JAN MICHAEL D.

LORENZO
SUGGESTED ANSWERS
TO JOINT MOCK BAR EXAMINATIONS
IN MERCANTILE LAW 2014
PART I
I.
a. No, the argument of Maria Montes is not tenable because as held by the
Supreme Court in the case of China Banking Corporation vs. Ortega
(1973), it was the intention of Congress in the passing of the law, that the
against examination of or inquiry into a bank deposit under Republic Act
1405 does not preclude its being garnished to insure satisfaction of a
judgment. Indeed there is no real inquiry in such a case, and if existence
of the deposit is disclosed the disclosure is purely incidental to the
execution process. It is hard to conceive that it was ever within the
intention of Congress to enable debtors to evade payment of their just
debts, even if ordered by the Court, through the expedient of converting
their assets into cash and depositing the same in a bank.
In this case, since it was the intention of Congress that the order of the
court to garnished the bank deposit is not one of the circumstances
prohibited by the Bank Secrecy Law, Maria's argument is not meritorious.
b. The circumstances where the Bank Secrecy Law does not apply are:
(1) under Section 2, of the Bank Secrecy Law: (a) upon written
permission of the depositor; (b) in cases of impeachment; (c) in
cases where the money deposited or invested is the subject
matter of the litigation; and (d) upon order of a competent court
in cases of bribery or dereliction of duty of public officials. Other
circumstances includes:
(2) upon order of the court in cases of unexplained wealth under
Section 8 of the Anti-Graft and Corrupt Practices Act (PNB v.
Gancayco[1965]);
(3) upon order of the Commissioner of the Internal Revenue with
respect to the bank deposits of a decedent for the purpose of
determining the decedent's gross estate (Section 6,[F1],
National Internal Revenue Code);
(4) upon the order of the Commissioner of the Internal Revenue
with respect to the bank deposits of a taxpayer who has filed an
application for compromise of his tax liability under Section 204
(A2) of the National Internal Revenue Code by reason of financial
incapacity to pay his tax liability (Sec 6 [F2], National Internal
Revenue Code);
(5) in the case of unclaimed balances (Section 2, Act 3936);
(6) without need of a court order, if the Anti-Money Laundering
Council determines that a particular deposit or investment with
any banking institution is related to any one of the following
unlawful activities:

(a) kidnapping for ransom under Article 267 of the Revised

Penal Code. (Section 3[i1], RA 9160);
(b) violations of Section 4, 5,6, 8,9,10,12,13,14,15 and 16
of the Comprehensive Dangerous Drugs Act of 2002
(Section 3[i2], RA 9160);
(c) hijacking and other violations under Republic Act No.
6235; destructive arson and murder, as defined under
the Revised Penal Code, including those perpetrated
by terrorists against non-combatant persons and
similar targets. (Sec.3[i12], RA 9160);
(d) upon order of the coourt, if the Anti-Money Laundering
Council determines that a particular deposit or
investment with any banking institution ir related to
any one of the unlawful activites under Section 3(i),
except those referred to in Section 3(i)[1], [2] and [12]
of RA 9160 or a money laundering offense under
Section 4 (Sec.11, RA 9160); and
(e) inquiry into or examination of any deposit or
investment with any banking institution when the
examination is made by the Bangko Sentral ng
Pilipinas to insure compliance with the Anti-Money
Laundering Law in the course of a periodic or special
examination in accordance with the rules of
examination of the BSP (Sec. 11, RA 9160)
(7) when the examination is made in the course of a special or
general examination of a bank and is specially authorized by the
Monetary Board after being satisfied that there is reasonable
ground to believe that a bank fraud or serious irregularity has
been or is being committed and that it is necessary to look into
the deposit to establish such fraud or irregularity;
(8) when examination is made by an independent auditor hired by
the bank to conduct its regular audit provided that examination
is for audit purposes only and the results thereof shall be for the
exclusive use of the bank;
(9) upon order of the court in cases filed by the Ombudsman and
upon the latter's authority to examine and have access to bank
accounts and records (Marquez v. Desierto [2001])
II.
a. According to Section 33 of the Corporation Code, if the interest of the
interlocking director in one corporation is substantial and his interest in
the other corporation or corporations is merely nominal, he shall be
subject to the provision of Section 32 of the same code. There is
substantial interest when his stockholdings exceed twenty (20) percent of
the outstanding capital stock.
In this case, since Mr. Julian Gorordo holds 5% of ABC Corporation and
30% of XYZ Holdings, Inc., in order for ABC Corporation to validly enter
into a contract with XYZ, must comply with Section 32, of the Corporation
Code. (1) that Mr. Gorordo's presence in the board meeting in which the

contract was approved was not necessary to constitute a quorum for such
meeting; (2) that the vote of Mr. Gorordo was not necessary for the
approval of the contract; (3) that the contract is fair and reasonable under
the circumstances; and (4) that in case of an officer, the contract has been
previously authorized by the board of directors.
If the first and second conditions is absent contract may be ratified by the
vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the members in
a meeting called for the purpose and that full disclosure of the adverse
interest of the directors or trustees involved is made at such meeting.
b. Section 33 of the Corporation Code provide that if the interest of the
interlocking director in one corporation is substantial and his interest in
the other corporation or corporations is merely nominal, he shall be
subject to the provision of Section 32 of the same code. There is
substantial interest when his stockholdings exceed twenty (20) percent of
the outstanding capital stock.
In this case, since Mr. Julian Gorordo holds 5% of ABC Corporation and
30% of XYZ Holdings, Inc., in order for XYZ Holdings to validly enter into a
contract with ABC Corporation, must comply with Section 32, of the
Corporation Code. (1) that Mr. Gorordo's presence in the board meeting in
which the contract was approved was not necessary to constitute a
quorum for such meeting; (2) that the vote of Mr. Gorordo was not
necessary for the approval of the contract; (3) that the contract is fair and
reasonable under the circumstances; and (4) that in case of an officer, the
contract has been previously authorized by the board of directors.
If the first and second conditions is absent contract may be ratified by the
vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the members in
a meeting called for the purpose and that full disclosure of the adverse
interest of the directors or trustees involved is made at such meeting.
c. No, a stockholder who feels aggrieved by such arrangement cannot file a
derivative suit, because the law provides that a derivative suit is a suit by
a shareholder to enforce a corporate cause of action. That corporation is a
necessary party to the suit, and the relief which is granted is a judgment
against a third person in favor of the corporation. Stockholder may
commence a derivative suit for mismanagement, waste or dissipation of
corporate assets because of a special injury to him for which he is
otherwise without redress. In effect, the suit is an action for specific
performance of an obligation owed by the corporation to the stockholders
to assist its right of action when the corporation is put on default by the
wrongful refusal of the directors or management to make suitable
measures for its protection.
In this case, the aggrieved stockholders can exercise his right of appraisal,
which is the right to withdraw from the corporation and demand payment

of the fair value of the shares after dissenting from certain corporate acts
involving fundamental changes in corporate structure
d. Subject matters when holders of nonvoting shares are allowed to vote: (1)
Amendment of the articles of incorporation; (2) Adoption and amendment
of by-laws; (3) Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate property; (4)
Incurring, creating or increasing bonded indebtedness; (5) Increase or
decrease of capital stock; (6) Merger or consolidation of the corporation
with another corporation or other corporations; (7) Investment of
corporate funds in another corporation or business in accordance with this
Code; and (8) Dissolution of the corporation.
III.
a. No, Xerex Lending Corporation cannot validly proceed with the foreclosure
of the chattel mortgage because as held by the Supreme Court in the
case of Acme Shoe v. Court of Appeals (1996), a chattel mortgage, can
only cover obligations existing at the time the mortgage is constituted.
Although a promise expressed in a chattel mortgage to include debts that
are yet to be contracted can be a binding commitment that can be
compelled upon, the security itself, however, does not come into
existence or arise until after a chattel mortgage agreement covering the
newly contracted debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract conformably with the form
prescribed by the Chattel Mortgage Law.
A chattel mortgage, must comply substantially with the form prescribed
by the Chattel Mortgage Law itself. One of the requisites, under Section 5
thereof, is an affidavit of good faith. The fact, that the statute has
provided that the parties to the contract must execute an oath that "mortgage is made for the purpose of securing the obligation specified in
the conditions thereof, and for no other purpose, and that the same is a
just and valid obligation, and one not entered into for the purpose of
fraud" makes it obvious that the debt referred to in the law is a current,
not an obligation that is yet merely contemplated.
In this case, since Xerex Lending Corporation and Mr. dela Cruz did not
amend their previous chattel mortgage or enter into a new agreement to
include the new obligations, the former cannot compel the foreclosure of
the chattel mortgage.
b. No, the mortgagor has no right of redemption because in the case of
Paray vs. Rodriguez (2006) the Supreme Court held that as early as 1927,
this Court has rejected the proposition that personal property may be
covered by the right of redemption. There is no law in our statute books
which vests the right of redemption over personal property.
The right remedy available to the mortgagor is Section 13, of the Chattel
Mortgage Law, which partakes of an equity of redemption, which is the
right of the mortgagor to redeem the mortgaged property after his default

in the performance of the conditions of the mortgage but before the sale
of the property to clear it from the encumbrance of the mortgage. It is not
the same as right of redemption which is the right of the mortgagor to
redeem the mortgaged property after registration of the foreclosure sale,
and even after confirmation of the sale. (RCBC vs. Royal Cargo Corp.
[2009])
IV.
a. The Remedy available to Mrs. Sta. Ana is to file for damages against
Orlando Transit Corporation for culpa contractual, as common carrier,
Article 1759 of the New Civil Code provides that there exist a contract of
carriage between the passenger and the carrier. The said law provides,
that the latter is bound to exercise extraordinary diligence for the safe
transportation of the passengers to their destination. This duty of care is
not excused by proof that they exercised the diligence of a good father of
the family in the selection and supervision of their employee. In the event
of contractual liability, the carrier is exclusively responsible therefore to
the passenger, even if such breach be due to the negligence of his driver
(Viluan v. The Court of Appeals, [1966])
Mrs. Sta. Ana may claim for indemnity for death, and loss of earning
capacity, moral damages, actual damages, attorney's fee and the court
may award exemplary damages. Article 1764 vis--vis Article 2206 of the
Civil Code holds the common carrier in breach of its contract of carriage
that results in the death of a passenger liable to pay (1) indemnity for
death, (2) indemnity for loss of earning capacity and (3) moral damages.
Indemnity for the death is fixed at P50,000 and Net Earning Capacity is
computed by multiplying the life expectancy with the difference between
the gross annual income of the deceased and reasonable and necessary
living expenses. (Spouses Dela Cruz vs. Sun Holidays Inc, [2010])
By way of exception, moral damages are recoverable in an action
predicated on a breach of contract: (a) where the mishap results in the
death of a passenger, as provided in Article 1764, in relation to Article
2206 of the Civil Code; and (b) where the common carrier has been guilty
of fraud or bad faith, as provided in Article 2220 of the Civil Code. Actual
damages, to be recoverable, must not only be capable of proof, but must
actually be proved with a reasonable degree of certainty. The reason is
that the court cannot simply rely on speculation, conjecture or guesswork
in determining the fact and amount of damages, but there must be
competent proof of the actual amount of loss, credence can be given only
to claims which are duly supported by receipts. Entitlement to Attorneys
fees was by virtue of their having been compelled to litigate or to incur
expenses to protect their interests, court may award exemplary damages
if the defendant is found to have acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner, Article 2232 of the Civil Code.
(PHILTRANCO SERVICE ENTERPRISES, INC., vs. Paras, [2012])

Mrs. Sta. Ana may also file against both the driver and the employer,
Orlando Transit Corporation, for culpa aquilliana, liability for quasi-delict or
culpa aquilliana may still exist despite the presence of contractual
relations. (Air France vs. Carrascoso,[1966])
Although liability under Article 2180 originates from negligent act of the
employee, the aggrieved party may sue the employer directly. When an
employee causes damage, the law presumes that the employer has
himself committed an act of negligence in not preventing or avoiding the
damage. This is the fault that the law condemns. While the employer is
civilly liable in a subsidiary capacity for the employees criminal
negligence, the employer is also civilly liable directly and separately for
his own civil negligence in failing to exercise due diligence in selecting and
supervising his employee. In the case of People vs. Fabro (1979) the court
ruled that an employees liability based on a quasi-delict is primary and
direct, while the employers liability based on a delict is merely subsidiary.
b. The bus company can raise the defense that it observed extraordinary
diligence for the safety of the passengers transported by them, according
to all the circumstances of each case. When a passenger dies or is injured,
the presumption is that the common carrier is at fault or that it acted
negligently (Article 1756). This presumption is only rebutted by proof on
the carrier's part that it observed the "extraordinary diligence" required in
Article 1733 and the "utmost diligence of very cautious persons" required
in Article 1755. (Spouses Landingin Vs. Pantranco, [1970]).
The carrier is not liable if during the accident, the passenger did not
observe the diligence of a good father of a family to avoid injury to himself
(Article 1761). While the the contributory negligence of the passenger
does not bar recovery of damages for his death or injuries, if the
proximate cause thereof is the negligence of the common carrier, the
amount of damages shall be equitably reduced (Article 1762).
V.
a. No, Jane has no recourse against Mr. Lagdameo because the facts involves
a transaction of an incomplete but delivered negotiable instrument.
Section 14, of the Negotiable Instruments Law provides that an
incomplete but delivered negotiable instrument when completed, may be
enforced against any person who became a party thereto prior to its
completion, if the same is filled up strictly in accordance with the authority
given and within a reasonable time. But if it is negotiated to a holder in
due course, it is valid and effectual for all purposes in his hand, as if it had
been filled up strictly in accordance with authority given and within a
reasonable time.
Article 52 of the Negotiable Instruments Law provides that a holder in due
course is a holder who has taken the instrument under the following
conditions: (a) That it is complete and regular upon its face; (b) That he

became the holder of it before it was overdue, and without notice that it
has been previously dishonored, if such was the fact; (c) That he took it in
good faith and for value; (d) That 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.
In this case, Rose didn't filled out the check in accordance to the authority
given to her, and when it was negotiated to Jane, the latter was well aware
of the infirmity in the check. Jane cannot be considered as a holder in due
course.
b. Yes, Sally has a recourse against Mr. Lagdameo because the facts involves
a transaction of an incomplete but delivered negotiable instrument.
Section 14, of the Negotiable Instruments Law provides that an
incomplete but delivered negotiable instrument when completed, may be
enforced against any person who became a party thereto prior to its
completion, if the same is filled up strictly in accordance with the authority
given and within a reasonable time. But if it is negotiated to a holder in
due course, it is valid and effectual for all purposes in his hand, as if it had
been filled up strictly in accordance with authority given and within a
reasonable time.
Article 52 of the Negotiable Instruments Law provides that a holder in due
course is a holder who has taken the instrument under the following
conditions: (a) That it is complete and regular upon its face; (b) That he
became the holder of it before it was overdue, and without notice that it
has been previously dishonored, if such was the fact; (c) That he took it in
good faith and for value; (d) That 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.
In this case, Sally is considered a Holder in Due Course because when it
was negotiated to her by Jane the former was not aware of the
circumstances behind the infirmed issued check.
VI.
a. The test in determining whether there is trademark infringement are the
Dominancy Test and the Holistic Test. The test of dominancy focuses on
the similarity of the prevalent features of the competing trademarks which
might cause confusion or deception and thus constitute infringement. On
the other side of the spectrum, the holistic test mandates that the entirety
of the marks in question must be considered in determining confusing
similarity. (Societe Des Produits Nestl, S.A. vs. Court of Appeals, [2001])
b. Time and time again, the Supreme Court has distinguished trademark
infringement and unfair competition in its decisions. Infringement of
trademark is the unauthorized use of a trademark, whereas unfair
competition is the passing off of one's goods as those of another; in
infringement of trademark fraudulent intent is unnecessary whereas in
unfair competition fraudulent intent is essential; in infringement of

trademark the prior registration of the trademark is a prerequisite to the

action, whereas in unfair competition registration is not necessary. (Del
Monte Corp. vs. Court of Appeals, [1990])
VII.
a. Yes, Mr. Sy can claim the benefits from the life insurance policy, but as to
the fire insurance with respect to the residential property he cannot claim
the benefits because citing the Insurance Code annotated by Hector De
Leon, as to life insurance, every person has an unlimited insurable interest
in his own life, whether the insurance is for the benefit of himself or
another, and it is not at all necessary that the beneficiary designated in
the policy should have any interest in the life of the insured. But as to
property insurance, according to the author Jose Sundiang, the beneficiary
of the policy must have insurable interest over the property insured upon
not only st the time of the taking of insurance but also at the time of the
contingent event.
In this case, when Mr. Go took a life insurance against his own life,
regardless of Mr. Sy interest to the former's life, Mr. Sy may claim the
benefit. But as to the fire insurance it is required that the beneficiary has
insurable interest over the property, where in this case Mr. Sy does not
have.
b. Yes, Mr. Tan can claim from the fire insurance policy which he himself took
out because it is a settle ruled that in real property mortgage the
insurable interest of the mortgagor is different from the insurable interest
of the mortgagee. This interest is separate and distinct from the other. The
former, as owner has an insurable interest to the extent of the value of
the property, even if the mortgage debt is equal to such value. And the
latter has an insurable interest in the mortgaged property to the extent of
the debt secured, such interest continues until the mortgage debt is
extinguished.
This does not constitute double insurance because Section 93 of the
Insurance Code provides that double insurance exists when the same
person is insured by several insurers separately in respect to the same
subject and interest.
In this case, Mr. Go and Mr. Tan took different insurance policy as to their
separate and distinct insurable interest, hence there is no double
insurance.

PART II
I.

C. The dollar savings account is covered by PDIC Law only while the trust fund is not
covered by any of these laws
Regulatory Issuance No. 2011-02 was published by the Philippine
Deposit Insurance Corporation (PDIC) last January to clarify which
deposit accounts and transactions are excluded from the coverage of
deposit insurance. It will be recalled that Congress passed Republic Act
No. 9576 in 2009 which increased the maximum amount of deposits
covered by PDIC insurance to P500,000.
Under the PDIC regulation, the account is an investment product if no
debtor-creditor relationship exists between the bank and the client,
and instead, the relationship is that of trustor-trustee or principalagent; the principal amount is not protected; the amount is not
withdrawable on demand; and other analogous features. On the other
hand, deposit accounts are unfunded or are fictitious or fraudulent if
the bank did not receive the money alleged to be deposited, or when
the deposit is simulated or feigned, as when it was made to appear
that money was received by the bank but in fact was not, or when the
bank employed means calculated to deceive. Dollar Savings is covered
by R.A. No. 6426 Foreign Currency Deposit Act of the Philippines.
II.
B. Pre-emptive right
Sec.39 of Corporation Code, provides that all stockholders of a stock
corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto
III.
A. Yes, because Sugbu Bank is bound to know the signature of its clients.
In the case of Bank of the Philippine Islands vs Casa Montessori
Internationale, (2004), the court held that forgery is the counterfeiting
of any writing, consisting of the signing of anothers name with intent
to defraud, is forgery. The bank which allows the payment on a check
where the signature is forged is liable to the depositor-drawer. When
one of two persons suffers the wrongful act of a third person, he whose
negligence was the proximate cause of the loss must bear the loss.
Pursuant to its prime duty to ascertain well the genuineness of the
signatures of its client- depositors, the drawee-bank is expected to use
reasonable business prudence. In the performance of that obligation, it
is bound by its internal banking rules and regulation that form part of
the contract it enters into with its depositors. A drawee bank must
restore to the account of the drawer the amounts of checks on which
the signature of its president was forged even of the forger was the
independent auditor of the drawer, who was in charge of reconciling
the bank statements with the records of the drawer
IV.
A. Yes, because although Sunrise Insurance Company is a covered institution

Insurance
companies,
insurance
agents,
insurance
brokers,
professional reinsurers, reinsurance brokers, holding companies,
holding company systems and all other persons and entities
supervised and/or regulated by the Insurance Commission (IC). A
contract of insurance is an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability
arising from an unknown or contingent event. Transacting insurance
business includes making or proposing to make, as insurer, any
insurance contract, or as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business
or activity of the surety, doing any kind of business specifically
recognized as constituting the doing of an insurance business within
the meaning of Presidential Decree (P.D.) No. 612, as amended,
including a reinsurance business and doing or proposing to do any
business in substance equivalent to any of the foregoing in a manner
designed to evade the provisions of P.D. No. 612, as amended.
(REVISED IMPLEMENTING RULES AND REGULATIONS R.A. NO. 9160, AS
AMENDED BY R.A. NO. 9194 Rule 3.a.2).

V.
C. The trustor has the right to vote and to receive dividends while the trustee has
the right to be elected as director.
Section 59 of the Corporation Code provides that One or more
stockholders of a stock corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees the right to vote and
other rights pertaining to the shares.
The transferring stockholder, although he has ceased to be a
stockholder of record, retains the right to inspection of corporate books
which he can exercise concurrently with the voting trustee, to receive
the dividends when they are collected by the trustee.
VI.
D. Unenforceable
Section 33 of the Warehouse Receipts Law, provides that the
warehouseman may satisfy his lien for a claim which has become due,
after serving written notice to the person on whose account the goods
are held and the claim is not paid on or before the date mentioned in
the notice, which shall not be less than ten (10) days from the delivery
of such notice. Without the payment, the warehouseman is authorized
by law to validly sell the goods through auction.
In the case at bar, while Saldy, the warehouseman, has an authority to
validly sell the goods held by him after Tony failed to pay after due
notice, but the authority granted to him is only to sell the goods
through action and not to a direct buyer. Thus, Saldy exceeded on his
authority.
Under Article 1403 of the Civil Code, contracts entered into by one who
has acted beyond his powers are unenforceable. Hence, the sale by

Saldy, the warehouseman, of the goods he held to a direct buyer and

not by auction is considered unenforceable.
VII.
D. No, the doctrine of limited liability provides for the extinguishment of its liability
to cargo owners by reason of shipwreck
In the case of Monarch vs. Court of Appeals (2000), the court ruled that
ship owners or agents liability is merely co-extensive with his interest
in the vessel such that a total loss thereof results in its extinction. The
total destruction of the vessel extinguishes maritime liens because
there is no longer any res to which it can attach.
VIII.
B. Yes, Brad is liable as he is an accommodation party and such is the nature of an
accommodation party
Section 29 of the Negotiable Instruments Law provides that an
accommodation party is one who has signed the instrument as maker,
drawer, acceptor or indorser, without receiving value therefor, and for
the purpose of lending his name to some other person, and that such
person is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument knew
him to be only an accommodation party.
IX.
C. Ingrid, who bidded Php 260,000 for 2,500 shares
Section 68 of the Corporation Code, provides that the highest bidder is
the person offering at the sale to pay the full amount of the balance on
the subscription together with accrued interest, cost of advertisement
and expenses of sale, for the smallest number of shares or fraction of a
share.
X.
A. Yes, the bus company is liable as the accident was caused by negligence of its
driver
In the case of People vs. Fabro (1979) the court ruled that an
employees liability based on a quasi-delict is primary and direct, while
the employers liability based on a delict is merely subsidiary.
Although liability under Article 2180 originates from negligent act of
the employee, the aggrieved party may sue the employer directly.
When an employee causes damage, the law presumes that the
employer has himself committed an act of negligence in not preventing
or avoiding the damage. This is the fault that the law condemns. While
the employer is civilly liable in a subsidiary capacity for the employees
criminal negligence, the employer is also civilly liable directly and

separately for his own civil negligence in failing to exercise due

diligence in selecting and supervising his employee