Suggested Answers to Bar Exam

Questions 2008 on Mercantile Law

I
X corporation entered into a contract with PT
Contruction Corp. for the latter to construct and
build a sugar mill within six (6) months. They agreed
that in case of delay, PT Construction Corp. will pay
X Corporation P100,000 for every day of delay. To
ensure payment of the agreed amount of damages,
PT Construction Corp. secured from Atlantic Bank a
confirmed and irrevocable letter of credit which was
accepted by X Corporation in due time. One week
before the expiration of the six (6) month period, PT
Construction Corp. requested for an extension of
time to deliver claiming that the delay was due to the
fault of X Corporation. A controversy as to the cause
of the delay which involved the workmanship of the
building ensued. The controversy remained
unresolved. Despite the controversy, X Corporation
presented a claim against Atlantic Bank by executing
a draft against the letter of credit.
1. Can Atlantic Bank refuse payment due to the
unresolved controversy? Explain. (3%)
2. Can X Corporation claim directly from PT
Construction Corp.? Explain. (3%)
SUGGESTED ANSWER:
1. No, Atlantic Bank

cannot

refuse

payment.

Under the independence principle of letters of credit, the

issuing bank is obliged to pay a draft drawn by the
beneficiary upon tender of the required documents
without need of examining the main contract, the letter
of credit being an independent undertaking by the bank.
In the given case, the unresolved controversy as to the
cause of the delay in the main contract does not in any
way affect Atlantic Bank's obligation under the letter of
credit. This is especially true since the letter of credit is
designated as irrevocable, which, thus, makes definite
the
bank's
undertaking
to
pay.
Hence, considering that all the required documents have
been tendered by X Corporation, Atlantic Bank cannot
validly
refuse
to
pay.
2. Yes, X Corporation may directly claim from PT
Construction
Corp.
Under the Civil Code, which is suppletory to the Code of
Commerce, a contract, once perfected binds the parties

not only to the fulfillment of what has been stipulated

but also to all the consequences which according to their
nature may be in keeping with good faith, usage and law.
A careful perusal of the contract between X
Corporationand PT Construction Corp. reveals the
intention of the parties to make the letter of credit
answerable for damages occasioned by the latter's delay.
At the same time, there is no showing that this is the
only
remedy
available
to
X
Corporation.
Hence, a claim against the letter of credit is merely an
alternative recourse and does not in any way prevent X
Corporation from claiming directly against PT
Construction Corp. (Transfield Phils. Inc. vs. Luzon
Hydro Corporation, G.R. No. 146717, Nov. 22, 2004)
II
Tom Cruz obtained a loan of P 1 Million from XYZ
Bank to finance his purchase of 5,000 bags of
fertilizer. He executed a trust receipt in favor of XYZ
Bank over the 5,000 bags of fertilizer. Tom Cruz
withdrew the 5,000 bags from the warehouse to be
transported to Lucena City where his store was
located. On the way, armed robbers took from Tom
Cruz the 5,000 bags of fertilizer. Tom Cruz now
claims that his obligation to pay the loan to XYZ
Bank is extinguished because the loss was not due to
his fault. Is Tom Cruz correct? Explain. (4%)
SUGGESTED ANSWER:
No,
Tom
Cruz
is

not

correct.

Under the Trust Receipts Law, the entrustee is liable for

loss of the goods whether or not he is negligent.
Moreover, in a trust receipt transaction where a loan
feature is involved, the obligation for the loan is not
extinguished
until
such
loan
is
paid.
In the present case, the fact that the stealing of the goods
was not Tom Cruz' fault does not exculpate him from
liability. This is especially true since the goods subject of
the trust receipt transaction serves only as security for
the payment of the loan. The loss of the security did not
impair XYZ Bank's title to the goods, which can only be
extinguished once Tom Cruz pays the advancement
made.
Hence, it is not correct for Tom Cruz to avoid liability
under the trust receipt on the premise that the goods are
lost without his fault.
III
1. As a rule under the Negotiable Instruments
Law, a subsequent party may hold a prior
party liable but not vice-versa. Give two (2)

instances where a prior party may hold a

subsequent party liable. (2%)
2. How does the "shelter principle" embodied in
the Negotiable Instruments Law operate to
give the rights of a holder-in-due course to a
holder who does not have the status of a
holder-in-due course? Briefly explain. (2%)
SUGGESTED ANSWER:
1. The following are two (2) instances where a prior
party may hold a subsequent party liable:

When the subsequent party is guilty of fraud as

in the case of the author of the forgery who is
liable not only to the person whose signature he
forged but also to all other parties prejudiced by
his forgery
When the subsequent party is an accommodated
party, the accommodating party, even though a
prior party, may hold him liable

2. Under the "shelter principle," the holder-in-due

course, by negotiating the instrument, to a party not a
holder-in-due course, transfers all his rights as such
holder to the latter, who thus acquires the right to
enforce the instrument as if he was a holder-in-due
course. However, this principle presupposes that the
"sheltered" holder is not a party to any fraud or illegality
impairing the validity of the instrument.
IV
AB Corporation drew a check for payment to XY
Bank. The check was given to an officer of AB
Corporation who was instructed to deliver it to XY
Bank. Instead, the officer, intending to defraud the
Corporation, filled up the check by making himself
as the payee and delivered it to XY Bank for deposit
to his personal account. AB Corporation came to
know of the officer's fraudulent act after he
absconded. AB Corporation asked XY Bank to
recredit its amount. XY Bank refused.
1. If you were the judge, what issues would you
consider relevant to resolve the case? Explain
(3%)
2. How would you decide the case? Explain.
(2%)
SUGGESTED ANSWER:
1. If I were the judge, I would consider the following
issues as relevant to the case:

Whether or not AB Corporation is negligent

If so, whether or not such negligence is the
proximate cause

2.

Whether or not there is contributory negligence

on the part of XY Bank

AB

Corporation

must

bear

the

loss.

The Negotiable Instruments Law provides that where an

instrument is wanting in any material particular,the
person in possession thereof has prima facie authority to
complete it by filling up the blanks therein. This rule is
founded upon the principle that where one of two
persons must suffer by the bad faith of another, the loss
must fall upon the one who first reposed confidence and
made it possible for the loss to occur.
Applying said principle to the case at bar, although AB
Corporation cannot necessarily be faulted for placing
confidence on its own officer, the fact remains that such
act is the proximate cause of the loss. Moreover, there is
no showing that XY Bank is likewise negligent. By the
very nature of negotiable instruments, one is not
obligated to inquire beyond what appears on its face.
Hence, as between the drawer AB Corporation and
drawee XY Bank, the former bears the loss.
V
Pancho drew a check to Bong and Gerard jointly.
Bong indorsed the check and also forged Gerard's
endorsement. The payor bank paid the check and
charged Pancho's account for the amount of the
check. Gerard received nothing from the payment.
1. Pancho asked the payor bank to recredit his
account. Should the bank comply? Explain
fully. (3%)
2. Based on the facts, was Pancho as drawer
discharged on the instrument? Why?(2%)
SUGGESTED ANSWER:
1.
Yes,
the
payor

bank

should

comply.

Basic is the rule that if the payee's indorsement is forged,

the drawee bank cannot debit the drawer's account and
the
drawee
bank
shall
bear
the
loss.
In the case at bar, it was the indorsement of Gerard, one
of the joint payees, which was forged. In the first place,
the payor bank had no right to pay the check due to such
forgery. In the second place, the fiduciary nature of their
relationship requires the bank to treat the accounts of its
depositors with meticulous care. By paying the check
where the payee's signature is forged, the bank is
obviously wanting in that degree of care required by the
nature
of
its
functions.
Hence, the payor bank is obliged to recredit Pancho's
account.

2.

Yes,

Pancho

was

discharged.

Under the Negotiable Instruments Law, a person

secondarily liable may be discharged by any act which
discharges the instrument. One of the acts that
discharges the instrument is payment made in due course
by or in behalf of the principal debtor. The same law
provides that payment in due course is one made at or
after maturity to the holder in good faith and without
notice
that
title
is
defective.

therefore escape liability by simply raising the defense

of Gemma's participation as an accessory to the crime.
VII
Terrazas de Patio Verde, a condominium building,
has a value of P50 Million. The owner insured the
building against fire with three (3) insurance
companies for the following amounts: Northern
Insurance Corp. - P20 Million Southern Insurance
Corp. - P30 Million Eastern Insurance Corp. - P50
Million
1. Is the owner's taking of insurance for the
building with three (3) insurers valid?
Discuss. (3%)
2. The building was totally razed by fire. If the
owner decides to claim from Eastern
Insurance Corp. only P50 Million, will the
claim prosper? Explain. (2%)

The facts of the case reveal that payment by payor bank

to Bong is one made in due course, it being made at or
after maturity to the holder (Bong) in good faith and
without notice that his title is defective.
Such being the case, the negotiable instrument is
discharged, which in turn discharges Pancho, as drawer,
from his secondary liability.
VI
On January 1, 2000, Antonio Rivera secured a life
insurance from SOS Insurance Corp. for P1 Million
with Gemma Rivera, his adopted daughter, as the
beneficiary. Antonio Rivera died on March 4, 2005
and in the police investigation, it was ascertained that
Gemma Rivera participated as an accessory in the
killing of Antonio Rivera. Can SOS Insurance Corp.
avoid liability by setting up as a defense the
participation of Gemma Rivera in the killing of
Antonio Rivera? Discuss with reasons. (4%)
SUGGESTED ANSWER:
No, SOS Insurance Corp. cannot avoid liability by
setting up as defense the participation of Gemma Rivera
in
the
killing
of
Antonio
Rivera.
Although the Insurance Code provides that the interest
of the beneficiary in a life insurance policy shall be
forfeited when the beneficiary is the principal,
accomplice, or accessory in willfully bringing about the
death of the insured, the same law also provides that in
such an event, the nearest relative of the insured shall
receive the proceeds of said insurance if not otherwise
disqualified.
The facts of the case reveal that Gemma Rivera's
participation as accessory is only based on the findings
of a police investigation. In other words, there is yet no
final judgment of conviction. But assuming arguendo
that a mere police investigation is enough to disqualify
Gemma, the fact remains that the law itself provides that
the insurance proceeds shall pertain to the nearest
relatives
of
the
insured.
Hence, all premises considered, the insurer cannot

SUGGESTED ANSWER:
1. Yes, as a general rule, the owner's taking of insurance
for the building with three (3) insurers is valid. This is a
case of double insurance where the same person is
insured by several insurers separately in respect to the
same
subject
and
interest.
Under the Insurance Code, such an arrangement is not
prohibited per se, although parties may agree upon an
"other insurance" clause, in which case the insured may
be prohibited from taking additional insurance without
the
insurer's
consent.
In the present case, it does not appear that the parties
agreed on an other insurance clause. Hence, in the
absence of any showing that such a restriction exists,
there is nothing to prevent the insured from taking
another insurance over the same property, subject only to
the caveat that he cannot recover more than the value of
his
interest
in
the
thing
insured.
2.

Yes,

the

claim

will

prosper.

In case double insurance, the insured has the option to

go after any one of the insurers unless the policy itself
provides that insurers contribute ratably to the loss. In
either case, he cannot recover more than the value of his
insurable
interest.
In the case at bar, the insured, as owner, has an insurable
interest up to P50 Million, the value of the building. That
being the case, he can therefore claim the entire P50
Million from Eastern Insurance Corp. In turn, by the
principle of contribution which applies in case of overinsurance due to double insurance, Eastern Insurance
Corp. may require the other insurers to contribute ratably

to the loss, considering that they separately insure the

same interest against the same peril.
VIII
City Railways, Inc. (CRI) provides train services, for
a fee, to commuters from Manila to Calamba,
Laguna. Commuters are required to purchase tickets
and then proceed to designated loading ang
unloading facilities to board the train. Ricardo
Santos purchased a ticket for Calamba and entered
the station. While waiting, he had an altercation with
the security guard of CRI leading to a fistfight.
Ricardo Santos fell on the railway just as a train was
entering the station. Ricardo Santos was run over by
the train. He died. In the action for damages filed by
the heirs of Ricardo Santos, CRI interposed lack of
cause of action, contending that the mishap occurred
before Ricardo Santos boarded the train and that it
was not guilty of negligence. Decide.(5%)
SUGGESTED ANSWER:
The
contention
of
CRI

is

not

insurer of the lost cargoes loaded on board the vessel

which were consigned to Debenhams Company. After
it indemnified Debenhams, Empire as subrogee filed
an action for damages against CSC.
1. Assume that the vessel was seaworthy. Before
departing, the vessel was advised by the
Japanese Meteorological Center that it was
safe to travel to its destination. But while at
sea, the vessel received a report of a typhoon
moving within its general path. To avoid the
typhoon, the vessel changed its course.
However, it was still at the fringe of the
typhoon when it was repeatedly hit by huge
waves, foundered and eventually sank. The
captain and the crew were saved except three
(3) who perished. Is CSC liable to Empire?
What principle of maritime law is applicable?
Explain. (3%)
2. Assume the vessel was not seaworthy as in
fact its hull had leaked, causing flooding in
the vessel. Will your answer be the same?
Explain. (2%)

tenable.

Under the law, the degree of care required of a common

carrier is extraordinary diligence or the obligation to
carry the passenger safely as far as human care and
foresight can provide, using the utmost diligence of very
cautious persons with due regard to all the
consequences. Thus, in case of death or injury to
passengers, the common carrier is presumed negligent
and upon him rests the burden of proof of exercise of
extraordinary diligence. The duty to exercise
extraordinary diligence attaches from the moment the
person who purchases the ticket from the carrier presents
himself at the proper place and in a proper manner to be
transported.
In the given case, there is no doubt that CRI is a
common carrier for the reason that it is engaged in the
business of transporting passengers by land, for
compensation, offering its services to the public. As
such, it is required to exercise extraordinary diligence
and this responsibility attached from the moment
Ricardo Santos purchased the ticket and entered the
station. When Ricardo died while he was within the
premises of CRI, the latter is presumed to be at fault.
This is true even if Ricardo has not yet boarded the train,
so long as he has presented himself to the carrier at the
proper place and in a proper manner.
Hence, CRI, as a common carrier, is liable to the heirs of
Ricardo Santos.
IX
On October 30, 2007, M/V Pacific, a Philippine
registered vessel owned by Cebu Shipping Company
(CSC), sank on her voyage from Hong Kong to
Manila. Empire Assurance Company (Empire) is the

3. Assume the facts in question (b). Can the

heirs of the three (3) crew members who
perished recover from CSC? Explain fully.
(3%)
SUGGESTED ANSWER:
1. No, CSC is not

liable

to

Empire.

The principle of maritime law applicable is the Doctrine

of Limited Liability. Under this rule, the exclusively real
and hypothecary nature of maritime law operates to limit
the liability of the shipowner to the value of the vessel,
earned freightage and proceeds of insurance if any.
Hence, the phrase "NO VESSEL, NO LIABILITY."
Total destruction or sinking of the vessel extinguishes
the maritime lien as there is no longer any res to which it
can
attach.
This doctrine is applicable in the case because, as the
facts reveal, the ship sank and was totally lost. The
exception that the carrier failed to overcome the
presumption of negligence is not obtaining as in fact
CSC was able to prove that the ship was seaworthy.
Moreover, the loss is due to a typhoon -- a fortuitous
event, which is one of the exempting circumstances
when
the
carrier
can
avoid
liability.
Hence, CSC is not liable under the Doctrine of Limited
Liability.
2.

No,

my

answer

will

not

be

the

same.

While as a rule, the shipowner's liability is limited only

to the value of the vessel so that loss of the vessel
operates to extinguish his liability, the same rule has no
application when the carrier failed to overcome the
presumption of negligence. Such presumption is only
rebutted when the carrier establishes that the vessel is
seaworthy.
According to the facts of the case, the vessel is not
seaworthy. Absent this requirement of seaworthiness of
the vessel, CSC has failed to overcome the presumption
of
negligence.
Hence, the Doctrine of Limited Liability is inapplicable
and
CSC
is
liable
for
the
loss.
3. Yes, the heirs of the three (3) crewmembers who
perished can recover from CSC. This is because another
exception to the applicability of the Limited Liability
Rule
is
Workmen's
Compensation
Claims.
However, in this case, the heirs cannot go after CSC
directly since their claim based on workmen's
compensation would have be to be filed with the Social
Security System (SSS). After paying said claims, the
SSS is subrogated to their rights and is thus entitled to
go after CSC. In either case, CSC cannot raise the
defense that its liability is limited to the value of his
vessel.
X
Nelson owned and controlled Sonnel Construction
Company. Acting for the company, Nelson contracted
the construction of a building. Without first installing
a protective net atop the sidewalks adjoining the
construction site, the company proceeded with the
construction work. One day a heavy piece of lumber
fell from the building. It smashed a taxicab which at
that time had gone offroad and onto the sidewalk in
order to avoid the traffic. The taxicab passenger died
as a result.
1. Assume that the company had no more
account and property in its name. As counsel
for the heirs of the victim, whom will you sue
for damages, and what theory will you adopt?
(3%)
2. If you were the counsel for Sonnel
Construction, how would you defend your
client? What would be your theory? (2%)
3. Could the heirs hold the taxicab owner and
driver liable? Explain. (2%)

1. As counsel for the heirs of the victim, I will sue

Nelson as owner of Sonnel Construction Company using
the Doctrine of Piercing the Veil of Corporate Fiction.
As a general rule, the liability of a corporation is
separate and distinct from that of the persons comprising
it. However, as an exception to the rule, the veil of
corporate fiction may be pierced when the separate
personality of the corporation is used as a shield to avoid
a clear legal obligation. In such an event, it is treated as a
mere association of persons upon whom liability
attaches.
In the given case, Sonnel Construction Company has a
clear legal obligation to the heirs of the victim for its
negligence in not installing a protective net atop the
sidewalk before beginning construction. Nelson, as
owner of the company, cannot use the separate entity
rule in order to avoid liability. This is especially true
when the company had no more account and property
under
its
name.
2. If I were the counsel of Sonnel Construction, I would
raise the defense of due diligence in the selection and
supervision
of
its
employees.
Under the doctrine of vicarious liability of employers,
the employer may be relieved of responsibility for the
negligent acts of their employees if they can show that
they observed all the diligence of a good father of a
family
to
prevent
damage.
In the given case, Sonnel Construction, as employer,
may prove due diligence in the selection and supervision
of its employees by establishing that prior to hiring, it
examined them as to their qualifications, experience and
service records and during the course of employment, it
formulated standard operating procedures, monitored
their implementation and imposed disciplinary measures
for
breaches
thereof.
3. Yes, the heirs may hold the taxicab owner and the
driver
liable.
As regards the taxicab owner, the heirs have two
concurrent causes of action based on the vicarious
liability of an employer and based on contractual breach.
In the first, the negligence of the driver gives rise to the
presumption of negligence of the taxicab owner as its
employer. In the second, there is a contract of carriage
between the taxicab owner and its passenger and the
breach thereof by the former gives rise to the
presumption that it failed to exercise extraordinary
diligence.

SUGGESTED ANSWER:
In addition, the heirs also have two concurrent causes of

action against the driver. First, they may hold the driver
criminally liable for reckless imprudence resulting in
homicide. In which case, the taxicab owner is also
subsidiarily liable in case the driver becomes insolvent.
Second, the heirs may likewise sue the driver for
damages
based
on
tort.
All four cases may be pursued separately and
simultaneously for they are independent of each other.
The only caveat is that the plaintiff may not recover
twice for the same negligent act.
XI

Under the Corporation Code, contracts entered into by

interlocking directors are valid if the interest of the
interlocking director in one corporation is nominal -- that
is, less than 20% of the outstanding capital stock -- and
provided that the following conditions are met:

1. Since February 8, 1935, the legislature has

not passed even a single law creating a
private corporation. What provision of the
Constitution precludes the passage of such a
law? (3%)
2. May the composition of the board of directors
of the National Power Corporation (NPC) be
validly reduced to three (3)? Explain your
answer fully. (2%)
SUGGESTED ANSWER:
1. Section 16, Article XII of the 1987 Constitution
provides that Congress shall not, except by general law,
provide for the formation, organization, or regulation of
private corporations. Government-owned or controlled
corporations may be created or established by special
charters in the interest of the common good and subject
to
the
test
of
economic
viability.
2. Yes, the composition of the board of directors of the
NPC may be validly reduced to three (3).
The NPC is a government-owned or controlled
corporation (GOCC) governed by its own charter. The
limitation under the Corporation Code that the number
of directors be not less than five (5) but not more than
fifteen (15) does not apply to a GOCCthat has its own
charter.
XII
Pedro owns 70% of the subscribed capital stock of a
company which owns an office building. Paolo and
Juan own the remaining stock equally between them.
Paolo also owns a security agency, a janitorial
company and a catering business. In behalf of the
office building company, Paolo engaged his
companies to render their services to the office
building. Are the service contracts valid? Explain.
(4%)
SUGGESTED ANSWER:
Yes,
the
service

contracts

are

valid.

the presence of such director in the board

meeting approving the contract was not
necessary to constitute a quorom
his vote was not necessary to approve the
contract
the contract is fair and reasonable under the
circumstances.

According to the facts of the case, Pedro owns 70% of

the stocks, leaving 30% to be divided equally between
Juan and Paolo. This shows that Paolo owns only a
nominal
interest
of
15%.
Hence, provided that all the other conditions are met,
Paolo's service contracts with the company are valid.
XIII
Grand Gas Corporation, a publicity listed company,
discover after extensive drilling a rich deposit of
natural gas along the coast of Antique. For five (5)
months, the company did not disclose the discovery
so that it could quietly and cheaply acquire
neighboring land and secure mining information.
Between the discovery and its disclosure of the
information to the Securities and Exchange
Commission, all the directors and key officer of the
company bought shares in the company at very low
prices. After the disclosure, the price of the shares
went up. The directors and officers sold their shares
at huge profits.
1. What provision of the Securities Regulation
Code (SRC) did they violate, if any? Explain.
(4%)
2. Assuming that the employees of the
establishment handling the printing work of
Grand Gas Corporation saw the exploration
reports which were mistakenly sent to their
establishment together with other materials
to be printed. They too bought shares in the
company at low prices and later sold them at
huge profits. Will they be liable for violation
of the SRC? Why? (3%)
SUGGESTED ANSWER:
1. The directors and key officers violated the provisions
prohibiting
insider
trading.
Under the Securities Regulation Code, it shall be

unlawful for an insider to sell or buy a security of the

issuer, while in possession of material information with
respect to the issuer or the security that is not generally
available
to
the
public.

based

In the given case, the directors and key officers are such
insiders, they being directors and officers of Grand Gas
Corporation, the issuer. As such, their act of purchasing
company shares while in possession of material nonpublic
information.

The Corporation Code provides that no certificate of

stock shall be issued to a subscriber until the full amount
of his subscription together with interest and expenses
(in case of delinquent shares) if any is due, has been
paid.
XV

Hence, the directors and key officers are guilty of insider

trading in violation of the Securities Regulation Code.
2.

Yes,

they

are

liable.

Under the Securities Regulation Code, a person whose

relationship or former relationship to the issuer gives or
gave him access to material information about the issuer
or security that is not generally available to the public is
likewise
an
insider.
In the case at bar, it can be readily seen that the
employees of the printing company received the material
information through its relationship with Grand Gas
Corporation as its printer. They are therefore insiders.
When they purchased the shares while in possession of
material non-public information, they committed insider
trading.
Hence, they can be held liable for violation of the
Securities Regulation Code.
XIV
Ace Cruz subscribed to 100,000 shares of stock of JP
Development Corporation, which has a par value of
P1 per share. He paid P25,000 and promised to pay
the balance before December 31, 2008. JP
Development Corporation declared a cash dividend
on October 15, 2008, payable on December 1, 2008.
1. For how many shares is Ace Cruz entitled to
be paid cash dividends? Explain. (2%)
2. On December 1, 2008, can Ace Cruz compel
JP Development Corporation to issue to him
the stock certificate corresponding to the
P25,000 paid by him? (2%)
SUGGESTED ANSWER:
1. Ace Cruz is entitled to be paid cash dividends for his
entire
subscribed
shares
of
100,000.
Under the Corporation Code, holders of subscribed
shares not fully paid which are not delinquent shall have
all the rights of a stockholder. This includes the
proprietary right of the stockholder to receive dividends

on

his

total

subscription.

2. No, Ace Cruz cannot compel JP Development

Corporation to issue to him the stock certificate.

Eloise, an accomplished writer, was hired by Petong

to write a bimonthly newspaper column for Diario de
Manila, a newly-established newspaper of which
Petong was the editor-in-chief. Eloise was to be paid
P1,000 for each column that was published. In the
course of two months, Eloise submitted three
columns which, after some slight editing, were
printed in the newspaper. However, Diario de Manila
proved unprofitable and closed only after two
months. Due to the minimal amounts involved, Eloise
chose not to pursue any claim for payment from the
newspaper, which was owned by New Media
Enterprises.
Three years later, Eloise was planning to publish an
anthology of her works, and wanted to include the
three columns that appeared in the Diario de Manila
in her anthology. She asks for your legal advice:
1. Does Eloise have to secure authorization from
New Media Enterprises to be able to publish
her Diario de Manila columns in her own
anthology? Explain fully. (4%)
2. Assume that New Media Enterprises plans to
publish Eloise's columns in its own anthology
entitled, "The Best of Diaro de Manila."
Eloise wants to prevent the publication of her
columns in that anthology since she was never
paid by the newspaper. Name one irrefutable
legal arguments Eloise could cite to enjoin
New Media Enterprises from including her
columns in its anthology. (2%)
SUGGESTED ANSWER:
1. Yes, Eloise has to secure authorization from New
Media
Enterprise.
In case of a work by an author during and in the course
of his employment, the copyright shall belong to the
employer, if the work is the result of his regular duties,
even if the employee uses the time, facilities and
materials
of
the
employer.
The facts reveal that Eloise created the works in question

during the course of her employment with New Media

Enterprises. Anent the fact that she was specifically
hired by Petong to write a bimonthly column, the said
works are the result of her regular duties.
Hence, being a mere employee, Eloise is not the owner
of the copyright and must therefore secure the authority
of the real owner before she can publish the works in her
own
anthology.
2. Eloise can invoke her moral rights in her works.
Although copyright over the works belong to the
employer, the author of the work shall, independently of
the economic rights, have moral rights in her works. This
includes the right to make alterations to her work prior
to,
or
withhold
it
from
publication.
In the given case, Eloise as the true author continues to
hold moral rights in her works, regardless of the fact that
New Media Enterprises owns the economic rights
thereto.
Hence, she may enjoin New Media Enterprises from
publishing her columns by invoking her moral rights as
author.
XVI
In 1999, Mocha Warm, an American musician, had a
hit rap single called Warm Warm Honey which he
himself composed and performed. The single was
produced by a California record company, Galactic
Records. Many noticed that some passages from
Warm Warm Honey sounded eerily similar to parts
of Under Hassle, a 1978 hit song by the British rock
band Majesty. A copyright infringement suit was filed
in the United States against Mocha Warm by
Majesty. It was later settled out of court, with
Majesty receiving attribution as co-author of Warm
Warm Honey as well as a share in the royalties. By
2002, Mocha Warm was nearing bankruptcy and he
sold his economic rights over Warm Warm Honey to
Galactic Records for $10,000 In 2008, Planet Films a
Filipino movie producing company, commissioned DJ
Chef Jean, a Filipino musician, to produce an
original re-mix of Warm Warm Honey for use in one
of its latest films, Astig!. DJ Chef Jean remixed
Warm Warm Honey with salsa beat and interspersed
as well a recital of a poetic stanza by John Blake, a
17th century Scottish poet. DJ Chef Jean died shortly
after submitting the remixed Warm Warm Honey to
Planet Films. Prior to the release of Astig!, Mocha
Warm learns of the remixed Warm Warm Honey and
demands that he be publicity identified as the author
of the remixed song in all the CD covers and publicity
releases of Planet Films.

1. Who are the parties or entities entitled to be

credited as author of the remixed Warm
Warm Honey? Reason out your answer. (3%)
2. Who are the particular parties or entities who
exercise copyright over the remixed Warm
Warm Honey? Explain. (3%)
SUGGESTED ANSWER:
1. The parties or entities entitled to be credited as author
of the remixed Warm Warm Honey are the following:

Mocha Warm, because as author, he has the

moral right of attribution, which exists
independently of any grant of an assignment or
license with respect to his economic rights
Majesty, because as co-author, it is one of the
original owners of the copyright and as such has
the right to be credited as author
DJ Chef Jean, because as an author
commissioned to produce a derivative work, he
enjoys all the rights of a copyright holder as
though it were a new work, without prejudice to
any subsisting copyright over the original works

2. The parties or entities who exercise copyright over the

remixed Warm Warm Honey are the following:

DJ Chef Jean, as producer, for purposes of

exhibition, and also as author commissioned to
produce a derivative work, he also exercises
copyright over the work for all other purposes.
Galactic Records, as owner of a subsisting
copyright over the original work
Majesty, as author of the original work

XVII
On January 1, 2008, Al obtained a loan of P10,000
from Bob to be paid on January 30, 2008, secured by
a chattel mortgage on a Toyota motor car. On
February 1, 2008, Al obtained another loan of
P10,000 from Bob to be paid on February 15, 2008.
he secured this by executing a chattel mortgage on a
Honda motorcycle. On the due date of the first loan
Al failed to pay. Bob foreclosed the chattel mortgage
but the car was bidded for P6,000 only. Al also failed
to pay the second loan due on February 15, 2008. Bob
filed an action for collection of sum of money. Al filed
a motion to dismiss claiming that Bob should first
foreclose the mortgage on the Honda motorcycle
before he can file the action for sum of money. Decide
with
reasons.
(4%)
SUGGESTED ANSWER:

The motion to dismiss must be denied. Under the Chattel

Mortgage Law, the mortgagee has two remedies in case
of default. He may file a collection suit or he may
foreclose the chattel mortgage with right to recover any
deficiency. These remedies are alternative and neither
one is a condition sine qua non of the other. In the given
case, Bob chose to file an action for collection of sum of
money. The law itself provides for this remedy to the
mortgagee and nothing in its language suggests that
before such a remedy is availed of, there must first be
foreclosure. Hence, all premises considered, the motion
to dismiss is without merit because foreclosure is not
necessary for an action for collection of sum of money.
XVIII
1. Can a distressed corporation file a petition
for corporate rehabilitation after the
dismissal of its earlier petition for insolvency?
Why? (2%)
2. Can the corporation file a petition for
rehabilitation first, and after it is dismissed
file a petition for insolvency? Why? (2%)
3. Explain the key phrase "equality is equity" in
corporate rehabilitation proceedings. (2%)
SUGGESTED ANSWER:
1. Yes, a distressed corporation can file a petition for
corporate rehabilitation after the dismissal of its earlier
petition for insolvency. This is because a petition for
corporate rehabilitation is granted upon different
grounds as a petition for insolvency. It is possible that
the petition for insolvency was not granted because the
ground relied upon is insufficient to warrant a
declaration of a state of insolvency, but that the same
ground may be obtaining in a petition for corporate
rehabilitation.
2. Yes, the corporation can file a petition for corporate
rehabilitation first and after it is dismissed, file a petition
for insolvency, for the same reason as above. The
grounds relied upon are different. For as long as the first
petition is no longer pending but is already terminated,
the second petition based on a ground incompatible with
the
first
may
still
be
filed.
3. "Equality is equity" means that whenever a distressed
corporation asks the Securities and Exchange
Commission for rehabilitation and suspension of
payments, preferred creditors may no longer assert
preference, but shall stand in equal footing with other
creditors. It is for this reason that during corporate
rehabilitation, all pending claims, whether secured or
unsecured, are suspended. However, the preferred status
of secured creditors still remain so that when the
corporation is declared insolvent and its assets are

distributed, the secured creditors continue to be preferred

over the unsecured ones.
XIX
Industry Bank, which has a net worth of P1 Billion,
extended a loan to Celestial Properties Inc.
amounting to P270 Million. The loan was secured by
a mortgage over a vast commercial lot in the Fort
Bonifacio Global City, appraised at P350 Million.
After audit, the Bangko Sentral ng Pilipinas gave
notice that the loan to Celestial Properties exceeded
the single borrower's limit of 25% of the bank's net
worth under a recent BSP Circular. In light of other
previous similar violations of the credit limit
requirement, the BSP advised Industry Bank to
reduce the amount of the loan to Celestial Properties
under pain of severe sanctions. When Industry Bank
informed Celestial Properties that it intended to
reduce the loan by P50 Million, Celestial Properties
countered that the bank should first release a part of
the collateral worth P50 Million. Industry Bank
rejected the counter-proposal, and referred the
matter to you as counsel. How would you advise
Industry Bank to proceed, with its best interest in
mind?
(5%)
SUGGESTED

ANSWER:

I would advise Industry Bank to release a part of the

collateral
worth
P50
Million.
While it is true that under the Civil Code a mortgage is
one and indivisible as to the contracting parties so that
every portion of the property mortgaged is answerable
for the whole obligation as soon as it falls due, the
Supreme Court has held that this rule is not applicable to
a situation where only a portion of the loan was released.
In such a case, the mortgage on the loan became
unenforceable to the extent of the unreleased portion.
In the case at bar, the loan agreement is for P270
Million. By reducing the amount to P220 Million (or
P270 Million less P50 Million), the real estate mortgage
over the commercial lot became unenforceable to the
extent of P50 Million and subsists as a security only for
P220 Million debt. In other words, in case of default of
Celestial Properties, the mortgage can be foreclosed only
to the extent of the P220 Million. (Central Bank of the
Philippines
vs.
CA,
139
SCRA
46[1985])
Hence, it would be in the best interest of the bank to
comply with its client's request since retaining the entire
collateral would not result in any benefit. On the
contrary, it might damage its relationship with its client
by refusing to accommodate its request.