the eye of the purchaser. Thus, even if IPI did not use an
oval design, the mere fact that it used the same stylized "S", the same being the dominant feature of S Corp.'s
trademark, already constitutes infringement under the Dominancy Test. [Sketchers USA v. Inter Pacific
Industrial, G.R. No. 164321, March 23, 2011]

19. EYIS corp., a Philippine company, distributes air conditioners and other industrial tools and
equipment. SD corp., on the other hand, is a Taiwanese company engaged in the manufacture of air
compressors. Both claimed to have the right to register the trademark "VESPA" for air compressors.
EYIS buys air compressors from SD, but the documents do not show that the said goods were
marked as “VESPA”. EYIS was able to register the mark “VESPA” with the IPO, and started using the
same on its products. A month later, SD was also granted registration. SD filed a petition to cancel
EYIS’ registration. Who is the true owner of the mark?

EYIS must be considered as the prior and continuous user of the mark "VESPA" and its true owner. Hence, EYIS
is entitled to the registration of the mark in its name. The registration of a mark is prevented with the filing of
an earlier application for registration. This must not, however, be interpreted to mean that ownership should
be based upon an earlier filing date. While Intellectual Property Code removed the previous requirement of
proof of actual use prior to the filing of an application for registration of a mark, proof of prior and continuous
use is necessary to establish ownership of a mark. Such ownership constitutes sufficient evidence to oppose
the registration of a mark. Sec. 134 of the IP Code provides that "any person who believes that he would be
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damaged by the registration of a mark x x x" may file an opposition to the application. The term "any person"
encompasses the true owner of the mark, the prior and continuous user. Notably, the Court has ruled that the
prior and continuous use of a mark may even overcome the presumptive ownership of the registrant and be
held as the owner of the mark. By itself, registration is not a mode of acquiring ownership. When the applicant
is not the owner of the trademark being applied for, he has no right to apply for registration of the same.
Registration merely creates a prima facie presumption of the validity of the registration, of the registrants
ownership of the trademark and of the exclusive right to the use thereof. Such presumption, just like the
presumptive regularity in the performance of official functions, is rebuttable and must give way to evidence
to the contrary. In the instant case, EYIS is the prior user of the mark, and is thus the true owner thereof. [E.Y.
Industrial Sales v. Shen Dar Electricity and Machinery Co. Ltd., G.R. No. 184850, 20 October 2010]

20. IFP Manufacturing is a local manufacturer of snacks and beverages. On May 26, 2011, it filed with
the IPO an application for the registration of the mark "OK Hotdog Inasal Cheese Hotdog Flavor
Mark" (OK Hotdog Inasal mark) in connection with goods under Class 30 of the Nice Classification,
which it intends to use on one of its curl snack products, Hotdog Inasal. The application was opposed
by Mang Inasal, domestic fast food company and the owner of the mark "Mang Inasal, Home of Real
Pinoy Style Barbeque and Device" !nasal mark) for services under Class 43 of the Nice Classification.
The said mark, which was registered with the IPO in 20067 and had been used by Mang Inasal for
its chain of restaurants since 2003. Mang Inasal argued that both marks have the words “INASAL”
in the same font , color, and style, using the same black outline and yellow background, and
arranged in the same staggered format. Also, the goods that the OK Hotdog Inasal mark is intended
to identify (i.e., curl snack products) are also closely related to the services represented by the Mang
Inasal mark (i.e., fast food restaurants). Both marks cover inasal or inasal-flavored food products.
Should registration be allowed?

No. Recent case law on trademark seems to indicate an overwhelming judicial preference towards applying
the dominancy test. And under the said test, OK Hotdog Inasal mark is a colorable imitation of the Mang Inasal
mark. The word “INASAL” in Mang Inasal’s mark is the dominant element, and the most distinctive and
recognizable feature of the same. Such dominant element, as stylized y Mang Inasal, is different from the term
"inasaf' per se. The term "inasal" per se is a descriptive term that cannot be appropriated. However, the
dominant element "!NASAL," as stylized in the Mang Inasal mark, is not. Thus, Mang Inasal, as the registered
owner of the mark, can claim exclusive use of such element. For IFP’s marks, dominant element "!NASAL" in
the OK Hotdog Inasal mark is exactly the same as the dominant element "INASAL" in the Mang Inasal mark.
Both elements in both marks are printed using the exact same red colored font, against the exact same black
outline and yellow background and is arranged in the exact same staggered format. Apart from the element
"INASAL," there appear no other perceivable similarities between the two marks. The two marks have the
same dominant element, “INASAL,” and thus has the potential to project the deceptive and false impression
that the latter mark is somehow linked or associated with the former mark. The differences between the two
marks are I trumped by the overall impression created by their similarity. It is doubtful if an catching a casual
glimpse of the OK Hotdog Inasal mark would pay more attention to the peripheral details of the said mark
than it would to the mark's more prominent feature, especially !when the same invokes the distinctive feature
of another more popular brand.

Likewise, the goods for the which the registration of the OK Hotdog Inasal Mark is sought are related to the
services being represented by the Mang Inasal Mark. Related services are those that, though non-identical or
non-similar, are so logically connected to each other that they may reasonably be assumed to originate from
one manufacturer or from economically-linked manufacturers. It is the fact that the underlying goods and
services of both marks deal with inasal and inasal-flavored products which ultimately fixes the relations
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between such goods and services. Given the foregoing circumstances and the aforesaid similarity between the
marks in controversy, an average buyer who comes across the curls marketed under the OK Hotdog Inasal
mark is likely to be confused as to the true source of such curls. It is not unlikely that such buyer would be led
into the assumption that the curls are of Mang Inasal’s and that the latter has ventured into snack
manufacturing or, if not, that IFP has supplied the flavorings for respondent's product. Either way, the
reputation of Mang Inasal would be taken advantage of and placed at the mercy of IFP. [Mang Inasal
Philippines v. IFP Manufacturing, G.R. No. 221717, June 19, 2017]

21. ABS-CBN was able to cover the release of a Filipino worker kidnapped in Iraq. The said Filipino was
released because of the withdrawal of Filipino troops from the said country. ABS-CBN allowed
Reuters Television Service (Reuters) to air the footages it had taken earlier under a special
agreement. Under the same agreement, it was stated that any of the footages taken by ABS-CBN
would be for the "use of Reuter's international subscribers only, and shall be considered and treated
by Reuters under 'embargo' against use by other subscribers in the Philippines. . . . [N]o other
Philippine subscriber of Reuters would be allowed to use ABS-CBN footage without the latter's
consent.” However, GMA received live video feed of the coverage of the arrival of the kidnapped
Filipino from Reuters, and immediately carried the same in its “Flash Report.” ABS-CBN thus filed a
complaint for copyright infringement against GMA. Is the news footage subject to copyright, and
would the prohibited use thereof be punishable under the Intellectual Property Code?

Yes. The news footage is copyrightable. The Intellectual Property Code is clear about the rights afforded to
authors of various kinds of work. Under the Code, "works are protected by the sole fact of their
creation, irrespective of their mode or form of expression, as well as of their content, quality and
purpose." These include "[audio-visual works and cinematographic works and works produced by a process
analogous to cinematography or any process for making audiovisual recordings.”

Contrary to the old copyright law, the Intellectual Property Code does not require registration of the work to
fully recover in an infringement suit. Nevertheless, both copyright laws provide that copyright for a work is
acquired by an intellectual creator from the moment of creation.

It is true that under Sec. 175 of the Intellectual Property Code, "news of the day and other miscellaneous facts
having the character of mere items of press information" are considered unprotected subject
matter. However, the Code does not state that expression of the news of the day, particularly when it
underwent a creative process, is not entitled to protection. The news or the event itself is not copyrightable.
However, an event can be captured and presented in a specific medium. As recognized by the court, television
"involves a whole spectrum of visuals and effects, video and audio." News coverage in television involves
framing shots, using images, graphics, and sound effects. It involves creative process and originality. Television
news footage is an expression of the news. And, what is protected is the expression of such new.

In this case, however, GMA admitted that the material under review — which is the subject of the controversy
— is an exact copy of the original. GMA did not subject ABS-CBN's footage to any editing of their own. The
news footage did not undergo any transformation where there is a need to track elements of the original.
News as expressed in a video footage is entitled to copyright protection. Broadcasting organizations have not
only copyright on but also neighboring rights over their broadcasts. Copyrightability of a work is different from
fair use of a work for purposes of news reporting.

The mere act of rebroadcasting without authority from the owner of the broadcast gives rise to the probability
that a crime was committed under the Intellectual Property Code. Note that, unless clearly provided in the
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law, offenses involving infringement of copyright protections should be considered malum prohibitum. It is
the act of infringement, not the intent, which causes the damage. To require or assume the need to prove
intent defeats the purpose of intellectual property protection. Nevertheless, proof beyond reasonable doubt
is still the standard for criminal prosecutions under the Intellectual Property Code.[ABS-CBN Corporation v.
Gozon et al., G.R. No. 195956, March 11, 2015]

22. K Inc. had the trademarks, trading styles, company names and business names "KENNEX", "KENNEX
& DEVICE", "PRO KENNEX" and "PRO-KENNEX", registered in its name. S Corp. filed an action against
K Inc. alleging trademark infringement, saying that K Inc. is a mere distributor of the goods covered
by the marks, and it is not the actual owner of the marks, since they actually belong to S Corp.
However, S Corp.’s registration of the marks had already been cancelled in a registration
cancellation case, wherein K Inc. was adjudged as the owners of the marks. Can the action prosper?
Was there unfair competition?

No. By operation of law, the trademark infringement aspect of S Corp.'s case has been rendered moot and
academic in view of the finality of the decision in the Registration Cancellation Case. In short, S Corp. is left
without any cause of action for trademark infringement since the cancellation of registration of a trademark
deprived it of protection from infringement from the moment judgment or order of cancellation became final.
To be sure, in a trademark infringement, title to the trademark is indispensable to a valid cause of action and
such title is shown by its certificate of registration. With its certificates of registration over the disputed
trademarks effectively cancelled with finality, S Corp.'s case for trademark infringement lost its legal basis and
no longer presented a valid cause of action. Likewise, there can be no infringement committed by K Inc. who
was adjudged with finality to be the rightful owner of the disputed trademarks in the Registration Cancellation
Case.

To establish trademark infringement, the following elements must be proven: (1) the validity of plaintiff's
mark; (2) the plaintiff's ownership of the mark; and (3) the use of the mark or its colorable imitation by the
alleged infringer results in "likelihood of confusion." Based on these elements, it is immediately obvious that
the second element – the plaintiff's ownership of the mark - was what the Registration Cancellation Case
decided with finality. On this element depended the validity of the registrations that, on their own, only gave
rise to the presumption of, but was not conclusive on, the issue of ownership.

Likewise, there is also no unfair competition in the instant case. From jurisprudence, unfair competition has
been defined as the passing off (or palming off) or attempting to pass off upon the public of the goods or
business of one person as the goods or business of another with the end and probable effect of deceiving the
public. The essential elements of unfair competition are (1) confusing similarity in the general appearance of
the goods; and (2) intent to deceive the public and defraud a competitor. In the instant case, there is no
evidence exists showing that K Inc. ever attempted to pass off the goods it sold (i.e. sportswear, sporting goods
and equipment) as those of S Corp. In addition, there is no evidence of bad faith or fraud imputable to K Inc.
in using the disputed trademarks, since, as stated, it has already been adjudged as the owner of the marks.
[Superior Commercial Enterprises v. Kunnan Enterprises., G.R. No. 169974, April 20, 2010]

23. L Corp. is an architectural and manufacturing company which was invited to submit designs and
specifications for the design of a residential building. Its designs were approved for construction,
and it subcontracted S Corp. to manufacture and install interior and exterior hatch doors for the 7th
to 22nd floors of the building based on the final shop plans/drawings. On the other hand, M Corp.
was also subcontracted to install interior and exterior hatch doors for the building’s 23rd to 41st
floors. L Corp. demanded that M Corp. cease from infringing its intellectual property rights. But, M
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Corp. insisted that no such infringement took place because the hatch doors it manufactured were
patterned in accordance with the drawings provided by S Corp. L Corp. then registered its designs
and specifications as well as its plans/drawings for interior and exterior hatch doors with the IPO.
Since S Corp. was still manufacturing and fabricating hatch doors, L Corp. accused S Corp. of
copyright infringement. Is there probable cause for copyright infringement?

No. Copyright infringement is committed by any person who shall use original literary or artistic works, or
derivative works, without the copyright owner’s consent in such a manner as to violate the foregoing copy
and economic rights. For a claim of copyright infringement to prevail, the evidence on record must
demonstrate: (1) ownership of a validly copyrighted material by the complainant; and (2) infringement
of the copyright by the respondent. While both elements subsist in the instant case, they did not
simultaneously concur so as to substantiate infringement of L Corp’s copyright registrations. There is no proof
that the S Corp. reprinted the copyrighted sketches/drawings of L Corp.’s hatch doors. Copyright, in the strict
sense of the term, is purely a statutory right. Being a mere statutory grant, the rights are limited to what
the statute confers. It may be obtained and enjoyed only with respect to the subjects and by the persons, and
on terms and conditions specified in the statute. Accordingly, it can cover only the works falling within the
statutory enumeration or description. Since the hatch doors cannot be considered as either
illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography,
topography, architecture or science, to be properly classified as a copyrightable class “I” work, what
was copyrighted were their sketches/drawings only, and not the actual hatch doors themselves. To
constitute infringement, the usurper must have copied or appropriated the original work of an author
or copyright proprietor, absent copying, there can be no infringement of copyright. [Sison Olano, et al. v.
Lim Eng Co, G.R. No. 195835. March 14, 2016]

24. To constitute copyright infringement of computer/software programs, is it required that the


computer/software programs involved first be photographed, photo-engraved, or pictorially
illustrated?

No. Our laws already acknowledge the existence of computer programs as works or creations protected
by copyright. To hold that the legislative intent is to require that the computer programs be first
photographed, photo-engraved, or pictorially illustrated as a condition for the commission of copyright
infringement invites ridicule. Such interpretation of the law defies logic and common sense because it focuses
on terms like “copy,” “multiply,” and “sell,” but blatantly ignored terms like “photographs,” “photo-
engravings,” and “pictorial illustrations.” The mere sale of the illicit copies of a software programs is enough
by itself to show the existence of probable cause for copyright infringement. There is no need to still prove
who copied, replicated or reproduced the software programs. [Microsoft Corporation v. Rolando D.
Manansala, et al., G.R. No. 166391, October 21, 2015]

25. F filed a petition for cancellation of Letters Patent with the Intellectual Property Office (IPO). The
petition was denied by the Bureau of Legal Affairs of the IPO. F, then appealed to the Office of the
Director General of the IPO, who, noting that the verification and certification against forum
shopping attached to the appeal was signed by F’s lawyers, required F to show proof that the
lawyers are authorized to sign on their behalf. F submitted a compliance attaching an old secretary’s
certificate stating that the said lawyers are authorized to sign. Despite this, the Director General
dismissed the appeal as F allegedly failed to show that the lawyers were authorized to sign at the
time the appeal was filed. Is the Director General correct?

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No. The IPO’s own Regulations on Inter Partes Proceedings (which governs petitions for cancellations of a
mark, patent, utility model, industrial design, opposition to registration of a mark and compulsory licensing,
and which were in effect when F filed its appeal) specify that the IPO "shall not be bound by the strict technical
rules of procedure and evidence.” In conformity with this liberality, Sec. 5(b) of the Intellectual Property
Office's Uniform Rules on Appeal expressly enables appellants, who failed to comply with Sec. 4's formal
requirements, to subsequently complete their compliance. Because of this, it was an error for the Director
General of the IPO to have been so rigid in applying a procedural rule and dismissing respondent's appeal.
[Palao v. Florentino International, Inc., G.R. No. 186967, January 18, 2017]

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BANKING LAWS
1. The BSP, through the Monetary Board is granted the power and authority to prescribe different
maximum rates of interest which may be imposed for a loan or renewal thereof or the forbearance
of any money, goods or credits, provided that the changes are effected gradually and announced in
advance. Thus, it issued CB Circular No. 905, removing all interest ceilings and suspended the usury
law. Did the BSP commit grave abuse of discretion in issuing CB Circular No. 905?

No. The BSP has the power to do so. It has been held that CB Circular No. 905 “did not repeal nor in anyway
amend the Usury Law but simply suspended the latter’s effectivity;” that “a [CB] Circular cannot repeal a law,
[for] only a law can repeal another law;” that “by virtue of CB Circular No. 905, the Usury Law has been
rendered ineffective;” and “Usury has been legally non-existent in our jurisdiction. Interest can now be
charged as lender and borrower may agree upon.” The law creating the BSP covered only loans extended by
banks, whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the maximum
rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or credits,
including those for loans of low priority such as consumer loans, as well as such loans made by pawnshops,
finance companies and similar credit institutions. It even authorizes the BSP-MB to prescribe different
maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans
of financial intermediaries. By lifting the interest ceiling, CB Circular No. 905 merely upheld the parties’
freedom of contract to agree freely on the rate of interest. Article 1306 of the New Civil Code provides that
the contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise interest rates to levels which
will either enslave their borrowers or lead to a hemorrhaging of their assets. Stipulations authorizing iniquitous
or unconscionable interests have been invariably struck down for being contrary to morals, if not against the
law. Indeed, under Article 1409 of the Civil Code, these contracts are deemed inexistent and void ab initio,
and therefore cannot be ratified, nor may the right to set up their illegality as a defense be waived.
Nonetheless, the nullity of the stipulation of usurious interest does not affect the lender’s right to recover the
principal of a loan, nor affect the other terms thereof. [Advocates for Truth in Lending v. Bangko Sentral
Monetary Board, G.R. No. 192986, 15 January 2013]

2. Can the exercise by the BSP Monetary Board of its power under Section 37 of RA No. 7653 and
Section 66 of RA No. 8791, imposing, at its discretion, administrative sanctions, upon any bank for
violation of any banking law, be the subject of an action for declaratory relief?

No, the act of the BSP Monetary Board imposing administrative sanctions is done in the exercise of its quasi-
judicial power, which cannot be the subject of an action for declaratory relief.

A quasi-judicial agency or body is an organ of government other than a court and other than a legislature,
which affects the rights of private parties through either adjudication or rule-making. The very definition of an
administrative agency includes its being vested with quasi-judicial powers. The ever increasing variety of
powers and functions given to administrative agencies recognizes the need for the active intervention of
administrative agencies in matters calling for technical knowledge and speed in countless controversies which
cannot possibly be handled by regular courts. A “quasi-judicial function” is a term which applies to the action,
discretion, etc. of public administrative officers or bodies, who are required to investigate facts, or ascertain
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the existence of facts, hold hearings, and draw conclusions from them, as a basis for their official action and
to exercise discretion of a judicial nature.

Undoubtedly, the BSP Monetary Board is a quasi-judicial agency exercising quasi-judicial powers or functions.
The BSP Monetary Board is an independent central monetary authority and a body corporate with fiscal and
administrative autonomy, mandated to provide policy directions in the areas of money, banking, and credit.
It has the power to issue subpoena, to sue for contempt those refusing to obey the subpoena without
justifiable reason, to administer oaths and compel presentation of books, records and others, needed in its
examination, to impose fines and other sanctions and to issue cease and desist order. Section 37 of Republic
Act No. 7653, in particular, explicitly provides that the BSP Monetary Board shall exercise its discretion in
determining whether administrative sanctions should be imposed on banks and quasi-banks, which
necessarily implies that the BSP Monetary Board must conduct some form of investigation or hearing
regarding the same. Having established that the BSP Monetary Board is indeed a quasi-judicial body exercising
quasi-judicial functions, then its act in imposing sanctions upon a bank cannot be the proper subject of an
action for declaratory relief. [Monetary Board v. Philippine Veterans Bank, G.R. No. 189571, January 21, 2015]

3. The late Mr. G deposited 2 million pesos with PALI. Conflicting claims of his relatives were presented
to PALI seeking the release of the money deposited. Pending investigation of the claims, PALI
deposited the money with UCPB, in an account under its name, but which was held in trust for the
heirs of Mr. G. UCPB however allowed PALI to withdraw the money leaving a balance of around 9
thousand pesos. Can UCPB be held liable for the allowing the withdrawal?

No. UCPB did not become a trustee by the mere opening of the account. While this may seem to be the case,
by reason of the fiduciary nature of the bank’s relationship with its depositors, this fiduciary relationship does
not “convert the contract between the bank and its depositors from a simple loan to a trust agreement,
whether express or implied.” It simply means that the bank is obliged to observe “high standards of integrity
and performance” in complying with its obligations under the contract of simple loan. Per Art. 1980 of the Civil
Code, a creditor-debtor relationship exists between the bank and its depositor. The savings deposit agreement
is between the bank and the depositor; by receiving the deposit, the bank impliedly agrees to pay upon
demand and only upon the depositor’s order. [Joseph Goyanko, Jr., as administrator of the Estate of Joseph
Goyanko, Sr. v. United Coconut Planters Bank, Mango Avenue Branch, G.R. No. 179096. February 6, 2013]

4. BOMC was created by a BSP circular to provide support service for banks, and is a subsidiary of BPI.
A service agreement was entered into by BPI and BOMC where the latter provides services to a
branch of the former. Later on, the services included those for another branch. As a result, some
services of the employees of BPI were transferred to BOMC. This was contested by the Union of BPI,
mainly on the ground of conflict between the BSP circular on bank service contracts wherein the
banking functions which cannot be contracted out are enumerated, the DOLE department order
governing what jobs may be contracted out. Which administrative issuance should prevail?

Both actually apply. There is no conflict between D.O. No. 10 and the BSP Circular. In fact, they complement
each other. Consistent with the maxim, interpretare et concordare leges legibus est optimus interpretandi
modus, a statute should be construed not only to be consistent with itself but also to harmonize with other
laws on the same subject matter, as to form a complete, coherent and intelligible system of jurisprudence.
The seemingly conflicting provisions of a law or of two laws must be harmonized to render each effective. It is
only when harmonization is impossible that resort must be made to choosing which law to apply.

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In the instant case, it is true that while the Central Bank regulates banking, and the Labor Code and its
implementing rules regulate the employment relationship, the fact that banks are of a specialized industry
must, however, be taken into account. The competence in determining which banking functions may or may
not be outsourced lies with the BSP. This does not mean that banks can simply outsource banking functions
allowed by the BSP through its circulars, without giving regard to the guidelines set forth under D.O. No. 10
issued by the DOLE.

While D.O. No. 10, Series of 1997, enumerates the permissible contracting or subcontracting activities, it is to
be observed that, its provisions are general in character – "x x x Works or services not directly related or not
integral to the main business or operation of the principal… x x x." This does not limit or prohibit the
appropriate government agency, such as the BSP, to issue rules, regulations or circulars to further and
specifically determine the permissible services to be contracted out. To reconcile the two, the BSP circular in
this case enumerated functions which are ancillary to the business of banks, hence, allowed to be outsourced,
while DOLE D.O. No. 10 is but a guide to determine what functions may be contracted out, subject to the rules
and established jurisprudence on legitimate job contracting and prohibited labor only contracting.

To illustrate, from the very definition of “banks” as provided under the General Banking Law, it can easily be
discerned that banks perform only two (2) main or basic functions – deposit and loan functions. Thus,
cashiering, distribution and bookkeeping are but ancillary functions whose outsourcing is sanctioned under
the BSP Circular as well as D.O. No. 10. In fact, the CBP’s Manual of Regulations has even categorically stated
and emphasized on the prohibition against outsourcing inherent banking functions, which refer to any
contract between the bank and a service provider for the latter to supply, or any act whereby the latter
supplies, the manpower to service the deposit transactions of the former. [BPI Employees Union-Davao City-
Fubu (BPIEU-Davao City-Fubu) v. Bank of the Philippine Islands (BPI), et al., G.R. No. 174912, July 24, 2013]

5. A was the corporate secretary of BPI, a bank. He was also the corporate secretary of IPB, a quasi-
bank. Does this violate the rule on interlocking directors?

No, not exactly. As a general rule, there shall be no concurrent officerships, including secondments, between
banks, or between an bank and a quasi-bank or a non-bank financial institution. However, subject to approval
of the Monetary Board, concurrent officerships, including secondments, may be allowed for “concurrent
officiership positions as corporate secretary or assistance corporate secretary between bank/s, quasi-bank/s
and non-bank financial institutions,” provided that proof of disclosure to and consent from all of the involved
financial institutions, on the concurrent officership positions, shall be submitted to the BSP. Likewise,
concurrent officership positions in the same capacity which do not involve management functions, i.e. internal
auditors, corporate secretary, assistant corporate secretary and security officer, between a quasi-bank and
one or more of its subsidiary quasi-banks or non-bank financial institutions, or between a quasi-bank and/or
a non-bank financial institution, or between bank/s, quasi-bank/s and non-bank financial institution/s, other
than investment houses, may also be allowed. Provided than in the last two instances, at least 20% of the
equity of each bank, quasi-bank and non-bank financial institution is owned by a holding company or by any
banks or quasi-banks within the group. [BSP Circular No. 851, series of 2014, amending Section X145 of the
Manual of Regulations for Banks (MORB) and Section 4145Q of the Manual for Regulations for Non-Bank
Financial Institutions (MORNBFI)]

6. BSP Circular No. 799 was issued in 2013, which changed the legal rate of interest for loans and
forebearances of money from 12% to 6% per annum. How will this affect the rules governing interest
rates laid down by the Court in the case of Eastern Shipping Lines?

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The guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to embody BSP-MB
Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
“Damages” of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on


the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except
when or until the demand can be established with reasonable certainty.

Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot
be so reasonably established at the time the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit. And, in addition to the above, judgments that have become
final and executory prior to July 1, 2013, shall not be disturbed and shall continue to be
implemented applying the rate of interest fixed therein.

[Dario Nacar v. Gallery Frames and/or Felipe Bordey, Jr., G.R. No. 189871, August 13, 2013.]

For transactions involving payment of indemnities in the concept of damages arising from default in the
performance of obligations in general and/or for money judgment not involving a loan or forbearance of
money, goods, or credit, the governing provision is Article 2209 of the Civil Code prescribing a yearly six
percent (6%) interest applies. [Land Bank of the Philippines v. West Bay Colleges, G.R. No. 211287, April 17,
2017]

7. M obtained a loan with time deposit from Prubank evidenced by a promissory note, wherein it was
stipulated that the loan was subject to 21% p.a., attorney's fees equivalent to 15% of the total
amount due but not less than P200.00 and, in case of default, penalty and collection charges of 12%
p.a. of the total amount due, with maturity date of 10 January 1985. The loan was renewed up to
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17 February 1985. Through a deed of assignment, M authorized BPI to pay his loan obligations with
Prubank. M and his wife again obtained a loan from BPI covered by a promissory note with maturity
date of 22 March 1990, to bear interest at 23% p.a., with attorney's fees equivalent to 15% p.a. of
the total amount due. To secure such loan, M mortgaged his land in favor of BPI. M failed to pay his
loan obligations, thus BPI sought to have the mortgage extrajudicially foreclosed. Thereafter, M and
his wife filed an action for annulment of mortgage. Are the interest rate of 23% p.a. and the penalty
charge of 12% p.a., excessive or unconscionable?

No. Jurisprudence establish that the 24% p.a. stipulated interest rate was not considered unconscionable,
thus, the 23% p.a. interest rate imposed on M’s loan in this case can by no means be considered excessive or
unconscionable. In one case, the Court found the stipulated interest rate of 66% p.a. or a 5.5% per month on
a P500,000.00 loan as excessive, unconscionable and exorbitant, hence, contrary to morals if not against the
law and declared such stipulation void. In another case, stipulated interest rates of 3% and 3.81% per month
on a P10 million loan, were found to be excessive and the court reduced the same to 1% per month. Also,
interest rates of 7% and 5% a month, which are equivalent to 84% and 60% p.a., respectively, were said to be
excessive and this reduced by the court to to 1% per month or 12% p.a. On the other hand, in a long line of
cases, the court has ruled that an interest rate of 24% per annum on a loan of P244,000.00, which was agreed
upon by the parties, is not unconscionable and excessive. Thus, the 23% p.s. interest rate in this case is not
unconscionable nor excessive.

Likewise, the stipulated 12% p.a. penalty charge is not excessive or unconscionable, since the court has held
that a 1% surcharge on the principal loan for every month of default is valid. This surcharge or penalty
stipulated in a loan agreement in case of default partakes of the nature of liquidated damages under Art. 2227
of the New Civil Code, and is separate and distinct from interest payment. Also referred to as a penalty clause,
it is expressly recognized by law. It is an accessory undertaking to assume greater liability on the part of an
obligor in case of breach of an obligation. The obligor would then be bound to pay the stipulated amount of
indemnity without the necessity of proof on the existence and on the measure of damages caused by the
breach. The enforcement of the penalty can be demanded by the creditor only when the non-performance is
due to the fault or fraud of the debtor. The non-performance gives rise to the presumption of fault; in order
to avoid the payment of the penalty, the debtor has the burden of proving an excuse - the failure of the
performance was due to either force majeure or the acts of the creditor himself. [Mallari v. Prudential Bank,
G.R. No. 197861, 5 June 2013]

8. The Lims obtained a loan from DBP to finance their business. It was covered by a promissory note
wherein it was stipulated that the loan is subject to an interest rate of 9% per annum and penalty
charge of 11% per annum. They obtained another, covered by another promissory note with an
interest rate of 12% per annum and a penalty charge of 1/3% per month on the overdue
amortization. The loans were covered by mortgages on their properties. They failed to pay their
loans as a result of the collapse of their business. DBP thus sought to foreclose the mortgage and
sell the properties, but the Lims asked for an extension of the period within which they could pay.
They were granted an extension, subject to the condition that they will be liable for an additional
interest of 18.5%, and other additional penalties. Is the imposition of additional penalties and
interests allowed under the law?

No. The imposition of additional interest and penalties not stipulated in the Promissory Notes, should not be
allowed. Art. 1956 of the Civil Code specifically states that "no interest shall be due unless it has been expressly
stipulated in writing." Thus, the payment of interest and penalties on loans is allowed only if the parties agreed
to it and they have reduced their agreement in writing. In this case, the Lims never agreed to pay additional
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interest and penalties. Hence, the imposition of additional interest and penalties is illegal, and thus, void. [Lim
v. Development Bank of the Philiipines, G.R. No. 177050, July 01, 2013]

9. The Spouses J obtained a loan from Chinabank covered by two promissory notes, secured by a real
estate mortgage over their property in White Plains. They failed to pay their loan, thus the mortgage
was foreclosed. Since the proceeds of the sale of the mortgaged property did not cover the entire
amount of the loan, Chinabank filed an action against the Spouses J for collection of the remaining
balance. During the trial it was found that the interest rate on the loan changes every month based
on the prevailing market rate. Though no prior notice of the change would be given, DBP alleged
that they notified the spouses of the prevailing rate by calling them monthly before their account
became past due. DBP also alleged that the spouses agreed to a changing interest rate by signing
the promissory note, indicating that they agreed to pay interest at the prevailing rate. Can DBP
subject the loan of the spouses to a changing rate of interest?

No. It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes
an increase in the stipulated rate of interest without the express conformity of the debtor. Such unbridled
right given to creditors to adjust the interest independently and upwardly would completely take away from
the debtors the right to assent to an important modification in their agreement and would also negate the
element of mutuality in their contracts. While a ceiling on interest rates under the Usury Law was already lifted
under Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets." The
provision in the promissory notes of the Spouses J authorizing DBP to increase, decrease or otherwise change
from time to time the rate of interest and/or bank charges "without advance notice" to the spouses, "in the
event of change in the interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines," does not give DBP unrestrained freedom to charge any rate other than that which was agreed
upon. Here, the monthly upward/downward adjustment of interest rate is left to the will of respondent bank
alone. It violates the essence of mutuality of the contract. Modifications in the rate of interest for loans
pursuant to an escalation clause must be the result of an agreement between the parties. Unless such
important change in the contract terms is mutually agreed upon, it has no binding effect. In the absence of
consent on the part of the spouses to the modifications in the interest rates, the adjusted rates cannot bind
them. Monthly telephone calls to the spouses advising them of the prevailing interest rates would not suffice.
A detailed billing statement based on the new imposed interest with corresponding computation of the total
debt should have been provided by the DBP to enable the spouses to make an informed decision. An
appropriate form must also be signed by the spouses to indicate their conformity to the new rates. Compliance
with these requisites is essential to preserve the mutuality of contracts. For indeed, one-sided impositions do
not have the force of law between the parties, because such impositions are not based on the parties’ essential
equality. Hence, the interest charged over the interest rate indicated in the promissory notes is invalid. [Juico
v. China Banking Corporation, G.R. No. 187678, April 10, 2013]

10. Are provisions on floating interest rates allowed by law?

Yes. The Banko Sentral ng Pilipinas (BSP) Manual of Regulations for Banks (MORB) allows banks and borrowers
to agree on a floating rate of interest, provided that it must be based on market-based reference rates: “The
rate of interest on a floating rate loan during each interest period shall be stated on the basis of Manila
Reference Rates (MRRs), T-Bill Rates or other market based reference rates plus a margin as may be agreed
upon by the parties.” The determination of interest rates cannot be left solely to the will of one party. The
MORB further emphasizes that the reference rate must be stated in writing, and must be agreed upon by the

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parties. [Security Corporation Vs. Sps. Rodrigo and Erlinda Mercado/Sps. Rodrigo and Erlinda Mercado v.
Security Bank and Trust Company, G.R. Nos. 192934 & 197010, June 27, 2018]

11. Are stipulations on floating interest rates the same as escalation clauses?

No. Stipulations on floating rate of interest differ from escalation clauses. Escalation clauses are stipulations
which allow for the increase (as well as the mandatory decrease) of the original fixed interest rate. Meanwhile,
floating rates of interest refer to the variable interest rate stated on a market-based reference rate agreed
upon by the parties. The former refers to the method by which fixed rates may be increased, while the latter
pertains to the interest rate itself that is not fixed. Nevertheless, both are contractual provisions that entail
adjustment of interest rates subject to the principle of mutuality of contracts. The principles on mutuality of
contracts equally apply to both. [Ibid.]

12. A is the estranged wife of B, who had several and/or time deposit accounts with a bank. The bank
allowed the time deposits to be pre-terminated and released the proceeds without requiring the
presentation of the requisite certificates of time deposit. Should the bank be held liable?

Yes. A certificate of deposit is defined as a written acknowledgment by a bank or banker of the receipt of
a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of
the depositor, or to some other person or his order, whereby the relation of debtor and creditor between the
bank and the depositor is created. In particular, the certificates of deposit contain provisions on the amount
of interest, period of maturity, and manner of termination. Specifically, they stressed that endorsement and
presentation of the certificate of deposit is indispensable to their termination. In other words, the accounts
may only be terminated upon endorsement and presentation of the certificates of deposit. Without the
requisite presentation of the certificates of deposit, BPI may not terminate them. The bank, thus, may only
terminate the certificates of deposit after it has diligently completed two steps. First, it must ensure the
identity of the account holder. Second, the bank must demand the surrender of the certificates of deposit.
This is the essence of the contract entered into by the parties which serves as an accountability measure to
other co-depositors. By requiring the presentation of the certificates prior to termination, the other depositors
may rely on the fact that their investments in the interest-yielding accounts may not be indiscriminately
withdrawn by any of their co-depositors. This protective mechanism likewise benefits the bank, which shields
it from liability upon showing that it released the funds in good faith to an account holder who possesses the
certificates. Without the presentation of the certificates of deposit, the bank may not validly terminate the
certificates of deposit. [Bank of the Philippine Islands v. Tacila Fernandez, G.R. No. 173134, September 2, 2015]

13. Spouses A had a dollar account with M Bank. Before their a scheduled trip to Thailand, they
withdrew $1,000.00 from the account at the bank’s Pateros branch and they were given 10 $100.00
noted. When they arrived in Thailand, exchanged five US$ I 00 bills into Baht, but only four of the
US$ I 00 bills had been accepted by the foreign exchange dealer because the fifth one was "no good."
They then asked a companion to exchange the same bill at a local bank in Bangkok, whose bank
teller informed them and their companion that the dollar bill was fake. The bill was confiscated and
the local bank threatened to report them to the police if they insisted in getting the fake dollar bill
back, due to which they had to settle for a Foreign Exchange Note receipt. They then tried to buy
jewelry from a shop owner by using four of the remaining US$100 bills as payment, but the next
day, they had been confronted by the shop owner at their hotel lobby because their four bills turned
out to be counterfeit. During the confrontation, the shop owner had shouted at them: "You
Filipinos, you are all cheaters!" within the hearing distance of fellow travelers and several
foreigners. Upon returning to the Philippines, they confronted the bank manager of M Bank’s
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Pateros branch regarding the fake dollar bills, but she merely insisted that the same were genuine,
having come from their head office. They had the dollar bills examined by the BSP which certified
that they were fake, but which were “near perfect genuine notes.” Can they hold M Bank liable for
moral and exemplary damages because to the incident?

No. The relationship existing between the Spouses A and the bank that resulted from a contract of loan was
that of a creditor-debtor. Even if the law imposes a high standard on the latter as a bank by virtue of the
fiduciary nature of its banking business, bad faith or gross negligence amounting to bad faith was absent.
Hence, there simply was no legal basis for holding the bank liable for moral and exemplary damages. In breach
of contract, moral damages may be awarded only where the defendant acted fraudulently or in bad faith. That
was not true herein because the bank was not shown to have acted fraudulently or in bad faith. With the BSP
stating that the dollars bills were near perfect copies, it appears that even the country's own currency note
expert found it difficult to determine their authenticity. Thus, to hold M Bank liable for damages would be
highly unwarranted in the absence of proof of bad faith, malice or fraud on its part. [Spouses Carbonell v.
Metropolitan Bank & Trust Company, G.R. No. 178467, April 26, 2017]

14. R entered into two transactions with C Bank through one of its Branch Managers. One was a savings
account which the branch manager said would yield high interest rates. The branch manager would
frequent R’s market stall in the public market to deliver the amount of interests she earned from
the savings account. Her passbook would be taken into the bank for updating, which would be
returned the next day, by the said manager. The manager then offered R a back-to-back scheme
where depositors would authorize the bank to use their deposits and invest the same in different
business ventures in return for high interests. R agreed while executing authorization letters for the
branch manager to move her funds around. Later on, R made her daughters co-depositors in her
accounts. However, the branch manager stopped giving her interest earnings from her accounts,
despite several demands. Thus, R and her daughters filed a complaint for sum of money against the
branch manager and the bank. Can the bank be held liable?

Yes. When the action against the bank is premised on. breach of contractual obligations, a bank's liability as
debtor is not merely vicarious but primary, in that the defense of exercise of due diligence in the selection and
supervision of its employees is not available. Liability of banks is also primary and sole when the loss or damage
to its depositors is directly attributable to its acts, finding that the proximate cause of the loss was due to the
bank's negligence or breach. The bank, in its capacity as principal, may also be adjudged liable under the
doctrine of apparent authority. The principal's liability in this case however, is solidary with that of his
employee. The liability of a bank to third persons for acts done by its agents or employees is limited to the
consequences of the latter's acts which it has ratified, or those that resulted in performance of acts within the
scope of actual or apparent authority it has vested.

In the instant case, it appears that R and her daughter entered into two types of transactions with the bank,
the first involving savings accounts, and the other loan agreements. Both of these transactions were entered
into outside the bank's premises, through the branch manager. In the first, the depositors, acts as the creditor,
and the bank, as the debtor. In these agreements, the bank, by receiving the deposit impliedly agrees to pay
upon demand and only upon the depositor's order. Failure by the bank to comply with these obligations 'would
be considered as breach of contract. The second transaction which involves three loan agreements, are the
subject of contention. These loans were obtained by R and her daughters, secured by their deposits with the
bank, and executed with corresponding authorization letters allowing the latter to debit from their account in
case of default. However, instead of investing their money, the branch manager misappropriated the same. R
cannot be blamed for believing that the branch manager has the authority to transact for and on behalf of the
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bank and for relying upon the representations made by him. After all, the branch manager is recognized within
his field and as to third persons as the general agent and is in general charge of the corporation, with apparent
authority commensurate with the ordinary business entrusted him and the usual course and conduct thereof.
As the employer of Robles, the bank is solidarily liable to the R for damages caused by the acts of the former.
[Citystate Savings Bank v. Tobias, G.R. No. 227990, March 7, 2018]

15. UBP, a local bank, placed an ad in a newspaper informing the public of an auction sale of certain
properties acquired by it through foreclosures of mortgages of their clients, including one
condominium unit in Makati City with “95 spm.” Interested, PB was able to visit the unit for
inspection, accompanied by a representative of UBP. Though the unit was irregularly shaped, and
needed some repairs, PB never questioned its size. He likewise inspected the title of the unit, which
had no apparent defects. He was able to place the winning bid during the public auction, and after
executing a contract to sell with UBP, PB occupied the unit and started paying the monthly
amortizations thereon. After some time, PB decided to construct an additional 2 bedrooms in the
unit, but when measured, it turned out that it was only 70 sqm, and not 95 sqm. After UBP insisted
that the unit was indeed 95 sqm., he hired an engineer to confirm the unit’s size, and who certified
that it was indeed just 74 sqm. Unsatisfied with UBP’s insistence on the bigger size of the unit (they
insisted that it was 95 sqm as the size should include common areas), he filed an action for rescission
of the contract to sell and damages against UBP. Can the case prosper?

Yes, the contract should be rescinded and UBP should be held liable for damages. Banks are required to
observe a high degree of diligence in their affairs. This encompasses their dealings concerning properties
offered as security for loans. Ascertainment of the status or condition of a property offered to it as security
for a loan must be a standard and indispensable part of a bank's operations. A bank that wrongly advertises
the area of a property acquired through foreclosure because it failed to dutifully ascertain the property's
specifications is grossly negligent as to practically be in bad faith in offering that property to prospective
buyers. Any sale made on this account is voidable for causal fraud. In actions to void such sales, banks cannot
hide under the defense that a sale was made on an as-is-where-is basis. As-is-where-is stipulations can only
encompass physical features that are readily perceptible by an ordinary person possessing no specialized skills.
Credit investigations are standard practice for banks before approving loans and admitting properties offered
as security. It entails the assessment of such properties: an appraisal of their value, an examination of their
condition, a verification of the authenticity of their title, and an investigation into their real owners and actual
possessors. Whether it was unaware of the unit's actual interior area; or, knew of it, but wrongly thought that
its area should include common spaces, respondent's predicament demonstrates how it failed to exercise
utmost diligence in investigating the Unit offered as security before accepting it. This negligence is so
inexcusable; it is tantamount to bad faith. Even the least effort on UBP’s part could have very easily confirmed
the Unit's true area. Similarly, the most cursory review of our Condominium laws would have ·revealed the
proper reckoning of a condominium unit's area. UBP could have exerted these most elementary efforts to
protect not only clients and innocent purchasers but, most basically, itself. UBP’s failure to do so indicates how
it created a situation that could have led to no other outcome than PB being defrauded. [Joseph Harry Walter
Poole-Blunden v. Union Bank of the Philippines, G.R. No. 205838, November 29, 2017]

16. Spouses A obtained a loan from PNB, secured by a real estate mortgage, and covered by 12
promissory notes providing for varying interest rates of 17.5% to 27% per interest period. It was
agreed upon by the parties that the rate of interest may be increased or decreased for the
subsequent interest periods, with prior notice to the spouses in the event of changes in interest
rates prescribed by law or the Monetary Board, or in the bank’s overall cost of funds. Can PNB
impose varying rates of interest on the loan of the spouses?
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No. The interest rates imposed by DBP are excessive and arbitrary. Thus, the foregoing interest rates imposed
on the Spouse’s loan obligation without their knowledge and consent should be disregarded, not only for being
iniquitous and exorbitant, but also for being violative of the principle of mutuality of contracts. In the instant
case, it is clear from the contract of loan between the spouses and the bank that the spouses, as borrowers,
agreed to the payment of interest on their loan obligation. But, though the rate of interest was subsequently
declared illegal and unconscionable does not entitle the spouses to stop payment of interest. It should be
emphasized that only the rate of interest was declared void. The stipulation requiring the Spouses to pay
interest on their loan remains valid and binding. They are, therefore, liable to pay interest from the time they
defaulted in payment until their loan is fully paid. Pursuant to Circular No. 799, series of 2013, issued by the
Office of the Governor of the BSP on 21 June 2013, and in accordance with the ruling of the Supreme Court in
the recent case of Dario Nacar v. Gallery Frames and/or Felipe Bordey, Jr., effective 1 July 2013, the rate of
interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of an express contract as to such rate of interest, shall be six percent (6%) per annum. Accordingly,
the rate of interest of 12% per annum on petitioners-spouses’ obligation shall apply from the date of default
– until 30 June 2013 only. From 1 July 2013 until fully paid, the legal rate of 6% per annum shall be applied to
the Spouses’ unpaid obligation. [Andal v. Philippine National Bank, G.R. No. 194201, November 27, 2013]

17. Spouses C obtained a loan from TRB, secured by a real estate mortgage over their property. They
failed to pay their loan, thus, TRB foreclosed the mortgage. The property was then sold at public
auction to V, who immediately took possession thereof, and started paying the real property taxes.
The one year redemption period passed without the spouses C redeeming the property. Thus, title
was consolidated under the name of V. Despite this, the Spouses C was able to buy back the
property, and were issued a certificate of redemption duly annotated on the title. V then filed an
action to annul the redemption, notice of which was duly annotated on the title. The court ruled in
favor of V and required the annulment of the redemption and ordered the transfer of the title back
to V. The then decision became final and executory, prompting V to have the decision in his favor
executed. However, the sheriff could not enforce the decision since it was found that the spouses
were again able to get a loan using the said property, this time from PNB. The mortgage was
annotated on the title a month before notice of V’s action was annotated thereon. The spouses
again defaulted on their loan, which resulted in PNB obtaining title to the property as a result of
being the highest bidder at the foreclosure sale, and the spouses having failed to exercise their right
to redeem the property. V now files an action against PNB to recover the property and for payment
of damages. Can V hold PNB liable?

Yes. PNB failed to observe the exacting standards required of banking institutions which are behooved by
statutes and jurisprudence to exercise greater care and prudence before entering into a mortgage contract.
Had the bank been prudent and diligent enough in ascertaining the condition of the property, it could have
discovered that the same was in the possession of V who, at that time, possessed a colorable title thereon. In
fact it was V who was paying the realty tax on the property, a crucial information that the bank could have
easily discovered had it exercised due diligence. Before approving a loan application, it is standard operating
procedure for banks and financial institutions to conduct an ocular inspection of the property offered for
mortgage and to determine the real owner/s thereof. The apparent purpose of an ocular inspection is to
protect the "true owner" of the property as well as innocent third parties with a right, interest or claim thereon
from a usurper who may have acquired a fraudulent certificate of title thereto. In this case, it was adjudged
by the courts of competent jurisdiction in a final and executory decision that the Spouses C’s reacquisition of
the property after the lapse of the redemption period is fraudulent and the property used by the mortgagors
as collateral rightfully belongs to V, an innocent third party with a right, could have been protected if PNB only
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observed the degree diligence expected from it. The highest degree of diligence is expected, and high
standards of integrity and performance are even required, of banks. PNB thus fell short in exercising the
degree of diligence expected from bank and financial institutions, in readily approving the loan and accepting
the collateral offered by the Spouses C without first ascertaining the real ownership of the property. It should
not have simply relied on the face of title but went further to physically ascertain the actual condition of the
property. That the property offered as security was in the possession of the person other than the one applying
for the loan and the taxes were declared not in their names could have raised a suspicion. A person who
deliberately ignores a significant fact that could create suspicion in an otherwise reasonable person is not an
innocent purchaser for value. Thus, it should be liable for damages. [Philippine National Bank v. Vila, G.R. No.
213241, August 1 2016]

18. ECBI was a banking institution which underwent BSP’s general examination. It was issued a cease
and desist order and was enjoined from pursuing certain acts and transactions that were considered
as unsafe or unsound banking practices, and from doing such other acts or transactions constituting
fraud or might result in the dissipation of its assets. This was the result of the continuing refusal of
ECBI’s BOD to allow the examination of the BSP. Thereafter, for defying the cease and desist order,
BSP issued as resolution placing it under receivership. Was the action of the BSP proper?

Yes. The Monetary Board (MB) may forbid a bank from doing business and place it under receivership without
prior notice and hearing. This is called the “close now, hear later” doctrine. It must be emphasized that R.A
.No. 7653 is a later law and under said act, the power of the MB over banks, including rural banks, was
increased and expanded. The Court, in several cases, upheld the power of the MB to take over banks without
need for prior hearing. Prior hearing is not necessary inasmuch as the law entrusts to the MB the appreciation
and determination of whether any or all of the statutory grounds for the closure and receivership of the erring
bank are present. The MB, under R.A. No. 7653, has been invested with more power of closure and placement
of a bank under receivership for insolvency or illiquidity, or because the bank’s continuance in business would
probably result in the loss to depositors or creditors.

Accordingly, the MB can immediately implement its resolution prohibiting a banking institution from doing
business in the Philippines and, thereafter, appoint the PDIC as receiver. The procedure for the involuntary
closure of a bank is summary and expeditious in nature. Such action of the MB shall be final and executory,
but may later be subjected to a judicial scrutiny via a petition for certiorari to be filed by the stockholders of
record of the bank representing a majority of the capital stock. Obviously, this procedure is designed to protect
the interest of all concerned, that is, the depositors, creditors and stockholders, the bank itself and the general
public. The protection afforded public interest warrants the exercise of a summary closure.

Management take-over under Sec. 11 of R.A. No. 7353 is no longer feasible considering the actuations of the
president of ECBI, which may show serious conditions of insolvency and illiquidity. Besides, placing ECBI under
receivership would effectively put a stop to the draining of its assets. [Alfeo D. Vivas, on his behalf and on
behalf of the Shareholders or Eurocredit Community Bank v. The Monetary Board of the Bangko Sentral ng
Pilipinas and the Philippine Deposit Insurance Corporation, G.R. No. 191424, August 7, 2013]

19. What is the nature of liquidation proceedings?

A liquidation proceeding is a special proceeding involving the administration and disposition, with judicial
intervention, of an insolvent's assets for the benefit of its creditors. Under the Central Bank Act, this
proceeding is cognizable by the Regional Trial Courts. But, if liquidation proceedings have already been started
in one court, another RTC branch cannot rule on the propriety of the rulings of the liquidation court.
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Due to the nature of their transactions and functions, the banking industry is affected with public interest and
banks can properly be subject to reasonable regulation under the police power of the State. It is the
Government's responsibility to see to it that the financial interests of those who deal with banks and banking
institutions are protected. Hence, the Monetary Board, under certain circumstances, is empowered to
(summarily and without need for prior hearing) forbid a banking institution from doing business in the
Philippines and designate a Receiver for the institution. Such grounds include:

1) Inability to pay its liabilities as they become due in the ordinary course of business: Provided,
That this shall not include inability to pay caused by extraordinary demands induced by financial
panic in the banking community; or

2) Has sufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or

3) Cannot continue in business without involving probable losses to its depositors or creditors; or

4) Willful violation of a cease and desist order that has become final, involving acts or transactions
which amount to fraud or a dissipation of the assets of the institution.

The judicial liquidation is intended to prevent multiplicity of actions against the insolvent bank. The lawmaking
body contemplated that for convenience only one court, if possible, should pass upon the claims against the
insolvent bank and that the liquidation court should assist the Superintendent of Banks and control his
operations. It is a pragmatic arrangement designed to establish due process and orderliness in the liquidation
of the bank, to obviate the proliferation of litigations and to avoid injustice and arbitrariness. Notwithstanding
this "pragmatic arrangement," claims may, under certain circumstances, be litigated before courts other than
the liquidation court. This, however, does not mean that the other courts can interfere with the liquidation
proceedings. Adjudicated claims must still be submitted to the liquidators for processing. [The Consolidated
Bank and Trust Corporation v. The Court of Appeals, United Pacific Leasing and Finance Corporation, G.R. No.
169457, October 19, 2015]

20. Can a closed bank under receivership, file a Petition for Review without joining its statutory
receiver, the Philippine Deposit Insurance Corporation, as a party to the case?

No. A bank which has been ordered closed by the Bangko Sentral ng Pilipinas is placed under the receivership
of the Philippine Deposit Insurance Corporation. As a consequence of the receivership, the closed bank may
sue and be sued only through its receiver, the Philippine Deposit Insurance Corporation. Considering that the
receiver has the power to take charge of all the· assets of the closed bank and to institute for or defend· ... any
action against it, only the receiver, in its fiduciary capacity, may sue and be sued on behalf of the closed bank.
Any action filed by the closed bank without its receiver may be dismissed. [Banco Filipino v. Bangko Sentral ng
Pilipinas, G.R. No. 200678, June 4, 2018]

21. What is the effect of bank liquidation on interest payments?

When a bank is ordered closed by the Monetary Board; PDIC is designated as the receiver which shall then
proceed with the takeover and liquidation of the closed bank. The placement of a bank under liquidation has
the following effect on interest payments: "The liability of a bank to pay interest on deposits and all other
obligations as of closure shall cease upon its closure by the Monetary Board without prejudice to the first
paragraph of Section 85 of Republic Act No. 7653 (the New Central Bank Act)," and on final decisions against
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the closed bank: "The execution and enforcement of a final decision of a court other than the liquidation court
against the assets of a closed bank shall be stayed. The prevailing party shall file the final decision as a claim
with the liquidation court and settled in accordance with the Rules on Concurrence and Preference of Credits
under the Civil Code or other laws." [Allan S. Cu v. Small Business Guarantee and Finance Corporation through
Mr. Hector M. Olmedillo, G.R. No. 211222, August 7, 2017]

22. What is a “petition for assistance in the liquidation of a closed bank”?

A petition for assistance in the liquidation of a closed bank is a special proceeding for the liquidation of a closed
bank, and includes the declaration of the concomitant rights of its creditors and the order of payment of their
valid claims in the disposition of assets. It is a proceeding in rem and the liquidation court has exclusive
jurisdiction to adjudicate disputed claims against the closed bank, assist in the enforcement of individual
liabilities of the stockholders, directors and officers, and decide on all other issues as may be material to
implement the distribution plan adopted by PDIC for general application to all closed banks. The provisions of
the Securities Regulation Code or RA 8799, and Supreme Court Administrative Matter No. 00-8-10-SC or the
Rules of Procedure on Corporate Rehabilitation are not applicable to the petition for assistance in the
liquidation of closed banks. [Ibid.]

23. Must the Monetary Board first make its own independent finding that a bank could no longer be
rehabilitated - instead of merely relying on the findings of the PDIC - before ordering the liquidation
of the said bank?

No. Nothing in Section 30 of RA 7653 requires the BSP, through the Monetary Board, to make an· independent
determination of whether a bank may still be rehabilitated or not. As expressly stated in the afore-cited
provision, once the receiver determines that rehabilitation is no longer feasible, the Monetary Board is simply
obligated to: (a) notify in writing the bank's board of directors of the same; and ( b) direct the PDIC to proceed
with liquidation. If the law had indeed intended that the Monetary Board make a separate and distinct factual
determination before it can order the liquidation of a bank or quasi-bank, then there should have been a
provision to that effect. There being none, it can safely be concluded that the Monetary Board is not so
required when the PDIC has already made such determination. It must be stressed that the BSP (the umbrella
agency of the Monetary Board), in its capacity as government regulator of banks, and the PDIC, as statutory
receiver of banks under RA 7653, are the principal agencies mandated by law to determine the financial
viability of banks and quasi-banks, and facilitate the receivership and liquidation of closed financial
institutions, upon a factual determination of the latter's insolvency. [Apex Bancrights Holdings v. Bangko
Sentral ng Pilipinas, G.R. No. 214866, October 2, 2017]

24. The BSP placed G7 Bank under receivership by the PDIC. Consequently, PDIC closed all of its deposit
accounts with other banks, including a checking account with the Land Bank against which the
several checks were issued Mr. Cu, one of its officers, to pay their creditor, SB Corp. PDIC likewise
issued a cease and desist order against the members of the Board of Directors and officers from
continuing business. Since the said account was closed, when SB Corp. presented the checks issued
by Mr. C, they were dishonored. Since Mr. C was not able to pay the amounts of the dishonored
checks despite written demand, SB Corp. filed a case against Mr. C for violation of BP 22. Should the
case against Mr. C be dismissed?

Yes. In the instant case, the bank had already been placed under receivership and its accounts have been
closed by the receiver, PDIC, when the checks were dishonored. This is similar to a case involving an SEC order
of suspension of payments preceded the presentment for encashment of the subject checks therein. Here,
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the subject checks were deposited by SB Corp. and dishonored for reason of "Account Closed," after the
closure of G7 Bank and after the PDIC, through its Deputy Receiver, had taken over G7 Bank, its premises,
assets and records and had issued a cease and desist order against the members of the Board of Directors and
officers of G7 Bank and closed all its deposit accounts with other banks, including its checking account with
the LBP against which the five disputed checks were issued. The said acts of the BSP and PDIC had the effect
of suspending or staying the demandability of the loan obligation of G7 Bank to SB Corp. with the concomitant
cessation of the former' s obligation to pay interest to the latter upon G7 Bank's closure. Moreover, these
events also affected G7 Bank's "liquidability" -subjecting the exact amount that SB Corp. is entitled to collect
from G7 Bank to the distribution plan adopted by PDIC and approved by the liquidation court in accordance
with the Rules on Concurrence and Preference of Credits under the Civil Code. Thus, at the time SB Corp.
presented the subject checks for deposit/encashment, it had no right to demand payment because the
underlying obligation was not yet due and demandable from Mr. C and he could not be held liable for the civil
obligations of G7 Bank covered by the subject dishonored checks on account of the BSP’s closure of G7 Bank
and the takeover thereof by PDIC. Even payment of interest on G7 Bank's loan ceased upon its closure.
Moreover, as of the time of presentment of the checks, there was yet no determination of the exact amount
that SB Corp. was entitled to recover from G7 Bank as this would still have to be ascertained by the liquidation
court pursuant to the PDIC's distribution plan in accordance with the Concurrence and Preference of Credits
under the Civil Code. [Ibid.]

25. How do you determine the insured deposit amount of a depositor?

Under Republic Act No. 3591 (PDIC Charter), as amended, all deposits in a bank maintained in the same right
and capacity for a depositor's benefit, either in his name or in the name of others, shall be added together for
the purpose of determining the insured deposit amount due to a bona fide depositor, which amount should
not exceed the maximum deposit insurance coverage (MDIC) of P250,000.00. Thus, the entitlement to a
deposit insurance is based not on the number of bank accounts held, but on the number of beneficial owners.
[Philippine Deposit Insurance Corporation v. Manu Gidwani, G.R. No. 234616, June 20, 2018]

26. G Corp. obtained a loan from DBP bank to finance its development of a resort complex. To secure
it, a promissory note was executed by G Corp. and mortgages were constituted on its properties.
Also, a cash equity was put up. The loan was released to G Corp. in tranches, but DBP eventually
refused to release the balance thereof, alleging that it failed to develop the said resort complex.
DBP then foreclose the mortgages, which prompted G Corp. to file an action for specific performance
against DBP. Was it proper for DBP to foreclose the mortgages?

No. Considering that it had yet to release the entire proceeds of the loan, DBP could not yet make an effective
demand for payment upon G Corp. to perform its obligation under the loan. Being a banking institution, DBP
owed it to G Corp. to exercise the highest degree of diligence, as well as to observe the high standards of
integrity and performance in all its transactions because its business was imbued with public interest. The high
standards were also necessary to ensure public confidence in the banking system. The stability of banks largely
depends on the confidence of the people in the honesty and efficiency of banks. Thus, DBP had to act with
great care in applying the stipulations of its agreement with G Corp., lest it erodes such public confidence. Yet,
DBP failed in its duty to exercise the highest degree of diligence by prematurely foreclosing the mortgages and
unwarrantedly causing the foreclosure sale of the mortgaged properties despite G Corp. not being yet in
default. [Development Bank of the Philippines (DBP) v. Guariña Agricultural and Realty Development
Corporation, G.R. No. 160758. January 15, 2014]

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27. The spouses S applied for a loan which was granted by BPI for a term of six months, secured by a
mortgage over their land. The Spouses S later on obtained a credit line from BPI in the amount of
P5.7 million. The mortgage was released on the representation of the spouses that the proceeds
will be used to pay the loans, but the same remained unpaid. Having defaulted on their loan
obligations, BPI demanded payment. However, the spouses filed a complaint against BPI, to
maintain the status quo, and alleged that BPI "deliberately refused to comply with the
condition/undertaking of the loan for IGLF endorsement and approval" until the maturity date of
the loan lapsed to their great prejudice and irreparable damage. They further alleged they neither
executed any P5.7 Million promissory note nor did they receive P5.7 Million from BPI. Thus, there
is no existing P5.7 Million Credit Line Facility Agreement as far as they are concerned. Is the
contention of the Spouses correct?

No. It appears from the allegations that Spouses S have misconstrued the concept of a Credit Line Facility
Agreement. A credit line is "that amount of money or merchandise which a banker, merchant, or supplier
agrees to supply to a person on credit and generally agreed to in advance." It is the fixed limit of credit granted
by a bank, retailer, or credit card issuer to a customer, to the full extent of which the latter may avail himself
of his dealings with the former but which he must not exceed and is usually intended to cover a series of
transactions in which case, when the customer’s line of credit is nearly exhausted, he is expected to reduce
his indebtedness by payments before making any further drawings.

Thus, contrary to the belief and understanding of Spouses S, BPI does not have to require the execution of
promissory note of the entire P5.7 Million since a credit line as stated above, is merely a fixed limit of credit.
Furthermore, still applying the above quoted definition, a credit line usually presupposes a series of
transactions until the credit line is nearly exhausted. BPI is not obliged to release the amount of P5.7 Million
to Spouses S all at once, in a single transaction. [Spouses Pio Dato and Sonia Y. Sia v. Bank of the Philippine
Islands, G.R. No. 181873, November 27, 2013]

28. ABC is a trust corporation which is a subsidiary of Z Corp., a quasi-bank. Are the assets held in trust
by ABC included in the computation of the single borrower’s limit for Z Corp.?

No. In case a stand-alone trust corporation is a subsidiary or an affiliate of a quasi-bank, the asset under
management of the trust corporation shall not form part of the relevant exposures of the parent quasi-bank
for purposes of calculating the single borrower’s limit and the ceilings for accommodation to DOSRI of the
parent quasi-bank. Likewise, the purchase by the trust corporation, in behalf of its client, of securities and
instruments issued by its parent quasi-bank shall not form part of the relevant exposure of the trust
corporation for purposes of the single borrower’s limits and DOSRI ceilings of the said trust corporation. [BSP
Circular No. 849, Series of 2014]

29. Can the account of a depositor be made the subject of a waiver of bank secrecy laws, based on a
mere provision in a compromise agreement involving parties other than the depositor himself?

No. Sec. 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits enacted in 1955, was first amended by
Presidential Decree No. 1792 in 1981 and further amended by R.A. No. 7653 in 1993. It now provides for
specific exceptions when records of deposits may be disclosed. These are under any of the following instances:
(a) upon written permission of the depositor, (b) in cases of impeachment, (c) upon order of a competent
court in the case of bribery or dereliction of duty of public officials or, (d) when the money deposited or
invested is the subject matter of the litigation, and (e) in cases of violation of the Anti-Money Laundering Act,
the Anti-Money Laundering Council may inquire into a bank account upon order of any competent court.
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In this case, the compromise agreement did not involve the depositor. There was no written consent given by
the depositor or its representatives, that it is waiving the confidentiality of its bank deposits. The provision on
the waiver of the confidentiality of bank deposits was merely inserted in the agreement. It is clear therefore
that the depositor is not bound by the said provision since it was without the express consent of the depositor
who was not a party and signatory to the said agreement.

Neither can the depositor be deemed to have given its permission by failure to interpose its objection during
the proceedings. It is an elementary rule that the existence of a waiver must be positively demonstrated since
a waiver by implication is not normally countenanced. The norm is that a waiver must not only be voluntary,
but must have been made knowingly, intelligently, and with sufficient awareness of the relevant circumstances
and likely consequences. There must be persuasive evidence to show an actual intention to relinquish the
right. Mere silence on the part of the holder of the right should not be construed as a surrender thereof; the
courts must indulge every reasonable presumption against the existence and validity of such waiver. [Dona
Adela International, Inc. v. Trade Investment Development Corporation, G.R. No. 201931, February 11, 2015]

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ANTI-MONEY LAUNDERING ACT ((R.A. NO. 9160, AS AMENDED


BY R.A. NO. 9194)
1. The AMLC filed an Urgent Ex-Parte Application for the issuance of a freeze order with the CA against
certain monetary instruments and properties of the L et al., pursuant to the Anti-Money Laundering
Act of 2001. This application was based on the February 1, 2005 letter of the Office of the
Ombudsman to the AMLC, recommending that the latter conduct an investigation on L and his
family for possible violation of the law. The CA granted the application and issued the freeze order.
Thereafter, an Urgent Motion for Extension of Effectivity of Freeze Order was filed, arguing that if
the bank accounts, web accounts and vehicles of L not continuously frozen, they could be placed
beyond the reach of law enforcement authorities and the government’s efforts to recover the
proceeds of the L’s unlawful activities would be frustrated. In support of the motion, it was alleged
that various cases against L were presently being investigated by the Ombudsman. The motion for
extension was also granted by the CA. L sought to have the extended freeze order lifted, arguing
that there was no evidence to support the extension of the freeze order, and that the extension not
only deprived them of their property without due process; it also punished them before their guilt
could be proven. The CA subsequently denied this motion. The Rules on Civil Forfeiture took effect
and stated that an extension of a freeze order was only for a maximum period of 6 months. Thus, L
asked the CA to reconsider its resolution denying his motion, insisting that the freeze order should
be lifted considering: (a) no predicate crime has been proven to support the freeze order’s issuance;
(b) the freeze order expired six months after it was issued; and (c) the freeze order is provisional in
character and not intended to supplant a case for money laundering. Should L’s Motion for
Reconsideration be granted?

Yes. A freeze order is an extraordinary and interim relief issued by the CA to prevent the dissipation, removal,
or disposal of properties that are suspected to be the proceeds of, or related to, unlawful activities as defined
in Section 3(i) of RA No. 9160, as amended. The primary objective of a freeze order is to temporarily preserve
monetary instruments or property that are in any way related to an unlawful activity or money laundering, by
preventing the owner from utilizing them during the duration of the freeze order. The relief is pre-emptive in
character, meant to prevent the owner from disposing his property and thwarting the State’s effort in building
its case and eventually filing civil forfeiture proceedings and/or prosecuting the owner.

The Anti-Money Laundering Act of 2001, as amended, from the point of view of the freeze order that it
authorizes, shows that the law is silent on the maximum period of time that the freeze order can be extended
by the CA. The final sentence of Section 10 of the Anti-Money Laundering Act of 2001 provides, "the freeze
order shall be for a period of twenty (20) days unless extended by the court." In contrast, Section 55 of the
Rule in Civil Forfeiture Cases qualifies the grant of extension "for a period not exceeding six months" "for good
cause" shown.

Nothing in the law grants the owner of the "frozen" property any substantive right to demand that the freeze
order be lifted, except by implication, i.e., if he can show that no probable cause exists or if the 20-day period
has already lapsed without any extension being requested from and granted by the CA. Notably, the Senate
deliberations on RA No. 9160 even suggest the intent on the part of our legislators to make the freeze order
effective until the termination of the case, when necessary.

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However, the supreme court has issued the rules on civil forfeiture cases, which limits the effectivity of an
extended freeze order to six months, since leaving the grant of an extension to the sole discretion of the CA,
which may extend a freeze order indefinitely or to an unreasonable amount of time, carries serious
implications on an individual’s substantive right to due process. In this case, the law has left to the CA the
authority to resolve the issue of extending the freeze order it issued. The extension granted by the CA
effectively bars L from using any of the property covered by the freeze order until after an eventual civil
forfeiture proceeding is concluded in their favor and after they shall have been adjudged not guilty of the
crimes they are suspected of committing. The periods of extension granted by the CA is way beyond the intent
and purposes of a freeze order which is intended solely as an interim relief; the civil and criminal trial courts
can very well handle the disposition of properties related to a forfeiture case or to a crime charged and need
not rely on the interim relief that the appellate court issued as a guarantee against loss of property while the
government is preparing its full case. A freeze order is meant to have a temporary effect; it was never intended
to supplant or replace the actual forfeiture cases where the provisional remedy - which means, the remedy is
an adjunct of or an incident to the main action – of asking for the issuance of an asset preservation order from
the court where the petition is filed is precisely available. For emphasis, a freeze order is both a preservatory
and preemptive remedy.

Thus, as a rule, the effectivity of a freeze order may be extended by the CA for a period not exceeding six
months. Before or upon the lapse of this period, ideally, the Republic should have already filed a case for civil
forfeiture against the property owner with the proper courts and accordingly secure an asset preservation
order or it should have filed the necessary information. Otherwise, the property owner should already be able
to fully enjoy his property without any legal process affecting it. However, should it become completely
necessary for the Republic to further extend the duration of the freeze order, it should file the necessary
motion before the expiration of the six-month period and explain the reason or reasons for its failure to file
an appropriate case and justify the period of extension sought. The freeze order should remain effective prior
to the resolution by the CA, which is hereby directed to resolve this kind of motion for extension with
reasonable dispatch. [Ligot v. Republic of the Philippines, G.R. No. 176944, March 6, 2013]

2. When can a trial court issue a bank inquiry order in favor of the AMLC?

For the trial court to issue a bank inquiry order, it is necessary for the AMLC to be able to show specific facts
and circumstances that provide a link between an unlawful activity or a money laundering offense, on the one
hand, and the account or monetary instrument or property sought to be examined on the other hand.
Likewise, a bank inquiry order may be applied for ex parte by the AMLC, which ex parte application oes not
violate substantive due process. There is no such violation, because the physical seizure of the targeted
corporeal property is not contemplated in any form by the law. The AMLC may indeed be authorized to apply
ex parte for an inquiry into bank accounts, but only in pursuance of its investigative functions akin to those of
the NBI. As the AMLC does not exercise quasi-judicial functions, its inquiry by court order into bank deposits
or investments cannot be said to violate any person's constitutional right to procedural due process. The
holder of a bank account that is the subject of a bank inquiry order issued ex parte has the opportunity to
question the issuance of such an order after a freeze order has been issued against the account. The account
holder can then question not only the finding of probable cause for the issuance of the freeze order, but also
the finding of probable cause for the issuance of the bank inquiry order. [Republic v. Bolante, G.R. Nos. 186717
& 190737, April 17, 2017]

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FOREIGN INVESTMENTS ACT (R.A. NO. 7042)

1. The Foreign Investments Act provides that a “where a corporation and its non-Filipino stockholders
own stocks in an SEC registered enterprise, at least 60% of the capital stock of outstanding and
entitled to vote of each of both corporations must be owned and held by citizens of the Philippines
and at least 60% of the members of the Board of Directors of each of both corporations, must be
citizens of the Philippines, in order that the corporation shall be considered a Philippine national.”
Does this mean that the grandfather rules has been abandoned?

No. The quoted portion of the FIA merely means that "corporate layering" is allowed under the law; but if it is
used to circumvent the Constitution and pertinent laws, then it becomes illegal. Though this is allowed, the
intention of the framers of the Philippine Constitution is to still apply the grandfather rule when corporate
layering is present. Elementary in statutory construction is when there is conflict between the Constitution
and a statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions under Art.
XII of the Constitution on National Economy and Patrimony, the quoted provision of the FIA will have no place
of application. As decreed by the honorable framers of our Constitution, the grandfather rule prevails and
must be applied. [Narra Nickel Mining and Development Corp., et al. v. Redmont Consolidated Mines, G.R. No.
195580, April 21, 2014]

2. Is a foreign corporation required to obtain a license to transact business in the Philippines if such
becomes a member of a petroleum consortium, but is not the operator thereof, and will hold only
a minority and non-controlling interest therein?

Yes, if the corporation is not a mere limited partner, then the subject foreign corporation still needs to obtain
a license to do business in the Philippines under the Foreign Investments Act (FIA) of 1991, notwithstanding
the fact that it holds a minority and non-controlling interest in the consortium. A consortium or joint venture
is a form of partnership, governed by the laws of partnership. Doing business is, among others, the
participation in the management, supervision, or control of any domestic business, firm, entity, or corporation.
in order to be exempted from obtaining a license to do business in the Philippines, the foreign corporation
must prove that it merely invested as a shareholder in a domestic corporation. This is limited to ‘investment
in a corporation’, which does not necessarily include ‘investment in a partnership’. There being differences
between the two, the effects of such investments should be differentiated. Investment in a partnership will
only be akin to an investment in a corporation that is exempt from the doing of business rule only when the
foreign corporation is exclusively a limited partner and takes no part in the management and control of the
business operation of the limited partnership. If the corporation is not a limited partner and actively takes part
in the control of the business, then the corporation is doing business in the Philippines as provided in Sec. 3(d)
of the FIA, and thus, must secure a license to do business in the Philippines. [SEC Opinion No. 14-01, 21
February 2014]

3. R. Hut, a Japanese company wishes to engage in a restaurant business in the Philippines by forming
a local company with Filipino individuals and companies. R Hut will own 40% of the shares, while
the Filipinos will own 60%. According to DOJ Opinion No. 248, s. 1954 dated September 22, 1954, in
a restaurant business, the eating of food by customers, in the regular course of business, involves a
sale of the food eaten, which falls within the definition of retail trade under the Retail Trade
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Liberalization Act (RTLA) of 2000. The RTLA provides certain foreign ownership limitations based on
the amount of minimum paid-up capital. Will the local company of R Hut be considered as a
Philippine national and how much capital should it have?

Assuming that 60% of the outstanding and voting capital stock of the local company to be set up by R Hut will
be owned and held by Filipinos, then it is a Philippine National under the Foreign Investments Act. As for its
capital requirements, the RTLA provides as follows:

a. Enterprises with paid-up capital of less than $2,500,000.00, should be wholly owned by Filipinos; and
b. Enterprises with minimum paid-up capital of $2,500,000.00 or more may be wholly owned by
Foreigners.

Thus, R Hut should comply with the $2,500,000.00 capital requirement under the RTLA since it is only 60%
Filipino owned, even if it is a Philippine National. [SEC-OGC Opinion No. 18-14, August 24, 2018]

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ELECTRONIC COMMERCE ACT OF 2000 (R.A. NO. 8792) AND THE RULES ON
ELECTRONIC EVIDENCE (A.M. NO. 01-7-01-SC)

1. During trial of a case, an e-mail printout was presented in court. This e-mail printout
contains advice from a bank informing another bank that the a specific check was
dishonored. The opposing party to the case argued that the same should not be admitted
by the court for lack of proper authentication. On the other hand, the other party countered
that it was merely corroborative evidence, and lack of authentication did not diminish its
value. Should the same be admitted?

Yes. While the said e-mail may not have been properly authenticated in accordance with the Rules
on Electronic Evidence, the same was merely corroborative evidence, and thus, its admissibility or
inadmissibility should not diminish the probative value of the other evidence presented during the
trial. Likewise, despite lack of authentication, there appears to be no objection on the part of the
other party when the same was presented. t is well-settled that evidence not objected to is deemed
admitted and may validly be considered by the court in arriving at its judgment. [Bank of the
Philippine Islands v. Mendoza, G.R. No. 198799, March 20, 2017]

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FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010 (R.A. NO. 10142)


1. What are insolvency proceedings?

Insolvency proceedings are defined as the statutory procedures by which a debtor obtains financial relief and
undergoes judicially supervised reorganization or liquidation of its assets for the benefit of its creditors.
[Pilipinas Petroleum v. Royal Ferry Services, G.R. No. 188146, February 1, 2017]

2. What law governs insolvency?

The first insolvency law, Republic Act No. 1956, was entitled "An Act Providing for the Suspension of Payments,
the Relief of Insolvent Debtors, the Protection of Creditors, and the Punishment of Fraudulent Debtors
(Insolvency Law)". It was derived from the Insolvency Act of California ( 1895), with few provisions taken from
the United States Bankruptcy Act of 1898.76 With the enactment of Republic Act No. 10142, otherwise known
as the Financial Rehabilitation and Insolvency Act of 2010 (FRIA), the Insolvency Law was expressly repealed
on July 18, 2010. The FRIA is currently the special law that governs insolvency. [Ibid.]

3. What is corporate rehabilitation?

Case law has defined corporate rehabilitation as an attempt to conserve and administer the assets of an
insolvent corporation in the hope of its eventual return from financial stress to solvency. It contemplates the
continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former
position of successful operation and liquidity. The inherent purpose of rehabilitation is to find ways and means
to minimize the expenses of the distressed corporation during the rehabilitation period by providing the best
possible framework for the corporation to gradually regain or achieve a sustainable operating form. "[It]
enable[s] the company to gain a new lease in life and thereby allow creditors to be paid [t]heir claims from its
earnings. Thus, rehabilitation shall be undertaken when it is shown that the continued operation of the
corporation is economically more feasible and its creditors can recover, by way of the present value of
payments projected in the plan, more, if the corporation continues as a going concern than if it is immediately
liquidated. [Bureau of Internal Revenue v. Lepanto Ceramic, Inc., G.R. No. 224764, April 24, 2017]

4. Once issued, what is the effect of a commencement order under the FRIA?

Upon the issuance of a Commencement Order - which includes a Stay or Suspension Order - all actions or
proceedings, in court or otherwise, for the enforcement of "claims" against the distressed company shall be
suspended. Under the FIRA, claim "shall refer to all claims or demands of whatever nature or character against
the debtor or its property, whether for money or otherwise, liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed, including, but not limited to; (1) all claims of the government,
whether national or local, including taxes, tariffs and customs duties; and (2) claims against directors and
officers of the debtor arising from acts done in the discharge of their functions falling within the scope of their
authority: Provided, That, this inclusion does not prohibit the creditors or third parties from filing cases against
the directors and officers acting in their personal capacities." Suspension of all actions involving claims against
the corporation includes collections, or attempts to collect deficiency taxes instituted by the BIR.

To clarify, however, creditors of the distressed corporation are not without remedy as they may still submit
their claims to the rehabilitation court for proper consideration so that they may participate in the
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MERCANTILE LAW UPDATES
2013-2018
By Esther M. Weigand
proceedings, keeping in mind the general policy of the law "to ensure or maintain certainty and predictability
in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights
and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated." In other
words, the creditors must ventilate their claims before the rehabilitation court, and any "[a]ttempts to seek
legal or other resource against the distressed corporation shall be sufficient to support a finding of indirect
contempt of court." [Ibid.]

5. A Corp. filed a petition for corporate rehabilitation. The same was found to be sufficient in form and
substance by the court, which thus issued a commencement order declaring A Corp. as being under
corporate rehabilitation and directed the BIR to file and serve on A Corp. its comment or opposition
to the petition, or its claims against the said corporation. Notice of the said order was sent to the
BIR by personal serving, and the order was likewise published. The BIR, however, issued a Notice of
Informal Conference to A Corp. for its tax liabilities for the year 2010, and a Formal Letter of Demand
informing A Corp. of deficiency taxes for a particular year, and demanding payment for the same.
Can the BIR be cited for indirect contempt for defying the commencement order?

Yes. Notably, the acts of sending a notice of informal conference and a Formal Letter of Demand are part and
parcel of the entire process for the assessment and collection of deficiency taxes from a delinquent taxpayer,
-an action or proceeding for the enforcement of a claim which should have been suspended pursuant to the
Commencement Order. Unmistakably, the BIR’s acts are in clear defiance of the Commencement Order. it was
improper for the BIR to collect, or even attempt to collect, deficiency taxes from A Corp. outside of the
rehabilitation proceedings concerning the latter, and in the process, willfully disregard the Commencement
Order lawfully issued by the Rehabilitation Court. Hence, court may correctly cite them for indirect contempt.
[Ibid.]

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