Last minute notes – Atty.

Zarah

Trust Receipt- security transaction creditor (entrustor) debtor (entrustee), latter commits to:

1. Sell the goods and remit the proceeds of sale

2. Return unsold goods (this will be sold by the entrustor which makes the entrustee liable to pay
deficiency or entitle to the excess)

Entrustee is required to cover deficiency, likewise excess of sale will be given to him.

Obligations of the entrustee

If entrustee is obliged to return to entrustor the unsold goods, for the latter to sell the same and apply
proceeds to indebtedness of entrustee, does it give rise to daccion en pago? Held: return does not
constitute daccion en pago (total extinguishment of obligation- hence, any deficiency cannot be
collected) because turnover of the goods is allowing the entrustor to secure its interest therein. Mere
return of goods to entrustor does not extinguish the loan of entrustee because any resulting deficiency is
for the account of the entrustee but latter is entitled for any excess thereof.

Standby letter of credit distinguished from commercial letter of credit

1. CLOC involves payment of money under the contract of sale while SLC is callable upon non-
performance by the parties of their obligations.
2. CLOC’s beneficiary is demonstrated in the instrument itself – strict compliance is required ;
SLOC’s beneficiary must prove that the obligor does not perform his obligation

LOC distinguished from contract of guaranty- latter destroys the independence of the bank’s
responsibility in the contract. In LOC, the bank has no responsibility to check compliance of the parties in
the contract. LOC- independence principle

A holder who acquired rights from a holder In due course- only with respect to parties prior to the HIDC
(provided the former did not participate in the fraud/illegality)

When a bank pays a materially altered check- drawee should pay only the original tenor of the
instrument, hence, any material alteration which was paid by the bank does not entitle him to
reimbursement. Except: drawer participated in the alteration (ex. Countersigned the alteration). Bank
must exercise utmost degree of diligence.

Contract of endorsement and guaranty- former involves transfer, latter involves security. Liability of
guarantor is greater than that of endorser. Demand /notice is not required to fix liability of
surety/guarantor unlike in endorsement, indorsers must be furnished with notice of dishonor before
making them liable (requires presentment of instrument and notice of dishonor).

Accommodation party-requisites; nature of his liability depends on what capacity he signed; liable to the
instrument to a holder for value; relation between AP and party accommodated is one of principal and
surety
Accommodated party- if allowed extension of payment w/o consent of the Accommodation party- is the
latter liable to pay the instrument? Even if accommodated party receives extension for payment, latter is
liable for the payment of whole obligation because he is considered a solidary debtor as far as the holder
is concerned (being a surety).

Check payable to X & Y – instrument payable to 2 or more payees. Payment of only 1 indorsement is
equivalent to payment of forged indorsement

Collecting bank- assumes the liability because it has the duty to ascertain the genuineness of the
instrument in all respects in purports to be.-

Between drawer and drawee- GR drawee bears the loss. Remedy is go after collecting bank

Holder cannot sue the drawee bank in case of insufficiency of fund. Drawee is liable only when it
certifies/accepts the check. Holder instead should sue the drawer upon service of notice of dishonour.
No privity of contract bet holder and drawee until it certifies/accepts the check.

Alteration of serial no. of check do not constitute material alteration while alteration of date is one of
Material alteration

Material alteration - changes the item stated in the instrument affecting the liability and relationship of
the parties to the instrument

Inland bill of exchange- on its face, both drawn and payable in PH

Foreign box- drawn in PH but payable in foreign or both drawn and payable in foreign country

MCheck- effect

Certification of check- equivalent to acceptance. If cert is procured by te holder, parties secondarily liable
are discharged

Check kiting- wrongful practice taking advantage the float situation- original check replaced by another
worthless check

Insurance of any eligible lot purchaser (insurance against mortgage/liability) effective on the date he
contracts a loan with the assured. No insurance if application of lot purchaser not approved by the
company. This is one where the insurance is ambiguous. In case of ambiguity, it shall be resolved against
the insurance company and construed liberally in favour of the insured.

Buyer has insurable interest over goods while in transit (regardless of the terms of shipment- FOB or CIF).
Insurable interest arises from the time equitable interest is vested on the buyer, even prior to actual
delivery, because his interest is based on the perfected contract of sale.
Loss payable clause- mortgagee is made as beneficiary in the insurance (default on the part of the
mortgagor defeats the right of mortgagee) and standard or union mortgage clause (exists a collateral
independent contract bet insurer and mortgagee – his rights shall not be defeated by the acts of the
mortgagor.

Mortgage redemption insurance- (MRI) group insurance policy of mortgagors intended to protect both
mortgagee and mortgagor. In the event of unexpected demise of mortgagor, the proceeds of insurance
will be paid to settle the debt, hence, will relieve the debts of the mortgagor, heirs will not be held liable.

In case of death, the mortgage will be extinguished. Mortgagee is a mere beneficiary in MRI.

How does subrogation takes place in insurance? Upon payment of indemnity for loss/damage to the
insured, insurer shall be entitled pro tanto to the rights of the insured against the offending party/one
who caused the damage.

Exception to subrogation rule:

1. Insured by his own act releases the party at fault from liability
2. Insurer pays the insured w/out notifying carrier who settled the loss
3. Insured is excepted from policy

Who are disqualified to be beneficiary of life insurance- those 3 disqualified under donation

Disabilities which are existing (pre-existing conditions) at the time of the effectivity of the insurance w/c
becomes manifest within 1 year- excluded.

Third party liability insurance- can the insurer be sued by the third party?

1. If benefit is intended for the third party

Note: the liability of insurer to indemnify third party does not make him solidarily liable with the
tortfeasor. Liable only up to extent of insurance.

Cash and carry rule

Grace period for life and industrial life insurance- must be expressly stated in the policy

Return of premium warranted when:

Thing insured was never exposed to peril insured against

Policy surrendered before stipulated period lapses

Contract voidable due to fault of insurer

Over insurance by several insurers

Devise used to prevent lapse of insurance policy:

 1. Grace period
2. Application of dividend
3. Restatement clause

All risk insurance policy- cover all loses

Industrial life insurance- prem payable monthly or oftener – face amount of insurance is not more than
500 x the min wage in the city of mla, industrial policy must be descriptive in the face of policy

Covernote- issuance/renewal is subject to approval of commission; duration not more thna 60 days from
issuance; cancellation within 7 days; extension for another 60 days subject to approval of commission

Re-insurance- original insurer may sue the re-insurer if it contains pour atrui provision

Requisites of co-insurance

1. Partial loss
2. insurance is less than prop insurance

Sec 136

Rules on claim under no-fault indemnity clause:

Total indemnity

No fault clause does not involve damage to property (apply only when policy is comprehensive)

Travel agency- not a common carrier- merely to make travel arrangement-

Registered owner rule- purpose is easy identification of the person who is responsible for injury /damage
caused by the vehicle

Registered owner has the right to be indemnified against the actual/real owner- can bring the matter in
court except in pari delicto (ex. Kabit system)

Ship agent- one who is responsible for the provisioning or apportioning the vessel in which it maybe
found

There can be a ship agent of charterer- also liable as long as the above is met.

Extra-ordinary diligence re: accuracy of travel papers of passengers- no, the carrier may inspect whether
the passengers has the required travel docs but does vouch the accuracy of info contained therein

Boundary system- owner remains liable as Common Carrier

Main business is brokerage (per charter of registration) but transport passengers- held liable as common
carrier. Business permit/charter is not controlling as long as the time the damage was caused, one is a
common carrier

Mere ancillary activity- common carrier as long as it receives pecuniary fee

Doctrine of last clear chance- impossible to determine who caused the loss; one who has the last clear
opportunity to prevent the injury. Applies if the suit applies between the owners of the vehicles, not
when the passenger files suit against the carrier. Does not apply to collision of vessels governed by code
of commerce.

3-fold Character of bill of lading- operates as a receipt, contract to transport and document of title
(facilitate transfer of title to goods tru negotiation /assignment)

Sec 366- effect of failure to give notice of loss/damage

Notice of claim is a condition precedent to legal action. Applies to land and cargo. Not applicable to
COGSA, filing of notice of claim not required as long as it is within 1 year period- extendible.

Code of commerce- notice of claim 24 hours if apparent damage

Close paramount- cogsa deems to apply if tranpo is domestic subject to the terms of bill of lading is
repugnant to cogsa

Sole prop- separate personality cannot be invoked. Doctrine of legal entity not applicable

When doctrine of piercing the veil of corp fiction must be raised before trial in court. Cannot be invoked
for the first time in appeal. This cannot be considered by the reviewing court as it cannot be raised for
the 1st time on appeal.

When to pierce

Piercing is done for liability purpose and apply on a case to case basis only. After the latter is established
and settled, the 2 corp may operate separately.

1. Use to evade liabilities involving labor issues

2. Used as an instrument in tax evasion

Instrumentality rule- applicable when the corp so organized and controlled making it as mere alter ego,
business conduit, adjunct or instrumentality of the other. Control test applies and determined as follows:

1. Not only stock control but complete dominion not only in terms of finances but also policies and
business practices

Voting rights- except preferred or redeemable shares w/c maybe deprived with voting rights.

Common stocks enjoy voting rights, except:

 1. Delinquency
2. In art of inc, founders share are extended without voting rights

Required: there must always be a class of share with voting rights

Deposit on stock subscription- one is not considered a stockholder yet because it is an advance payment
for future subscription, which may or may not happen

Can a stockholder pull out the properties contributed to the company? No. this belongs to the corp. Prop
of corp is not prop of stockholders. Separate personality rule and trust fund doctrine

Can a corp provide limitation on voting rights of members of non-stock corp? yes, it may limit or broaden
the voting rights.

Stipulation in the by-laws re: election of the members of the board by district- allowed for non-stock
corp. this is a form of limitation on the voting rights of the members in a non-stock corp.

Presence of majority of members entitled to vote- required only when directors are elected at large
(stock corp.)

Sec 31- personal liabilities of directors/officers/trustees

1. Consent to patently unlawful act

2. Acted with bad faith, malice or gross negligence
3. Conflict of interest to the prejudice of the corp
4. Voted for issuance of watered stocks/failure to submit objection to the secretary

Doctrine of apparent authority- doctrine of ostensible agency- holding out theory

Who are entitled to get dividends- those who are holders on record at the time of declaration or at the
holders on record at the time directors declared future dividends.

Merger- takes effect upon SEC approval (issuance of Cert. of merger)

All assets, liab and prop of absorbed company are transferred to the surviving corp

Dead members- not included for quorum purposes in non-stock; for stock corp- considered because
dead person remains as stockholder of the corp.

Derivative suit-

Nuisance suit- failure to allege the complaint act is fraudulent

Exhaustion of intracorp controversy excused in filing derivative suit- when it is directed against a person
who has complete control over the corp.
Derivative suit also applies also to a closed corp.- no distinction

Doing business—activity must be one which is a profit-making business, otherwise, not doing business

Participation in bidding- constitute doing business as it shows the foreign company’s intention to do
business in PH (substance test)

Continuity test- actual performance of the act to which it is incorporated

Engagement of Filipino national to run foreign corporation- managerial/operational acts in establishing

commercial transactions- not mere passive investment- doing business

Substance test- foreign corp brings in PH substance of its operation to earn profits

Continuity test- acts/functions incident to execute the object of its incorporation

SEC- its authority to receive fees for examining/filing of art of inc. and amendments thereto is
recognized. Also its power to recommend to pres revision/alteration/amendment of charges.

Trasnfer of Sec jurisdiction – election contest/appointment/removal/dismissal- if court has juris over

main case, may assume juris over the other issues even regulatory/administrative in nature. RTC may
also call special meetings for its stockholders- valid jurisdiction as it is connection with the election case
(main case)

Issue cease and desist order from SEC- conditions:

1. Proper investigation and verification- must be complete

2. Finding that the act is less restrained
3. To protect injury/prejudice to investors

SEC- composed of chairperson and 4 commissioners

Quorum- @ least 3

Issuance of CDO is an act of SEC itself and cannot be delegated to a commissioner.

Proxy issues re: validity of election of directors- jurisdiction of RTC

Proxy not used for election matters- SEC jurisdiction

Mandatory close out rule- vest upon broker or dealer of securities to cancel/lliquidate customers order if
not paid w/in 3 days.

How may criminal violation under SRC be pursued- specialized dispute must be referred to admin of
special competence- SEC. Court will not cover issues which an admin agency has a more competent
jurisdiction to determine technical issues
Check recording
#54

Tender offer rule- applies to direct/indirect acquisition of shares; gives the minority to exit company
under reasonable terms; @ least 35% threshold acquisition of shares- mandatory tender offer. Even if
less than 35% if after acquisition will result to more than 50% ownership of capital stock, mandatory
tender offer applies.

Public company

Insider trading

Insider is prohibited to disclose info:

1. Existence of relationship giving access directly/indirectly to info intended solely for corp purpose
2. Inherent unfairness of the info (check recording)

Fact of special significance- whether or not it will make the decision change

1. Material fact w/c may likely affect market price

2. Reasonable person consider important with regard to the status of his shares

Depositor and the bank relationship- simple loan (creditor-debtor relationship). Savings deposit
agreement is the agreement bet the two. The relationship is not one of bailor-bailee relationship.
Mandamus does not lie as it is not available in case of contractual relations

DOSRI violations distinguished from estafa

DOSRI- failure to comply with procedural/reportorial requirements pertaining to the extension of loans
to directors/officers and stockholders. This is a criminal offense. Elements of abuse of confidence, deceit
(elements of estafa) are not material to DOSRI violations. Estafa can be prosecuted separately from this

Violation of provision on self-dealing wth the bank- directors obtaining fraudulent loans by establishing
dummy corp- is the case w/in juris of BSP or regular courts. This is not an ordinary intra corp controversy,
but one which calls for the proper determination of violation of banking laws, hence, under juris of BSP.
Requires designation of a receiver from BSP

CB act- Sec 30 re: a current and complete examination of bank before placing it under receivership- not
required anymore. Decision of MB re: closure of the bank must be duly supported, no need to conduct
examination. Prior notice/hearing not required before closing a bank.

Effects of bank closure:

1. Does not diminish the power of liquidator to receive collectible/receivables

2. Can prosecute suits against debtors, foreclosure of mortgages
3. Collect loans
4. Interest rate agreed bet parties must not be excessive/unconscionable and can continue
 5. Continue to collect interest from borrowers

Liquidation (closure/receivership) of a bank by BSP does not require prior tax clearance.
Different from dissolution of corp which SEC requires prior tax clearance.

Trust accounts- are w/in the coverage of bank secrecy law, except when inapplicable (ex. Subject matter
of investigation for plunder, tax evasion cases)

Deposit- not limited to accounts which give rise to debtor-creditor relationship

Co-payee in a check deposited in a bank is likewise a co-depositor. No written consent is required upon
the said payee when co-depositor transacts the check.

Foreigner- cannot own capital stock in a rural bank

Blanket mortgage clause- subsume all the liabilities of the mortgage, past or future- not allowed in
chattel mortgage but allowed in pledge and REM

X company was incorporated as a realty company, created to transfer the property of Y bank re: excess in
investment in real property (as the law sets a cap for real property investment).- the arrangement bet
the parties is contrary to law. Court will not assist either party in achieving its improper purpose
following the clean hands doctrine. Demand for reconveyance or payment of rentals cannot be granted
by the court. Both parties are in pari delicto. Neither party will obtain relief.

Doctrine of equivalence – an infringement also takes place (patent) when a device appropriates a prior
invention by adopting the innovative steps though with additional works/change done upon it but it
performs substantially same function and gives same result

Unfair competition, elements:

1. Confusing similarity in gen appearance of goods- maybe established by external factors (like
packaging/appearance)
2. intent to deceive public or defraud competitor- inferred from similarity of goods

Actual fraudulent intent need not be shown.

Does an infringement case constitute prejudicial question to an unfair competition case? No prejudicial
question because the 2 actions are independent from each other. Basis of unfair competition is fraud
while infringement is violation of one’s right of registration.

2 types of confusion from use of similar or colourable imitation of marks

1. Confusion of goods- known as product confusion- ordinary purchaser will be induced to

purchase the product believing that he is purchasing the other
2. Confusion of business – source/origin confusion- goods are different, product of defendant is
reasonably assumed to belong to the plaintiff
Definition of public company under SRC- not limited to public companies whose shares are publicly
listed.

Requirements:

1. Assets exceeds 90m

2. At least 200 shareholders

Investment contract- scheme where a person invest money to a particular enterprise and profit from the
efforts of another

Howey test

Sale of internet website- does not fall under invesment contract

improper disclosure of bank account details- mere discussion of function as an account officer and
identificatnio of person who guaranteed payment of an obligation does not constitute improper
disclosure under the bank secrecy law

extraordinary diligence- degree of diligence required upon the bank in handling real estate mortgage.
Mirror doctrine not applicable to banks by reason of public policy. Mere reliance to the face of title is not
sufficient, it must conduct further investigation. Failure to do so will make the mortgagee in bad faith.

Cert of deposit- written acknowledgment of the bank re: receipt of certain sum of money which it
promise to pay the depositor or some other person authorized by the latter (it created debtor-creditor
relationship). Passbook can qualify as cert of deposit, no formality required.

Check presented to drawee bank 120 days from date thereof- determine whether drawer has been
discharged from maintaining sufficient bank- court ruled drawer not discharged. 6 months is the required
period to render the check stale, which discharges the drawer from maintaining of fund thereto.

Drawer an indispensable party to a suit against indorsers in case of non-payment of an instrument- after
instrument is dishonoured, indorsers are secondarily liable. Holder need not go to the drawer. Indorser
maybe sued directly, without including the drawer. Drawer not indispensable

Mutual insurance company- cooperative enterprise where members are both the insurer and insured.
Members contribute fund from which loses are paid.

Insurable interest in prop- must exist at the time the insurance takes effect and at the time of the
happening of the loss

Retirement insurance- intended for the benefit of ‘yee for his old age/incapacity after rendering service
for a required no of years. Beneficiary can only claim if employee dies before his retirement

Other insurance clause- to avert perpetration of fraud (check recording 52:

Driver not authorized by the actual owner- does not exempt the owner (authority is immaterial). To
require authorization is to defeat purpose of vehicle registration

Limited liability rule- ship owner/agent may invoke this. Presupposes lost of vessel which excuses owner
from liability. Provided no concurring negligence on the part of the owner/agent. Assumption: closer
supervision by shipowner should have prevented the damage

Defense of Improper packing- if this is known to the carrier, its employees/agents, but still accepts and
issued clean BOL, defense cannot be invoked.

Check concession theory- without the state giving its consent, corp do not acquire juridical existence.

Is writing off a loan equivalent to condonation- no. it does not constitute condonation/release of liab of
debtor. Not even a ground of extinguishing obligation of debtor. In making the write off is a unilateral
action of the creditor. Merely an accounting strategy for the company to maintain a more accurate value
of its assets. The creditor is not barred from collecting the debt in the future. Book will be adjusted upon
collection threof.

Continuing bond- bond that has no fixed expiration date and maybe cancelled only by oblige, insurance
com or court

Effect of unnotarized chattel mortgage- valid as bet the parties but not valid as to third parties. Barring
rule: if there is deficiency claim. If the thing purchased ws instituted as chattel to secure the loan, recto
law says, that deficiency can no longer pay the deficiency of proceeds upon foreclosure sale. This applies
is te seller pursues the chattel… but if the seller pursues the collection and not able to pay, hence, opted
to foreclose, in this case, the deficiency is collectible.

Actual sale of counterfeit goods- this is not a requirement to file an infringement case. Mere preparatory
acts are already acts of infringement regardless of actual sale of counterfeit goods.

Venue of extra judicial mortgage of REM- city or municipality wher prop is situated. Venue of action
stipulated by parties cannot prevail.

Mortgagor alleged that extra-juidicial foreclosure did not comply with the requirements like posting for
the sale, court said that foreclosure proceedings with irregularity cannot depend on mere allegations of
said facts. Testimony of the sheriff is compliant with the requirement of proving compliance.

When to redeem prop foreclosed- 1 year from reg of sale

If there’s deficiency arising from foreclosure of REM, can the mortgagee collect deficiency, if he can w/in
what period? In an extrajudicial foreclosure, mortgagee can collect deficiency from debtor. Mortgage
action prescribes after 10 years from the time right of action accrues.

Wilson gamboa v CA- capital refers to share of stocks entitled to vote refer to common stocks, preferred
stocks unless voting. Shares of stocks for control purposes must be one that is voting.
Page 2 handout- Wilson gamboa- the 60 – 40 ownership applies to each class of shares separately,
regardless of voting rights.

Who are corp officers- although the board is given authority to create corp officers, this cannot be
viewed as corp officers under the corp code unless the creation is included in the by-laws.

Will court take judicial notice on board resolutions? Courts are not expected to take judicial notice on
board reso for the authorities officers to represent the company. Failure to submit board reso is a ground
for dismissal thereof.

Appointment as resident agent of a foreign corp.- not automatic to represent the foreign corp. (ex. Cert.
of non-forum shopping). He must be armed with a separate board resolution.

Foreign corp not engaged in doing business- (check recording 1:20) no. 54

Exempt transactions/exempted securities

Shares are trustworthy (source is the government)– commonality among exempt securities

Are banks allowed to regulate access to their premise- yes to protect not only the records under its
custody, its personnel and clients, provided the limitations are not contrary to law.

Long use and exclusivity of use

Warehouse receipts- can be issued in a negotiable or non-nego form. In either case, both are doc of title,
cannot pass the test of negotiability because subj matter is not payment of money but delivery of goods.
Negotiation is only limited to the transferor and his right over the goods. Once stolen and in possession
of another, cannot acquire valid title.

Difference bet nego and non-nego warehouse receipt- in terms of privileges – better title over others
who has claim over the goods if acquired thru nego warehouse receipt, warehouseman is directly liable
to deliver the goods even w/out notification to him. With non-nego, notice to warhouseman is required
and possible to be claimed by other third parties. Remedy in this case is to proceed against the
transferee, not the wareshouseman.

Bulk sales law- exceptions

Warranties of transferor of warehouse receipt- transferor does not guaranty the warehouseman’s
performance of his obligations. Only warrants genuiness of the receipt, title to it. In case of damage is
only attributable to the warehouseman, not the transferor.