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Pointers in Mercantile Law

2017 BAR EXAMS


By Professor Victoria V. Loanzon
Assisted by Atty. John Stephen Humiwat and
Atty. Diane Steffi Guillamon

LETTERS OF CREDIT

Q: Define a letter of credit.

A: By definition, a letter of credit is a written instrument whereby the writer requests or


authorizes the addressee to pay money or deliver goods to a third person and assumes
responsibility for payment of debt therefor to the addressee.

A letter of credit, however, changes its nature as different transactions occur and if carried
through to completion ends up as a binding contract between the issuing and honoring
banks without any regard or relation to the underlying contract or disputes between the
parties thereto.

Q: What is the obligation of the issuing bank?

A: Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit
once the draft and the required documents are presented to it. (Philippine National Bank vs.
San Miguel Corporation G.R. No. 186063; January 15, 2014 J. Peralta)

Q: What is the obligation of a confirming bank?

A: In order to consider a correspondent bank as a confirming bank, it must have assumed a


direct obligation to the seller as if it had issued the letter of credit itself. If the
correspondent bank was a confirming bank, then a categorical declaration should have
been stated in the letter of credit that the correspondent bank is to honor all drafts
drawn in conformity with the letter of credit. Thus, if we were to hold Allied Bank liable
abased on the rule of strict compliance, it must be because Allied Bank acted as confirming
bank under the language of L/C No. 21970.

It must be remembered that a Letter Agreement was executed by Marphil and Allied Bank.
The Letter of Agreement is a contract between Marphil and Allied Bank where the latter
agreed to purchase the draft and credit the former its value on the undertaking that Allied
Bank will be reimbursed in case the draft is dishonored. This obligation is direct, and is
independent. The Letter Agreement simply creates a separate obligation on Marphil's
part to refund the amount of the proceeds, in case of dishonor.

When Allied Bank credited the amount of Pl,913,763.45 to Marphil' s account, it became the
debtor of Marphil. However, once Nanyang Bank dishonored the export documents and

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draft, Marphil became the debtor of Allied Bank for the amount by virtue of its obligation to
reimburse the bank under the Letter Agreement. This obligation consisting of sum of
money became demandable upon notice of the dishonor by Nanyang Bank. Thus, legal
compensation may take place between the two debts.

In sum, the Court affirmed that Allied Bank is not a confirming bank under L/C No.
21970. In any case, whether Allied Bank is directly liable as confirming bank will not affect
Marphil's obligation to reimburse Allied Bank the amount of Pl ,913,763.45 because its
liability to refund the amount arose under an independent contract, i.e. the Letter
Agreement. And while Allied Bank is the debtor of Marphil for the amount it credited
under the draft, the obligation under the Letter Agreement made Allied Bank the creditor
of Marphil for the same amount. Being debtor and creditor of each other, Allied Bank
was entitled to legal compensation by debiting the amount, which did not result in
any loss to Marphil. (MARPHIL EXPORT CORPORATION and IRENEO LIM vs. ALLIED
BANKING CORPORATION, substituted by PHILIPPINE NATIONAL BANK G.R. No. 187922,
September 21, 2016, J. JARDELEZA)

Q: Who among the parties bears the liability to pay the amount stated in the Letter of
Credit?

A: Letters of credit are governed primarily by their own provisions, by laws specifically
applicable to them, and by usage and custom. Consistent with the rulings in several cases,
usage and custom refers to UCP 400.

Article 17 of UCP 400 explains that under this principle, an issuing bank assumes no
liability or responsibility "for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular conditions stipulated in
the documents or superimposed thereon..." Thus, as long as the proper documents are
presented, the issuing bank has an obligation to pay even if the buyer should later on
refuse payment. To allow issuing bank to refuse to honor the Letter of Credit simply
because it could not collect first from the buyer is to countenance a breach of the
Independence Principle.

A bank such as HSBC has the duty to observe the highest degree of diligence. HSBC ought to
have noticed the discrepancy between City Trust's request for collection under URC 322
and the terms of the Letter of Credit requiring application of UCP 400. Regardless of any
error that City Trust may have committed, the standard of care expected of HSBC dictates
that it should have made a separate determination of the significance of the presentment of
the Letter of Credit and the attached documents. (THE HONGKONG & SHANGHAI BANKING
CORPORATION, LIMITED v. NATIONAL STEEL CORPORATION AND CITYTRUST BANKING
CORPORATION (NOW BANK OF THE PHILIPPINE ISLANDS), G.R. No. 183486, February 24,
2016, JARDELEZA, J.)

Q: Explain the Independence Principle/Doctrine of Independence.

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A: Where the trial court rendered a decision finding the applicant of a letter of credit solely
liable to pay the beneficiary and omitted by inadvertence to insert in its decision the phrase
without prejudice to the decision that will be made against the issuing bank, the bank
cannot evade responsibility based on this ground. The Independence Principle assures
the seller or the beneficiary of prompt payment independent of any breach of the
main contract and precludes the issuing bank from determining whether the main
contract is actually accomplished or not.

In a letter of credit transaction, such as in this case, where the credit is stipulated as
irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary
provided that the stipulated documents are presented and the conditions of the
credit are complied with. Precisely, the independence principle liberates the issuing bank
from the duty of ascertaining compliance by the parties in the main contract. As the
principle's nomenclature clearly suggests, the obligation under the letter of credit is
independent of the related and originating contract. In brief, the letter of credit is separate
and distinct from the underlying transaction. (Philippine National Bank vs. San Miguel
Corporation G.R. No. 186063; January 15, 2014 J. Peralta)

TRUST RECEIPTS LAW

Q: Is the Bangko Sentral ng Pilipinas authorized to foreclose mortgage?

A: No. In a trust receipt transaction, the entrustee has the obligation to deliver to the
entruster the price of the sale, or if the merchandise is not sold, to return the merchandise
to the entruster. There are, therefore, two obligations in a trust receipt transaction: the
first refers to money received under the obligation involving the duty to turn it over
to the owner of the merchandise sold, while, the second refers to the merchandise
received under the obligation to "return" it to the owner. Clearly, this concept of trust
receipt is inconsistent with that of an assignment of credit where there is an absolute
conveyance of title that would have in effect given authority to BSP to foreclose the subject
mortgage. Without a valid assignment of credit, as in this case, BSP has no authority to
foreclose the mortgaged property of the Spouses Libo-on to the Rural Bank of Hinigaran.
Moreso, BSP could not possibly sell the subject property without violating the prohibition
against pactum commissorium since without a valid assignment of credit, BSP cannot ipso
facto appropriate for itself the Spouses Libo-on's mortgaged property to the Rural Bank of
Hinigaran. In the absence of such absolute conveyance of title to qualify as an assignment of
credit, the subject promissory note with trust receipt agreement should be interpreted as it
is denominated. The contract being that of a mere loan, and because there was no valid
assignment of credit, BSP may not foreclose the mortgage. (Bangko Sentral ng Pilipinas v.
Agustin Libo-on, G.R. No. 173864, November 23, 2015, Reyes, J.)

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NEGOTIABLE INSTRUMENTS LAW

Q: Who is a holder in due course?

A: Arguing that Gutierrez is not a holder in due course, Patrimonio filed the instant petition
praying that the ruling of the CA, ordering him to pay Gutierrez, be reversed. The SC ruled
that Section 52(c) of the NIL states that a holder in due course is one who takes the
instrument "in good faith and for value." Acquisition in good faith means taking without
knowledge or notice of equities of any sort which could be set up against a prior holder of
the instrument. It means that he does not have any knowledge of fact which would render
it dishonest for him to take a negotiable paper. The absence of the defense, when the
instrument was taken, is the essential element of good faith. In this case, after having been
found out that the blanks were not filled up in accordance with the authority the
Patrimonio gave, Gutierrez has no right to enforce payment against Patrimonio, thus, the
latter cannot be obliged to pay the face value of the check. (ALVIN PATRIMONIO vs.
NAPOLEON GUTIERREZ AND OCTAVIO MARASIGAN III, G.R. No. 187769, June 4, 2014, J.
Brion)

Q: What defenses can be interposed against a holder of a managers check?

A: Notably, the mere issuance of a manager's check creates a privity of contract between
the holder and the drawee bank, the latter primarily binding itself to pay according to the
tenor of its acceptance. The drawee bank, as a result, has the unconditional obligation to
pay a manager's check to a holder in due course irrespective of any available personal
defenses. However, while this Court has consistently held that a manager's check is
automatically accepted, a holder other than a holder in due course is still subject to
defenses.

The drawee bank of a manager's check may interpose personal defenses of the purchaser of
the manager's check if the holder is not a holder in due course. In short, the purchaser of a
manager's check may validly countermand payment to a holder who is not a holder
in due course. Accordingly, the drawee bank may refuse to pay the manager's check by
interposing a personal defense of the purchaser. (RCBC SAVINGS BANK v NOEL M. ODRADA,
G.R. No. 219037, SECOND DIVISION, October 19, 2016, CARPIO, J.)

Q: Drawee bank pays a materially altered check. Can it still claim reimbursement for
the amount of the check?

A: Yes. When the drawee bank pays a materially altered check, it violates the terms of the
check, as well as its duty to charge its clients account only for bona fide disbursements he
had made. If the drawee did not pay according to the original tenor of the instrument, as
directed by the drawer, then it has no right to claim reimbursement from the drawer, much

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less, the right to deduct the erroneous payment it made from the drawers account which it
was expected to treat with utmost fidelity. The drawee, however, still has recourse to
recover its loss. The collecting banks are ultimately liable for the amount of the
materially altered check. It cannot further pass the liability back to Cesar and Lolita
absent any showing in the negligence on the part of Cesar and Lolita which substantially
contributed to the loss from alteration. (CESAR V. AREZA and LOLITA B. AREZA vs. EXPRESS
SAVINGS BANK, INC. and MICHAEL POTENCIANO, G.R. No. 176697, September 10, 2014, J.
PEREZ)

Q: M Bank issued a managers check. When the check was sent for clearance, the
same countermanded for being drawn against a closed account. Was the act of
countermanding correct?

A: No. Clearing should not be confused with acceptance. Managers and cashiers checks are
still the subject of clearing to ensure that the same have not been materially altered or
otherwise completely counterfeited. However, managers and cashiers checks are pre-
accepted by the mere issuance thereof by the bank, which is both its drawer and drawee.
Thus, while managers and cashiers checks are still subject to clearing, they cannot be
countermanded for being drawn against a closed account, for being drawn against
insufficient funds, or for similar reasons such as a condition not appearing on the face of
the check. Long standing and accepted banking practices do not countenance the
countermanding of managers and cashiers checks on the basis of a mere allegation of
failure of the payee to comply with its obligations towards the purchaser. On the contrary,
the accepted banking practice is that such checks are as good as cash. (MBTC vs. WILFRED
CHIOK, BPO vs. WILFRED CHIOK, GLOBAL BUSINESSBANK, INC. vs. WILFRED CHIOK, G.R. No.
172652, G.R. No. 175302, G.R. No. 175394, November 26, 2014, Leonardo-De Castro, J.

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INSURANCE CODE

Q: What is mortgage redemption insurance?

A: Mortgage redemption insurance is a device for the protection of both the mortgagee and
the mortgagor. On the part of the mortgagee, it has to enter into such form of contract so
that in the event of the unexpected demise of the mortgagor during the subsistence of
the mortgage contract, the proceeds from such insurance will be applied to the
payment of the mortgage debt, thereby relieving the heirs of the mortgagor from
paying the obligation. In a similar vein, ample protection is given to the mortgagor under
such a concept so that in the event of death, the mortgage obligation will be
extinguished by the application of the insurance proceeds to the mortgage
indebtedness.

In allowing the inclusion of the mortgagee bank as a third-party defendant, the Court
recognizes the inseparable interest of the bank (as policyholder of the group policy) in the
validity of the individual insurance certificates issued by the insurer. The mortgagee bank
need not institute a separate case, considering that its cause of action is intimately related
to that of the insurer as against the insured- mortgagor. The soundness of admitting a
third-party complaint hinges on causal connection between the claim of the plaintiff in his
complaint and a claim for contribution, indemnity or other relief of the defendant against
the third-party defendant. (PARAMOUNT LIFE & GENERAL INSURANCE CORPORATION, v.
CHERRY T. CASTRO AND GLENN ANTHONY T. CASTRO, G.R. No. 195728; CHERRY T. CASTRO
AND GLENN ANTHONY T. CASTRO v. PARAMOUNT LIFE & GENERAL INSURANCE
CORPORATION G.R. No. 211329, April 19, 2016, SERENO, C.J.)

Life Insurance

Q: An insurance policy was reinstated effective June 22, 1999. X died on September
22, 2001. A controversy arose as to whether the reinstated life insurance policy is
already incontestable at the time of Xs death. Resolve.

A: The date of last reinstatement mentioned in Section 48 of the Insurance Code pertains to
the date that the insurer approved the application for reinstatement. However, in light
of the ambiguity in the insurance documents to this case, this Court adopts the
interpretation favorable to the insured in determining the date when the reinstatement
was approved. Indeed, more than two years had lapsed from the time the subject insurance
policy was reinstated on June 22, 1999 vis-a-vis Xs death on September 22, 2001. As such,
the subject insurance policy has already become incontestable at the time of Xs death.
(THE INSULAR LIFE ASSURANCE COMPANY, LTD v. PAZ Y. KHU, FELIPE Y. KHU, JR., AND
FREDERICK Y. KHU, G.R. No. 195176, April 18, 2016, DEL CASTILLO, J.)

Q: A applied for life insurance with Y Insurance. On February 5, 2001, the application
was approved. On May 11, 2011, A died as a result of a gunshot wound. Y Insurance
denied the claim for benefits on the ground that the medical history of the insured
was not disclosed in the application. Was the denial of the claim for benefits proper?

A: No. After the two-year period from the effectivity of a life insurance contract lapses, or
when the insured dies within said period, the insurer must make good on the policy, even
though the policy was obtained by fraud, concealment, or misrepresentation. This is not to
say that insurance fraud must be rewarded, but that insurers who recklessly and
indiscriminately solicit and obtain business must be penalized, for such recklessness and
lack of discrimination ultimately work to the detriment of bona fide takers of insurance and
the public in general. (SUN LIFE OF CANADA (PHILIPPINES), INC. v. MA. DAISY'S. SIBYA,
JESUS MANUEL S. SIBYA III, JAIME LUIS S. SIBYA, AND THE ESTATE OF THE DECEASED ATTY.
JESUS SIBYA, JR., G.R. No. 211212, June 08, 2016, REYES, J.)

Q: What is the nature of a health care agreement?

A: For purposes of determining the liability of a health care provider to its members, a
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health care agreement is in the nature of non-life insurance, which is primarily a
contract of indemnity. Once the member incurs hospital, medical or any other expense
arising from sickness, injury or other stipulated contingent, the health care provider must
pay for the same to the extent agreed upon under the contract. Limitations as to liability
must be distinctly specified and clearly reflected in the extent of coverage which the
company voluntary assumes, otherwise, any ambiguity arising therein shall be constructed
in favor of the member. (FORTUNE MEDICARE, INC. V. DAVID ROBERT AMORIN, G.R. NO.
195872, MARCH 12, 2014, REYES, J)

Q: Can a named beneficiary still claim the proceeds from insurance despite the non-
filing of written notice of claim within three months from death or disability as
mandated in the insurance contract?

A: Yes. There is a rationale in the contract of agency, which flows from the "doctrine of
representation," that notice to the agent is notice to the principal. Here, BPI had been
informed of Rheozel's (insured party) death by the latter's family. Since BPI is the agent of
FGU Insurance, then such notice of death to BPI is considered as notice to FGU Insurance as
well. FGU Insurance cannot now justify the denial of a beneficiary's insurance claim for
being filed out of time when notice of death had been communicated to its agent within a
few days after the death of the depositor-insured. In short, there was timely notice of
Rheozel's death given to FGU Insurance within three months from Rheozel's death as
required by the insurance company. (BANK OF THE PHILIPPINE ISLANDS AND FGU
INSURANCE CORPORATION (PRESENTLY KNOWN AS BPI/MS INSURANCE CORPORATION),
Petitioners, v. YOLANDA LAINGO, G.R. No. 205206, March 16, 2016, CARPIO, J.)

Q: An action for sum of money was filed by B Resort against M Insurance on the basis
of a contractors all risk bond in relation to the construction of B Resorts project. On
January 27, 1992, fire burned down the cottages in the project, resulting in losses to
B Resort. Besides the award of insurance proceeds, the trial court ordered the
payment of interest at double the applicable rate following Sec. 243 of the Insurance
Code. On May 12, 2005, a Writ of Execution was issued. M Insurance filed an Urgent
Motion to Suspend Execution contending that the interest penalty was
unconscionable and iniquitous. What is the rate applicable in the computation for
the payment of interest?

A: Given the provisions of the Insurance Code, which is a special law, the applicable rate of
interest shall be that imposed in a loan or forbearance of money as imposed by the Bangko
Sentral ng Pilipinas (BSP), even irrespective of the nature of insurer's liability. In the past
years, this rate was at 12% per annum. However, in light of Circular No. 799 issued by the
BSP on June 21, 2013 decreasing interest on loans or forbearance of money, the CA's
declared rate of 12% per annum shall be reduced to 6% per annum from the time of
the circular's effectivity on July 1, 2013. The Court explained in Nacar v. Gallery Frames
that the new rate imposed under the circular could only be applied prospectively, and not
retroactively. (STRONGHOLD INSURANCE CO., INC. v. PAMANA ISLAND RESORT HOTEL AND
MARINA CLUB, INC., G.R. No. 174838, June 01, 2016, REYES, J.)

Q: Dr. Y obtained two (2) insurance policies with Z Insurance. When the insured died
a year and three (3) months after the subject insurance policies had been in force,
his wife claimed the proceeds to the same. Z Insurance denied the claim alleging
concealment or misrepresentation in the application, and thereafter instituted a
Complaint for Rescission of Insurance Contracts. Can Z Insurance rescind the
insurance contracts based on the alleged concealment and misrepresentation?

A: The fraudulent intent on the part of the insured must be established to entitle the
insurer to rescind the contract. Misrepresentation as a defense of the insurer to avoid
liability is an affirmative defense and the duty to establish such defense by satisfactory and
convincing evidence rests upon the insurer. For failure of Manulife to prove intent to
defraud on the part of the insured, it cannot validly sue for rescission of insurance
contracts. (MANULIFE PHILIPPINES, INC. v HERMENEGILDA YBANEZ, G.R. No. 204736,
SECOND DIVISION, November 28, 2016, DEL CASTILl.O, J.)
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TRANSPORTATION LAWS

Q: Is an airline liable for damages on account of issuance of a plane ticket with an


allegedly erroneous flight schedule?

A: No. The Air Passenger Bill of Right mandates that the airline must inform the passenger
in writing of all the conditions and restrictions in the contract of carriage. Purchase of the
contract of carriage binds the passenger and imposes reciprocal obligations on both the
airline and the passenger. The airline must exercise extraordinary diligence in the
fulfillment of the terms and conditions of the contract of carriage. The passenger,
however, has the correlative obligation to exercise ordinary diligence in the conduct
of his or her affairs.

Petitioners, in failing to exercise the necessary care in the conduct of their affairs, were
without a doubt negligent. The cause of petitioners injury was their own negligence; hence,
there is no reason to award moral damages. The duty of an airline to disclose all the
necessary information in the contract of carriage does not remove the correlative
obligation of the passenger to exercise ordinary diligence in the conduct of his or her
affairs. The passenger is still expected to read through the flight information in the
contract of carriage before making his or her purchase. (ALFREDO MANAY, JR., FIDELINO
SAN LUIS, ADRIAN SAN LUIS, ANNALEE SAN LUIS, MARK ANDREW JOSE, MELISSA JOSE,
CHARLOTTE JOSE, DAN JOHN DE GUZMAN, PAUL MARK BALUYOT, AND CARLOS S. JOSE,
Petitioners, v. CEBU AIR, INC., G.R. No. 210621, April 04, 2016, LEONEN, J.)

Q: A URC van, driven by its driver Patrick, collided with Greenbus during a holiday.
Greenday filed a complaint for damages, insisting that URV should be liable for
Patricks negligence. URC argued that the collision which happened during a holiday
should only mean that Patrick was driving in his personal capacity and not for the
company. RTC dismissed the case which was affirmed by the CA. Was the dismissal of
the case proper?

A: Applying the pronouncement in the Caravan Travel and Tours case, it must be said that
when by (1) evidence the ownership of the van and (2) Bicomong's employment were
proved, the presumption of negligence on respondents' part attached, as the registered
owner of the van and as Bicomong's employer. The burden of proof then shifted to
respondents to show that no liability under Article 2180 arose. This may be done by proof
of any of the following:

1. That they had no employment relationship with Bicomong; or


2. That Bicomong acted outside the scope of his assigned tasks; or
3. That they exercised the diligence of a good father of a family in the selection and
supervision of Bicomong.

Q: What does the doctrine of last clear chance state?

The doctrine of last clear chance provides that where both parties are negligent but the
negligent act of one is appreciably later in point of time than that of the other, or where it is
impossible to determine whose fault or negligence brought about the occurrence of the
incident, the one who had the last clear opportunity to avoid the impending harm but failed
to do so, is chargeable with the consequences arising there from. Stated differently, the rule
is that the antecedent negligence of a person does not preclude recovery of damages
caused by the supervening negligence of the latter, who had the last fair chance to
prevent the impending harm by the exercise of due diligence. (GREENSTAR EXPRESS,
INC. and FRUTO L. SAYSON, JR., v. UNIVERSAL ROBINA CORPORATION and NISSIN
UNIVERSAL ROBINA CORPORATION, G.R. No. 205090, SECOND DIVISION, October 17, 2016,
DEL CASTILLO, J)

Q: Does a complaint for breach of contract of carriage and damages survive the death
of the complainant?
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A: Section 1, Rule 87 of the Rules of Court enumerates the following actions that survive the
death of a party, namely: (1) recovery of real or personal property, or an interest from the
estate; (2) enforcement of liens on the estate; and (3) recovery of damages for an injury to
person or property. Sesante's claim against the petitioner involved his personal injury
caused by the breach of the contract of carriage and hence, the complaint survived his
death, and could be continued by his heirs following the rule on substitution.

Clearly, the trial court is not required to make an express finding of the common carrier's
fault or negligence. The presumption of negligence applies so long as there is evidence
showing that: (a) a contract exists between the passenger and the common carrier; and (b)
the injury or death took place during the existence of such contract. In such event, the
burden shifts to the common carrier to prove its observance of extraordinary diligence, and
that an unforeseen event or force majeure had caused the injury. However, for a common
carrier to be absolved from liability in case of force majeure, it is not enough that the
accident was caused by a fortuitous event. The common carrier must still prove that it did
not contribute to the occurrence of the incident due to its own or its employees' negligence.
(SULPICIO LINES, INC. vs. NAPOLEON SESANTE, NOW SUBSTITUTED BY MARIBEL
ATILANO, KRISTEN MARIE, CHRISTIAN IONE, KENNETH KERRN AND KARISNA KATE, ALL
SURNAMED SESANTE, G.R. NO. 172682, July 27, 2016, BERSAMIN, J.

Q: Petitioners purchased five China Southern Airlines roundtrip plane tickets from A
Travel Agency. On their way back to the Manila, petitioners were prevented from
taking their flight despite the fact that earlier that day an agent from Active Tours
informed them that their bookings are confirmed. The refusal came after petitioners
already checked in all their baggages, were given claim stubs and paid the terminal
fees. According to the airlines' agent, petitioners were merely chance passengers but
they may be allowed to join the flight after paying an additional fee. Petitioners
refused to defray the additional cost. Hence, their baggages were offloaded from the
plane. Petitioners initiated an action for damages against A Travel Agency. Are the
petitioners entitled to the award of damages?

A: Yes. When an airline issues a ticket to a passenger confirmed on a particular flight, on a


certain date, a contract of carriage arises, and the passenger has every right to expect that
he would fly on that flight and on that date. If that does not happen, then the carrier opens
itself to a suit for breach of contract of carriage. In an action based on a breach of contract
of carriage, the aggrieved party does not have to prove that the common carrier was at fault
or was negligent. All he has to prove is the existence of the contract and the fact of its non-
performance by the carrier, through the latter's failure to carry the passenger to its
destination. (ALFREDO S. RAMOS, CONCHITA S. RAMOS, BENJAMIN B. RAMOS, NELSON T.
RAMOS and ROBINSON T RAMOS v. CHINA SOUTHERN AIRLINES CO. LTD., G.R. No. 213418,
September 21, 2016, PEREZ, J)

Q: A Complaint for damages was filed by A and B against C Airlines. A and B prayed
damages for the alleged besmirched reputation and honor, as well as the public
embarrassment they had suffered as a result of a series of involuntary downgrades
of their trip. Are A and B entitled to the damages prayed for?

A: Yes. In Air France v. Gillego, the Court ruled that in an action based on a breach of
contract of carriage, the aggrieved party does not have to prove that the common carrier
was at fault or was negligent; all that he has to prove is the existence of the contract and the
fact of its nonperformance by the carrier. In this case, both the trial and appellate courts
found that respondents were entitled to First Class accommodations under the contract of
carriage, and that petitioner failed to perform its obligation.

However, the award of P5 million as moral damages is excessive, considering that the
highest amount ever awarded by this Court for moral damages in cases involving airlines is
P500,000. As said in Air France v. Gillego, "the mere fact that respondent was a
Congressman should not result in an automatic increase in the moral and exemplary
damages." Upon the facts established, the amount of P500,000 as moral damages is
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reasonable to obviate the moral suffering that respondents have undergone. With regard to
exemplary damages, jurisprudence shows that P50,000 is sufficient to deter similar acts of
bad faith attributable to airline representatives. (CATHAY PACIFIC AIRWAYS, LTD., v.
SPOUSES ARNULFO and EVELYN FUENTEBELLA, G. R. No. 188283, FIRST DIVISION, July 20,
2016, SERENO, CJ)

Q: Can a brokerage be considered a common carrier? Assuming that it is a common


carrier, how can it absolve itself fro, any liability for a resulting loss?

A: Yes. A brokerage may be considered a common carrier if it also undertakes to deliver


the goods for its customers. The law does not distinguish between one whose principal
business activity is the carrying of goods and one who undertakes this task only as an
ancillary activity.

Theft or the robbery of the goods is not considered a fortuitous event or a force majeure.
Nevertheless, a common carrier may absolve itself of liability for a resulting loss: (1) if it
proves that it exercised extraordinary diligence in transporting and safekeeping the goods;
or (2) if it stipulated with the shipper/owner of the goods to limit its liability for the loss,
destruction, or deterioration of the goods to a degree less than extraordinary diligence.
(TORRES-MADRID BROKERAGE, INC. vs. FEB MITSUI MARINE INSURANCE CO., INC. and
BENJAMIN P. MANALAST AS, doing business under the name of BMT TRUCKING SERVICES
G.R. No. 194121, July 11, 2016, BRION, J.)

Q: M Insurance filed a money claim against T Shipping. The dispute stemmed from an
alleged shortage in a shipment of fertilizer delivered by the carrier to a consignee. T
Shipping insists that the shortage was caused by bad weather, which must be
considered a storm under Article 1734 of the Civil Code or a peril of the sea under
the Carriage of Goods by Sea Act (COGSA). Is the transaction governed by the
provisions of the Civil Code on common carriers or by the provisions of COGSA?

A: The provisions of the Civil Code on common carriers are applicable. According to the
New Civil Code, the law of the country to which the goods are to be transported shall
govern the liability of the common carrier for their loss, destruction or deterioration. The
Code takes precedence as the primary law over the rights and obligations of common
carriers with the Code of Commerce and COGSA applying suppletorily.

The strong winds accompanying the southwestern monsoon could not be classified as a
"storm." Such winds are the ordinary vicissitudes of a sea voyage. Strong winds and waves
are not automatically deemed perils of the sea, if these conditions are not unusual for that
particular sea area at that specific time, or if they could have been reasonably anticipated
or foreseen.

Even assuming that the inclement weather encountered by the vessel amounted to a
"storm" under Article 1734(1) of the Civil Code, there are two other reasons why petitioner
cannot be absolved from liability for loss or damage to the cargo under the Civil Code. First,
there is no proof that the bad weather encountered by M/V Meryem Ana was the proximate
and only cause of damage to the shipment. Second, petitioner failed to establish that it had
exercised the diligence required from common carriers to prevent loss or damage to the
cargo. (TRANSIMEX CO. vs. MAFRE ASIAN INSURANCE CORP. G.R. No. 190271, September 14,
2016, SERENO, CJ)

Q: May a common carrier release the goods to the consignee even without the
surrender of the bill of lading?

A: Yes. The general rule is that upon receipt of the goods, the consignee surrenders the bill
of lading to the carrier and their respective obligations are considered canceled. Article 353
of the Code of Commerce, however, provides two exceptions where the goods may be
released without the surrender of the bill of lading because the consignee can no longer
return it. These exceptions are when the bill of lading gets lost or for other cause. In
either case, the consignee must issue a receipt to the carrier upon the release of the
10 | P a g e
goods. Such receipt shall produce the same effect as the surrender of the bill of lading.

Here, the buyer could not produce the bill of lading covering the shipment not because it
was lost, but for another cause: the bill of lading was retained by the seller pending
buyer's full payment of the shipment. Buyer and carrier then entered into an Indemnity
Agreement, wherein the former asked the latter to release the shipment even without the
surrender of the bill of lading. The execution of this Agreement, and the undisputed fact
that the shipment was released to seller pursuant to it, operates as a receipt in substantial
compliance with the last paragraph of Article 353 of the Code of Commerce. (DESIGNER
BASKETS, INC. v. AIR SEA TRANSPORT, INC. AND ASIA CARGO CONTAINER LINES, INC., G.R.
No. 184513, March 09, 2016, JARDELEZA, J)

Q: Is the Doctrine of Limited Liability applicable to claims under Philippine Overseas


Employment Administration Standard Employment Contract (POEA-SEC)?

A: No. In Abueg v. San Diego, it was ruled that the limited liability rule found in the Code of
Commerce is inapplicable in a liability created by statute to compensate employees and
laborers, or the heirs and dependents, in cases of injury received by or inflicted upon them
while engaged in the performance of their work or employment.

Based on Section 176 of the Insurance Code, casualty insurance may cover liability or loss
arising from accident or mishap. In liability insurance, the insurer assumes the obligation
to pay third party in whose favor the liability of the insured arises. On the other hand,
personal accident insurance refers to insurance against death or injury by accident or
accidental means. In an accidental death policy, the accident causing the death is the thing
insured against. The Court ruled that while the Personal Accident Policies are casualty
insurance, they do not answer for petitioner's liabilities arising from the sinking of the
vessel. It is an indemnity insurance procured by petitioner for the benefit of the seafarers.
As a result, petitioner is not directly liable to pay under the policies because it is merely the
policyholder of the Personal Accident Policies. (PHIL-NIPPON KYOEI, CORP. vs. ROSALIA T.
GUDELOSAO, on her behalf and in behalf of minor children CHRISTY MAE T. GUDELOSAO and
ROSE ELDEN T. GUDELOSAO, CARMEN TANCONTIAN, on her behalf and in behalf of the
children CAMELA B. TANCONTIAN, BEVERLY B. TANCONTIAN, and ACE B. TANCONTIAN, G.R.
No. 181375, July 13, 2016, JARDELEZA, J.)

THE CORPORATION CODE

Q: On May 20, 2013, the SEC issued SEC-MC No. 8 entitled "Guidelines on Compliance
with the Filipino-Foreign Ownership Requirements Prescribed in the Constitution
and/or Existing Laws by Corporations Engaged in Nationalized and Partly
Nationalized Activities." Section 2 of SEC-MC No. 8 provides:

Section 2. All covered corporations shall, at all times,


observe the constitutional or statutory ownership
requirement. For purposes of determining compliance
therewith, the required percentage of Filipino ownership
shall be applied to BOTH (a) the total number of
outstanding shares of stock entitled to vote in the election
of directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote in the
election of directors.

Corporations covered by special laws which provide specific citizenship


requirements shall comply with the provisions of said law.

Atty. Roy filed the Petition, assailing the validity of SEC-MC No. 8 for not conforming
to the letter and spirit of the Gamboa Decision and Resolution and for having been
issued by the SEC with grave abuse of discretion. Petitioner Roy seeks to apply the
60-40 Filipino ownership requirement separately to each class of shares of a public
utility corporation, whether common, preferred nonvoting, preferred voting or any
11 | P a g e
other class of shares.

Is SEC-MC No. 8 in conformity with the Gamboa Decision and Resolution?

A: Yes. The pronouncement of the Court in the Gamboa Resolution -the constitutional
requirement to "apply uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation - is clearly an obiter
dictum that cannot override the Court's unequivocal definition of the term "capital" in both
the Gamboa Decision and Resolution.

Nowhere in the discussion of the definition of the term "capital" in Section 11, Article XII of
the 1987 Constitution in the Gamboa Decision did the Court mention the 60% Filipino
equity requirement to be applied to each class of shares. The definition of "Philippine
national" in the FIA and expounded in its IRR, which the Court adopted in its interpretation
of the term "capital", does not support such application. In fact, even the Final Word of the
Gamboa Resolution does not even intimate or suggest the need for a clarification or re-
interpretation.

To revisit or even clarify the unequivocal definition of the term "capital" as referring "only
to shares of stock entitled to vote in the election of directors" and apply the 60% Filipino
ownership requirement to each class of share is effectively and unwarrantedly amending
or changing the Gamboa Decision and Resolution. The Gamboa Decision and Resolution
Doctrine did NOT make any definitive ruling that the 60% Filipino ownership
requirement was intended to apply to each class of share.

The fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are
definite, clear and unequivocal. While there is a passage in the body of the Gamboa
Resolution that might have appeared contrary to the fallo of the Gamboa Decision
capitalized upon by petitioners to espouse a restrictive re-interpretation of "capital" - the
definiteness and clarity of the fallo of the Gamboa Decision must control over the obiter
dictum in the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign
ownership requirement to "each class of shares, regardless of differences in voting rights,
privileges and restrictions." (JOSE M. ROY III, v. CHAIRPERSON TERESITA HERBOSA, THE
SECURITIES AND EXCHANGE COMMISSION, and PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY, et al., GERARDO C. EREBAREN v. PHILIPPINE STOCK EXCHANGE, INC.
SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., G.R. No. 207246, November 22,
2016, EN BANC, CAGUIOA, J.)

Q: What is trust fund doctrine? Explain.

A: The trust fund doctrine enunciates the rule that the property of a corporation is a trust
fund for the payment of creditors, but such property can be called a trust fund only by way
of analogy or metaphor. As between the corporation itself and its creditors it is a simple
debtor, and as between its creditors and stockholders its assets are in equity a fund for the
payment of its debts. (HALLEY v. PRINTWELL, INC., G.R. No. 157549, 20 May 2011,
BERSAMIN, J.)

Q: ST Corporation decided to amend its articles of incorporation to remove the


stockholders pre-emptive rights to newly issued shares of stock. Feeling that the
corporate move would be prejudicial to their interest as stockholders, the X, Y and Z
voted against the amendment and demanded payment of their shares. ST
Corporation had no retained earnings at the time of the demand. As the legal counsel
of ST Corporation would you advise to pay the shares of withdrawing stockholders?
Explain.

A: I would advise ST Corporation to defer the payment of shares of the withdrawing


shareholders, unless there is a showing that the corporation has unrestricted retained
earnings. The trust fund doctrine backstops the requirement of unrestricted retained
earnings to fund the payment of the shares of stocks of the withdrawing stockholders.
Under the doctrine, the capital stock, property, and other assets of a corporation are
12 | P a g e
regarded as equity in trust for the payment of corporate creditors, who are preferred in the
distribution of corporate assets. The creditors of a corporation have the right to assume
that the board of directors will not use the assets of the corporation to purchase its own
stock for as long as the corporation has outstanding debts and liabilities. There can be no
distribution of assets among the stockholders without first paying corporate debts. Thus,
any disposition of corporate funds and assets to the prejudice of creditors is null and void.
(TURNER VS. LORENZO SHIPPING CORPORATION, G.R. No. 157479, 24 November 2010,
BERSAMIN, J.)

Q: AAO Corp. commissioned JPB, Inc. for the printing of the magazine Philippines, Inc.
(together with wrappers and subscription cards) that AAO Corp. published and sold.
AAO Corp. placed with JPB, Inc. several orders on credit. Considering that AAO Corp.
paid only P25,000.00, JPB, Inc. filed a case for the collection of the unpaid balance of
AAO Corp. with the RTC. JPB, Inc. amended the complaint in order to implead as
defendants all the original stockholders and incorporators to recover on their
unpaid subscriptions, including Janine.

In her Answer, Janine denied any liability since she already paid her subscription in
full as evidenced by receipts, income tax returns, and relevant financial statements.
Is her contention tenable?

A: Janines contention is untenable. Under the trust fund doctrine, a corporation has no
legal capacity to release an original subscriber to its capital stock from the obligation of
paying for his shares, in whole or in part, without a valuable consideration, or fraudulently,
to the prejudice of creditors. The creditor is allowed to maintain an action upon any unpaid
subscriptions and thereby steps into the shoes of the corporation for the satisfaction of its
debt. To make out a prima facie case in a suit against stockholders of an insolvent
corporation to compel them to contribute to the payment of its debts by making good
unpaid balances upon their subscriptions, it is only necessary to establish that the
stockholders have not in good faith paid the par value of the stocks of the corporation.
(HALLEY v. PRINTWELL, INC., G.R. No. 157549, 20 May 2011, BERSAMIN, J.)

Q: Can piercing the veil of corporate fiction be applied in labor cases?

A: The common thread running among the aforementioned cases is that the veil of
corporate fiction can be pierced, and responsible corporate directors and officers or
even a separate but related corporation, may be impleaded and held answerable
solidarily in a labor case, even after final judgment and on execution, so long as it is
established that such persons have deliberately used the corporate vehicle to unjustly
evade the judgment obligation, or have resorted to fraud, bad faith or malice in doing so.
When the shield of a separate corporate identity is used to commit wrongdoing and
opprobriously elude responsibility, the courts and the legal authorities in a labor case have
not hesitated to step in and shatter the said shield and deny the usual protections to the
offending party, even after final judgment. The key element is the presence of fraud,
malice or bad faith. Bad faith, in this instance, does not connote bad judgment or
negligence but imports a dishonest purpose or some moral obliquity and conscious doing
of wrong; it means breach of a known duty through some motive or interest or ill will; it
partakes of the nature of fraud. (JOSE EMMANUEL P. GUILLERMO v. CRISANTO P. USON G.R.
No. 198967, March 07, 2016)

Q: What are the grounds for the application of the piercing the veil doctrine in
cases involving fraud?

A: Veil-piercing in fraud cases requires that the legal fiction of separate juridical
personality is used for fraudulent or wrongful ends. The Court identified red flags of
fraudulent schemes in public procurement, all of which were established and the totality of
which strongly indicate that MPEI was a sham corporation formed merely for the purpose
of perpetrating a fraudulent scheme. The red flags are as follows: (1) overly narrow
specifications; (2) unjustified recommendations and unjustified winning bidders; (3)
failure to meet the terms of the contract; and (4) shell or fictitious company.
13 | P a g e
Fictitious companies are by definition fraudulent and may also serve as fronts for
government officials. The typical scheme involves corrupt government officials creating a
fictitious company that will serve as a "vehicle" to secure contract awards. Often, the
fictitious or ghost company will subcontract work to lower cost and sometimes
unqualified firms.
Shell companies have no significant assets, staff or operational capacity. They pose a
serious red flag as a bidder on public contracts, because they often hide the interests of
project or government officials, concealing a conflict of interest and opportunities for
money laundering. Also, by definition, they have no experience. MPEI qualifies as a shell
or fictitious company. It was nonexistent at the time of the invitation to bid; to be precise, it
was incorporated only 11 days before the bidding. It was a newly formed corporation and,
as such, had no track record to speak of.

Because all the individual respondents actively participated in the perpetration of


the fraud against petitioner, their personal assets may be subject to a writ of
preliminary attachment by piercing the corporate veil. Contrary to respondent the
claim of Willy (President of MPEI), his participation in the fraud is clearly established by his
unequivocal agreement to the execution of the automation contract with the COMELEC, and
his signature that appears on the voided contract. That his signature appears on the
automation contract means that he agreed and acceded to its terms. His participation in the
fraud involves his signing and executing the voided contract. With respect to the other
individual respondents, they never denied their participation in the questioned
transactions of MPEI, merely raising the defense of good faith and shifting the blame to the
COMELEC. The individual respondents have, in effect, admitted that they had knowledge of
and participation in the fraudulent subcontracting of the automation contract to the four
corporations. (REPUBLIC OF THE PHILIPPINES v MEGA PACIFIC eSOLUTIONS, INC., et al, G.R.
No. 184666, June 27, 2016, FIRST DIVISION, SERENO, CJ)

Q: How is the doctrine of piercing the veil applied in labor cases?

A: The Court has time and again disregarded separate juridical personalities under the
doctrine of piercing the corporate veil where a separate legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, among other grounds.

The Court discerns from the synchronized actions of petitioner and the two other
companies an attempt to frustrate or defeat workers right to collectively bargain through
the shield of the corporations separate juridical personalities. While alleging the absence
of employer-employee relationship, they alternately refer to one another as the employer
of the members of the bargaining units sought to be represented respectively by the
unions. In order to safeguard the right of the workers and Unions A, B, and C to engage in
collective bargaining, the corporate veil of Express Lamination and Express Coat must be
pierced. (ERSON ANG LEE DOING BUSINESS as "SUPER LAMINATION SERVICES," v.
SAMAHANG MANGGAGA WA NG SUPER LAMINATION (SMSLSNAFLU-KMU), G.R. No. 193816,
First Division, November 21, 2016, SERENO, CJ)

Q: Chris passed away, leaving a holographic will. The named executors in the will
filed a petition for probate in court. Consequently, Isabel, claiming to be the adopted
daughter of Chris, filed manifestation and motion which included a prayer to order
the tenants of Chris properties to deposit their rentals in court. The executors
argued that the probate court had no jurisdiction over the properties mistakenly
claimed by Isabel as part of Chris estate because the same properties are under the
name of Prime Corp. The probate court applied the doctrine of piercing the veil of
corporate fiction and ordered the deposit of rent as prayed for by Isabel. Is the
doctrine applicable in this case?

A: Instead of holding the decedent's interest in the corporation separately as a stockholder,


the situation was reversed. Instead, the probate court ordered the lessees of the
corporation to remit rentals to the estate's administrator without taking note of the fact
that the decedent was not the absolute owner of Primrose but only an owner of shares
14 | P a g e
thereof. Mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stocks of a corporation is not of itself a sufficient reason for
disregarding the fiction of separate corporate personalities.

Furthermore, the probate court in this case has not acquired jurisdiction over Primrose and
its properties. Piercing the veil of corporate entity applies to determination of liability
not of jurisdiction. It is not available to confer on the court a jurisdiction it has not
acquired, in the first place, over a party not impleaded in a case. This is so because the
doctrine of piercing the veil of corporate fiction comes to play only during the trial of the
case after the court has already acquired jurisdiction over the corporation. Hence, before
this doctrine can be even applied, based on the evidence presented, it is imperative that the
court must first have jurisdiction over the corporation. A corporation not impleaded in a
suit cannot be subject to the court's process of piercing the veil of its corporate fiction.
Resultantly, any proceedings taken against the corporation and its properties would
infringe on its right to due process. (MANUELA AZUCENA MAYOR v. EDWIN TIU and
DAMIANA CHARITO MARTY G.R. NO. 203770, SECOND DIVISION, November 23, 2016,
MENDOZA, J.)

Q: Can an officer be held solidarily liable for a corporations labor obligations?

A: The Court had repeatedly emphasized that the piercing of the veil of corporate fiction is
frowned upon and can only be done if it has been clearly established that the separate and
distinct personality of the corporation is used to justify a wrong, protect fraud, or
perpetrate a deception. To disregard the separate juridical personality of a corporation, the
wrongdoing must be established clearly and convincingly. It cannot be presumed.

As a general rule, an officer may not be held liable for the corporation's labor
obligations unless he acted with evident malice and/or bad faith in dismissing an
employee. Section 31 of the Corporation Code is the governing law on personal liability of
officers for the debts of the corporation. To hold a director or officer personally liable for
corporate obligations, two requisites must concur: (1) it must be alleged in the
complaint that the director or officer assented to patently unlawful acts of the
corporation or that the officer was guilty of gross negligence or bad faith; and (2)
there must be proof that the officer acted in bad faith. (REYNO C. DIMSON v. GERRY T.
CHUA, G.R. No. 192318, THIRD DIVISION, December 5, 2016, REYES, J.)

Q: May the name of a dissolved firm be used by another firm?

A: The name of a dissolved firm shall not be allowed to be used by other firms within three
(3) years after the approval of the dissolution of the corporation by the Commission, unless
allowed by the last stockholders representing at least majority of the outstanding capital
stock of the dissolved firm. (INDIAN CHAMBER OF COMMERCE PHILS., INC. vs. FILIPINO
INDIAN CHAMBER OF COMMERCE IN THE PHILIPPINES, INC., G .R. No. 184008, August 3,
2016, JARDELEZA, J.)

Q: Without notice and hearing, the Board of Directors of QC Club issued a resolution
suspending As membership privileges for nonpayment of a special assessment,
distinct from the regular dues and ordinary bills incurred by members which allow
immediate suspension of membership in case of nonpayment. The By-laws of the
country club required notice and hearing prior to a members suspension. Was the
manner by which the Board suspended As membership privileges done in violation
of the latters rights under the corporations by-laws?

A: Yes. The Court had previously recognized in Forest Hills Golf and Country Club, Inc. v.
Gardpro, lnc., that articles of incorporation and by-laws of a country club are the
fundamental documents governing the conduct of the corporate affairs of said club; they
establish the norms of procedure for exercising rights, and reflected the purposes and
intentions of the incorporators. The by-laws are the self-imposed rules resulting from the
agreement between the country club and its members to conduct the corporate business in
a particular way. In that sense, the by-laws are the private "statutes" by which the country
15 | P a g e
club is regulated, and will function. (CATHERINE CHING, LORENZO CHING, LAURENCE
CHING, AND CHRISTINE CHING v. QUEZON CITY SPORTS CLUB, INC., MEMBERS OF THE
BOARD OF DIRECTORS, G.R. No. 200150, November 7, 2016, FIRST DIVISION, LEONARDO-DE
CASTRO, J.)

Q: Stella, a member of Soprano Choir, sought the assistance of Chard in looking for
sponsors for their airfare to a competition abroad. Chard owns a travel agency and
requested his brother Atty. Gerard to represent him in the negotiation with Stella. A
Memorandum of Agreement was executed between Chard, through Atty. Gerard, and
Alto Foundation, an alleged sponsor for Soprano Choir. Under the said Agreement,
Chard will advance the payment of the tickets on the assurance that Alto Foundation
will pay later on. For failure to pay the obligation under the MOA, Chard filed a
complaint for sum of money. RTC ruled in favor of Chard. The CA relieved Stella of
any liability for monetary claims, noting the absence of her name in the MOA and a
showing that she was duly authorized to enter into the MOA. How is apparent
authority established under the Corporation Code?

A: The existence of apparent authority may be ascertained through (1) the general manner
in which the corporation holds out an officer or agent as having the power to act or, in
other words, the apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, whether within or beyond the scope of his ordinary powers. In this case, Sr.
Medalle formed and organized the Group. She had been giving financial support to the
Group, in her capacity as President of Holy Trinity College. The Board of Trustees never
questioned the existence and activities of the Group. Thus, any agreement or contract
entered into by Sr. Medalle as President of Holy Trinity College relating to the Group bears
the consent and approval of respondent. (BENJIE B. GEORG rep by BENJAMIN C.
BELARMINO, JR. v. HOLY TRINITY COLLEGE, INC., G.R. No. 190408, July 20, 2016, PEREZ, J.)

Q: On behalf of "Ocean Quest Fishing Corporation," Chua and Yao entered in to a


contract of sale with PFGI, Inc. They claimed that they were engaged into a business
venture with Lim, who was not a signatory to the agreement. The buyers, however,
failed to pay for the merchandise. Upon inquiry with the SEC, PFGI, Inc. discovered
that Ocean Question Fishing Corporation does not exist. Thus, PGFGI, Inc. filed a
collection suit against Chua, Yao and Lim.
Lim contended that he should not be held liable as he was not signatory to the
contract of sale. He argues that under the doctrine of corporation by estoppel,
liability can be imputed only to Chua and Yao, and not to him.
How is a corporation by estoppel formed?
A: All persons who assume to act as a corporation knowing it to be without authority to do
so shall be liable as general partners for all debts, liabilities and damages incurred or
arising as a result thereof: Provided however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use as a defense its lack of corporate personality. (Sec. 21,
Corporation Code)

Is Lims contention tenable?

A: No. Clearly, under the law on estoppel, those acting on behalf of a corporation and those
benefited by it, knowing it to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation.
However, having reaped the benefits of the contract entered into by persons with whom he
previously had an existing relationship, he is deemed to be part of said association and is
covered by the scope of the doctrine of corporation by estoppel. (LIM TONG LIM, vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., G.R. No. 136448, 3 NOVEMBER 1999;
PANGANIBAN, J.)

16 | P a g e
Q: Petitioners obtained a loan from MACD Cooperative with an interest of 2.3% per
month, with surcharge of 2% in case of default in payment of any installment due.
Petitioners failed to pay their loans. Thus, MACD Cooperative filed five separate
complaints for Collection of Sum of Money. Petitioners filed a motion to dismiss by
way of a demurrer to evidence on the ground of lack of authority to file the
complaints and to sign the verification against forum shopping. Respondent filed an
opposition to the demurrer averring that there was a subsequent board resolution
confirming the authority to file the complaints. The lower court denied the motion to
dismiss. Was the denial correct?

A: Yes. That the applicable law should be the Cooperative Code and not the Corporation
Code is not sufficient to warrant a different resolution. Both codes recognize the authority
of the BOD, through a duly-issued board resolution, to act and represent the corporation or
the cooperative, as the case maybe, in the conduct of official business. In Section 23 of the
Corporation Code, it is provided that all corporate powers of all corporations formed
under the Code shall be exercised by the BOD. All businesses are conducted and all
properties of corporations are controlled and held by the same authority. In the same
manner, under Section 39 of the Cooperative Code, the BOD is given the power to direct
and supervise the business, manages the property of the cooperative and may, by
resolution, exercise all such powers of the cooperative. The BOD, however, may
authorize a responsible officer to act on its behalf through the issuance of a board
resolution attesting to its consent to the representation and providing for the scope
of authority.

In Cagayan Valley Drug Corporation v. Commissioner of Internal Revenue, it was noted that
he following officials or employees of the company can sign the verification and
certification without need of a board resolution: (1) the Chairperson of the Board of
Directors, (2) the President of a corporation, (3) the General Manager or Acting
General Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor
case. In this case, Nacario, being the acting manager of the Cooperative, clearly falls under
the enumeration above.

The lack of authority of a corporate officer to undertake an action on behalf of the


corporation or cooperative may be cured by ratification through the subsequent issuance
of a board resolution, recognizing the validity of the action or the authority of the
concerned officer.

Q: The loan was obtained with an interest of 2.3% per month with surcharge of 2%
in case of default in payment. The RTC and CA reduced the interest and surcharge to
12% per annum. Was the imposition correct?

A: Yes. The RTC correctly ruled that the stipulated interest rate of 2.3% per month on the
promissory notes and 2% per month surcharge are excessive, iniquitous, exorbitant and
unconscionable, thus, rendering the same void. Since the stipulation on the interest rate is
void, it is as if there was no express contract thereon, in which case, courts may reduce the
interest rate as reason and equity demand. However, there is a need to modify the rate of
legal interest imposed on the money judgment in order to conform Resolution No. 796
dated May 16, 2013 issued by the Bangko Sentral ng Pilipinas Monetary Board. The rate of
interest on the principal loans should be modified to six percent (6%) per annum and the
surcharge imposed also to the prevailing legal rate of six percent (6%) per annum. (LYLITH
B. FAUSTO et al v. MULTI AGRI-FOREST AND COMMUNITY DEVELOPMENT COOPERATIVE
(formerly MAF CAMARINES SUR EMPLOYEES COOPERATIVE, INC.), G.R. No. 213939, THIRD
DIVISION, October 12, 2016, REYES, J.)

Q: Who may sign the verification and certification against non-forum shopping
without need of a board resolution?

A: In the leading case of Cagayan Valley Drug Corporation v. Commission on Internal


Revenue, the Court, in summarizing numerous jurisprudence, rendered a definitive rule
that the following officials or employees of the company can sign the verification and
17 | P a g e
certification without need of a board resolution: (1) the Chairperson of the Board of
Directors, (2) the President of a corporation, (3) the General Manager or Acting General
Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case. The
rationale behind the rule is that these officers are "in a position to verify the
truthfulness and correctness of the allegations in the petition. (GABRIEL YAP, SR. duly
represented by GILBERT YAP and also in his personal capacity, GABRIEL YAP, JR., and HYMAN
YAP, vs. LETECIA SIAO, L YNEL SIAO, JANELYN SIAO, ELEANOR FAYE SIAO, SHELETT SIAO
and HONEYLET SIAO, G.R. No. 212493; CEBU SOUTH MEMORIAL GARDEN, INC. vs. LETECIA
SIAO, L YNEL SIAO, JANELYN SIAO, ELEANOR FAYE SIAO, SHELETT SIAO and HONEYLET
SIAO G.R. No. 212504, June 1, 2016, PEREZ, J.)

Q: X, the universitys VP for Finance, executed a deed of real estate mortgage over
universitys property in favor of BSP. X did not present any Board Resolution from
the directors of the university for the mortgage. Was the act of X proper?

A: Acts of an officer that are not authorized by the board of directors/trustees do not bind
the corporation unless the corporation ratifies the acts or holds the officer out as a person
with authority to transact on its behalf.

Petitioner does not have the power to mortgage its properties in order to secure loans of
other persons. Securing FISLAI's loans by mortgaging petitioner's properties does not
appear to have even the remotest connection to the operations of petitioner as an
educational institution. Not having the proper board resolution to authorize Saturnino
Petalcorin to execute the mortgage contracts for petitioner, the contracts he executed are
unenforceable against petitioner. (UNIVERSITY OF MINDANAO v. BANGKO SENTRAL NG
PILIPINAS, G.R. No. 194964-65, January 11, 2016, LEONEN,J.)

Q: A controversy arose as to the legality of the elections conducted. The stockholders


who insisted they represented 51% of Sai Corporation filed a petition to declare the
elections null and void, alleging that they were prevented from participating in the
elections conducted. The remaining stockholders denied this and alleged that the
election was attended by stockholders representing 98.76% of Sai Corporation. May
the election be declared null and void?

A: No. The SC ruled that in the absence of evidence to the contrary, the presumption is that
the respondents were duly elected as directors/officers of Philinterlife during the aforesaid
annual stockholders' meeting. (ESTATE OF DR. JUVENCIO P. ORTAEZ, REPRESENTED BY
DIVINA ORTAEZ-ENDERES, LIGAYA NOVICIO, AND CESAR ORTAEZ, v. JOSE C. LEE et al,
G.R. No. 184251, March 09, 2016, PEREZ, J.)

Q: Members of the Board of Directors of C Gas, in their capacity as members of such


Board, were charged for violation of BP 33. The members questioned the charge
before the Secretary of Justice and CA. Both affirmed the validity of the charges. Can
the members of the Board of Directors of C Gas be criminally prosecuted for the
corporations alleged violation of BP 33?

A: In the case of Ty v. NBI Supervising Agent De Jemil, the Court ruled that a member of the
Board of Directors of a corporation, cannot, by mere reason of such membership, be held
liable for the corporation's probable violation of BP 33. (FEDERATED LPG DEALERS
ASSOCIATION v. MA. CRISTINA L. DEL ROSARIO, CELSO E. ESCOBIDO U, SHIELA M. ESCOBIDO,
and RESTY P. CAPILI, G.R. No. 202639, November 9, 2016, SECOND DIVISION, DEL CASTILLO,
J.)

Q: Jade, a stockholder of CTCM Corp., filed a complaint against the directors of CTCM
Corp. for allegedly conspiring in refusing without valid cause the exercise of her
right to inspect business transaction records of the company. The directors argued
that CTCM Corp. has ceased business operations prior to the filing of the complaint
and therefore, there was no longer any duty for corporate officers to allow
inspection of the records. Was the argument of the directors tenable?

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A: No. Despite the expiration of CTCM's corporate term in 1999, duties as corporate officers
still pertained to the petitioners when Joselyn 's complaint was filed in 2000. As correctly
pointed out by the OSG, Sections 122 and 145 of the Corporation Code explicitly provide for
the continuation of the body corporate for three years after dissolution. The rights and
remedies against, or liabilities of, the officers shall not be removed or impaired by reason of
the dissolution of the corporation. Corollarily then, a stockholder's right to inspect
corporate records subsists during the period of liquidation. Hence, Joselyn, as a
stockholder, had the right to demand for the inspection of records. Lodged upon the
corporation is the corresponding duty to allow the said inspection.

In the case at bar, the petitioners were charged with violations of Section 74, in relation to
Section 144, of the Corporation Code, a special law. Accordingly, since Joselyn was deprived
of the exercise of an effective right of inspection, offenses had in fact been committed,
regardless of the petitioners' intent. (ALFREDO L. CHUA, TOMAS L. CHUA and MERCEDES P.
DIAZ, v. PEOPLE OF THE PHILIPPINES, G.R. No. 216146, August 24, 2016, THIRD DIVISION,
REYES, J.)

Q: CC Corp filed a Petition for Injunction seeking to enjoin PP Corp from


misrepresenting to the public that they own the lot occupied by CC Corp. The case
was assigned to the RTC which was designated as a special commercial court. The
RTC dismissed the case for injunction ruling that the issue involved is not an intra-
corporate controversy cognizable by the said court as a special commercial court.
Did the RTC err in dismissing the case?

A: Yes. The designation of the said branch as a special commercial court by no means
diminished its power as a court of general jurisdiction to hear and decide cases of all
nature, whether civil, criminal or special proceedings. There is no question, therefore, that
the Makati RTC, Branch 149 erred in dismissing the petition for injunction with damages,
which is clearly an ordinary civil case. As a court of general jurisdiction, it still has
jurisdiction over the subject matter thereof.

As the suit between petitioner and respondents neither arises from an intra-corporate
relationship nor does it pertain to the enforcement of their correlative rights and
obligations under the Corporation Code, and the internal and intra-corporate regulatory
rules of the corporation, RTC correctly found that the subject matter of the petition is in the
nature of an ordinary civil action. (CONCORDE CONDOMINIUM, INC. v. AUGUSTO H.
BACULIO, et al, G.R. No. 203678, February 17, 2016, PERALTA, J.)

Derivative Suit

A stockholder may suffer from a wrong done to or involving a corporation, but this does
not vest in the aggrieved stockholder a sweeping license to sue in his or her own capacity.
The determination of the stockholder's appropriate remedywhether it is an individual
suit, a class suit, or a derivative suit hinges on the object of the wrong done. When the
object of the wrong done is the corporation itself or "the whole body of its stock and
property without any severance or distribution among individual holders," it is a
derivative suit, not an individual suit or class/representative suit, that a stockholder
must resort to. (MARCELINO M. FLORETE, JR. et al v. ROGELIO M. FLORETE, et al., G.R. No.
174909, January 20, 2016, 2016, LEONEN, J.)

Q: When is there an election contest under the Rules?

A: Where one of the reliefs sought in the complaint is to nullify the election of the Board of
Directors at the annual stockholders meeting, the complaint involves an election contest.
Under Section 3, Rule 6 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies (Interim Rules), an election contest should be filed within 15 days from the
date of the election.

Q: Can the annual stockholders meeting and its proceedings be invalidated


assuming that no proper notice was given to the stockholders?
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A: No. Section 50 of the Corporation Code provides in effect that failure to give notice of the
regular or annual meetings when the date thereof is fixed in the by-laws will not affect the
validity of the annual stockholders meeting or the proceedings therein. (CORAZON H.
RICAFORT, et al. v. HONORABLE ISAIAS P. DICDICAN, et al. G.R. Nos. 202647-50, March 09,
2016; CORAZON H. RICAFORT, et al. v. ROBERTO R. ROMULO, et al. G.R. NOS. 205921-24,
March 09, 2016, REYES, J.)

Q: Simny is a stockholder and member of the board of directors of Goodland Corp.


Guy is also a stockholder, allegedly elected as new director by virtue of the assailed
stockholders' meeting. Simny received notice of meeting only 15 days after the
stockholders meeting. Thus, Simny filed a complaint for the nullification of the
meeting and election of directors. The RTC dismissed the Complaint and upheld the
validity of the stockholders meeting and election. Was the meeting and election
validly held?

A: The provisions under Section 50 of the Corporation Code and the by-laws of GCI are
clear and unambiguous. The provisions only require the sending/mailing of the notice of a
stockholders' meeting to the stockholders of the corporation. "Send" means to deposit in
the mail or deliver for transmission by any other usual means of communication with
postage or cost of transmission provided for and properly addressed. It is not required
that the notice of stockholders meeting be actually received by the stockholder
within the period allowed in the Corporation Code or the By-laws.

Q: Who is a stockholder of record?

A: A "stockholder of record" is defined as a person who desires to be recognized as


stockholder for the purpose of exercising stockholders' right and must secure standing by
having his ownership of share recorded on the stock and transfer book. Thus, only those
whose ownership of shares are duly registered in the stock and transfer book are
considered stockholders of record and are entitled to all rights of a stockholder. (SIMNY
GUY v. GILBERT GUY, et al. and/or JANE DOES, G.R. No. 184068, April 19, 2016, SERENO,CJ)

Q: Oceanic Inc. entered into a subscription agreement with R.C. Lee, covering
5,000,000 of its shares. R.C. Lee paid 25% of the subscription. Oceanic merged with
Interport, with the latter as the surviving corporation. Under the terms of the
merger, each share of Oceanic was exchanged for a share of Interport. SSI, a domestic
corporation, received Oceanic Subscription Agreements, all outstanding in the name
of R.C. Lee. The Oceanic subscription agreements were duly delivered. Later on, R.C.
Lee requested Interport for a list of subscription agreements and stock certificates
issued in its name. Interport provided the list. R.C. Lee paid its unpaid subscriptions
and was accordingly issued stock certificates. Thereafter, Interport issued a call for
the full payment of subscription receivables. SSI tendered payment prior to the
deadline. However, stockbrokers reported to SSI that Interport refused to honor the
Oceanic subscriptions. SSI learned that Interport had issued the shares to R.C. Lee.
SSI demanded for the cancellation of the shares issued to R.C. Lee. SSI filed a case in
the SEC to compel the respondents to deliver the shares and to pay damages. SEC
ordered Interport to deliver the shares. Can Interport be held liable to deliver to SSI
the Oceanic shares of stock, or the value thereof, under Subscriptions Agreement?

A: Yes. Novation extinguished an obligation between two parties. Clearly, the effect of the
assignment of the subscription agreements to SSI was to extinguish the obligation of R.C.
Lee to Oceanic or Interport to settle the unpaid balance on the subscription. As a result of
the assignment, Interport was no longer obliged to accept any payment from R.C. Lee
because the latter had ceased to be privy to Subscription Agreements. On the other
hand, Interport was legally bound to accept SSI's tender of payment for the balance on the
subscription price because SSI had become the new debtor. As such, the issuance of the
stock certificates in the name of R.C. Lee had no legal basis in the absence of a
contractual agreement between R. C. Lee and Interport. (INTERPORT RESOURCES
CORPORATION vs. SECURITIES SPECIALIST, INC., and R.C. LEE SECURITIES INC., G .R. No.
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154069, June 6, 2016, BERSAMIN, J.)

Q: Is the delivery of the stock certificate to the corporation a condition sine qua non
for registration of the transfer of shares?

A: No. The delivery or surrender of certificate of stock is not a requisite before the
conveyance may be recorded in its books. To compel delivery to the corporation of the
certificates as a condition for the registration of the transfer would amount to a restriction
on the right of a stockholder to have the stocks transferred to his name, which is not
sanctioned by law. The only limitation imposed by Section 63 is when the corporation
holds any unpaid claim against the shares intended to be transferred. (ANNA TENG v.
SECURITIES AND EXCHANGE COMMISSION (SEC) AND TING PINGLAY, G.R. No. 184332,
February 17, 2016, REYES, J.)

Q: Can transferees of shares of stocks compel the registration of the transfer and
issuance of stock certificates?

A: Yes. Transferees of shares of stock are real parties in interest. Thus, they have a cause of
action for mandamus to compel the registration of the transfer and the corresponding
issuance of stock certificates. (JOSEPH OMAR O. ANDAYA vs. RURAL BANK OF CABADBARAN,
INC., DEMOSTHENES P. ORAIZ and RICARDO D. GONZALEZ, G.R. No. 188769, August 3, 2016,
SERENO, CJ)

Dissolution

Q: Jose Miguel brought a complaint for illegal dismissal against MCP Corp., which was
formerly known as AME, Corp. For its part, MCP Corp. denies liability in so far as
AME, Corp. already ceased its corporate existence when it amended its articles of
incorporation (AOI) and changed its name from AME, Corp. to MCP Corp. MCP Corp.
further contends that is a new corporation, and as such had no obligation to absorb
the employees of AME Corp. Is the contention of MCP Corp. correct?

A: No. The amendments of the articles of incorporation of AME Corp. to change the
corporate name to MCP Corp. did not produce the dissolution of the former as a
corporation. AME Corp. and MCP Corp. remained one and the same corporation. MCP Corp.,
despite its new name, was the mere continuation of AME Corp's corporate being, and still
held the obligation to honor all of AME Corp's obligations, one of which was to respect Jose
Miguel's security of tenure. The dismissal of San Miguel from employment on the pretext
that petitioner, being a different corporation, had no obligation to accept him as its
employee, was illegal and ineffectual. (ZUELLIG FREIGHT AND CARGO SYSTEMS VS. NLRC,
G.R. No. 157900, 22 July 2013, BERSAMIN, J.)

Q: Sps. Flores, as incorporators of Tristan School, filed a Complaint for a derivative


suit with prayer for the creation of a management committee, appointment of a
receiver, and claim for damages against the President and Chairman of Tristan
School. Sps. Flores alleged that the President employed schemes resulting in
dissipation of the schools assets prejudicial to the schools interests. RTC issued an
order appointing a receiver. The CA reversed the RTCs ruling. Was the reversal
warranted?

A: Yes. Section 1, Rule 9 of the Interim Rules applies to both the appointment of a receiver
and the creation of a management committee. Further, the Court held that there must be
imminent danger of both the dissipation, loss, wastage, or destruction of assets or
other properties; and paralyzation of its business operations that may be prejudicial
to the interest of the minority stockholders, parties-litigants, or the general public, before
allowing the appointment of a receiver or the creation of a management committee.

The CA correctly ruled that RTC prematurely appointed a receiver considering that (1) the
RTC explicitly stated in its May 14, 2010 decision that there was yet no evidence to support
the Sps. Hiterozas allegations on Charitos fraud and misrepresentation to justify the
21 | P a g e
appointment of a receiver and (2)the appointment of the receiver was based on the
inability of the parties to work out an amicable settlement of their dispute, and in order
to enable the court to ascertain the veracity of the claim that the President has
unjustifiably failed and refused to comply with the final Decision in this case dated May 14,
2010. (SPS. AURELIO HITEROZA and CYNTHIA HITEROZA, , - versus - CHARITO S. CRUZADA,
President and Chairman, CHRIST'S ACHIEVERS MONTESSORI, INC., and CHRIST'S ACHIEVERS
MONTESSORI, INC., G.R. No. 203527, June 27, 2016, SECOND DIVISION, BRION J)

Q: In the event of mergers, shall the employees of an absorbed corporation be ipso


facto considered dismissed from their occupation by virtue of such merger?

A: No. The merger of a corporation with another does not operate to dismiss the employees
of the corporation absorbed by the surviving corporation. This is in keeping with the
nature and effects of a merger as provided under law and the constitutional policy
protecting the rights of labor. The employment of the absorbed employees subsists.
Necessarily, these absorbed employees are not entitled to separation pay on account of
such merger in the absence of any other ground for its award. (THE PHILIPPINE
GEOTHERMAL, GEOTHERMAL, INC. EMPLOYEES UNION, Petitioner v. UNOCAL PHILIPPINES,
INC. (now known as CHEVRON GEOTHERMAL PHILIPPINES HOLDINGS, INC., GR. No. 190187,
September 28, 2016, SECOND DIVISION, LEONEN,J.)

Q: Yu bought several golf and country club shares from MADCI. Regrettably, the latter
did not develop the supposed project. Yu then demanded the return of his payment,
but MADCI could not return it anymore because all its assets had been transferred.
Through the acts of YIL, MADCI sold all its lands to YILPI and, subsequently to YICRI.
Thus, Yu now claims that the petitioners inherited the obligations of MADCI. On the
other hand, the petitioners counter that they did not assume such liabilities because
the transfer of assets was not committed in fraud of the MADCI's creditors. Decide.

A: YPLI and YICRI assumed the liabilities of MADCI. While the Corporation Code allows the
transfer of all or substantially all of the assets of a corporation, the transfer should not
prejudice the creditors of the assignor corporation. Under the business-enterprise
transfer, the YPLI and YICRI have consequently inherited the liabilities of MADCI because
they acquired all the assets of the latter corporation. The continuity of MADCI's land
developments is now in the hands of the YPLI and YICRI, with all its assets and liabilities.
To allow an assignor to transfer all its business, properties and assets without the consent
of its creditors will place the assignor's assets beyond the reach of its creditors. Thus, the
only way for Yu to recover his money would be to assert his claim against the petitioners as
transferees of the assets. (Y-I LEISURE PHILIPPINES, INC., YATS INTERNATIONAL LTD. AND
Y-I CLUBS AND RESORTS, INC., G.R. No. 207161, September 08, 2015, MENDOZA, J.)

Q: What is the Nell Doctrine?

A: Generally, where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor, except:
1. Where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of the corporations;
3. Where the purchasing corporation is merely a continuation of the selling
corporation; and
4. Where the transaction is entered into fraudulently in order to escape liability for
such debts. (THE EDWARD J. NELL COMPANY vs. PACIFIC FARMS, INC., G.R. No. L-
20850, 29 November 1965, CONCEPCION, J.)

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

Q: CJHDC entered into a Lease Agreement with the BCDA for the development within
the John Hay Special Economic Zone in Baguio City. The plan included the
construction of two (2) condominium-hotels. Subject to CJHDC's leasehold rights, the
residential units in these condotels were then offered for sale to the general public
by means of two schemes. The first is a straight purchase and sale contract. The
22 | P a g e
second scheme involved the sale of the unit with an added option to avail of a
"leaseback" or a "money-back" arrangement. BCDA learned of such scheme and
required the SEC to conduct investigation. The SEC issued a Cease and Desist Order
(CDO) on the finding that there is a prima facie evidence that CJHDC is engaged in
selling securities without proper registration. Is the issuance of a CDO the proper
remedy?

A: Section 10- 8 of the Rules provides: xxx A CDO when issued, shall not be the subject of an
appeal and no appeal from it will be entertained; xxx. Furthermore, Section 10-3 of the
2006 Rules of Procedure of the SEC provides that the appropriate remedy to a party against
whom a CDO was issued is to file a motion to lift the assailed CDO. Since the law and the
SEC Rules require that this motion be heard by the SEC, it is during this hearing that
respondents could have presented evidence in support of their contentions.

The SEC was not mandated to allow herein respondents to participate in the investigation
conducted by the Commission prior to the cease and desist order's issuance. A cease and
desist order may be issued by the SEC motu proprio, it being unnecessary that it results
from a verified complaint from an aggrieved party. A prior hearing is also not required
whenever the Commission finds it appropriate to issue a cease and desist order that aims
to curtail fraud or grave or irreparable injury to investors.

The main issue, as to whether or not the sale of "The Manor" or "The Suites" units to the
general public under the "leaseback" or "money-back" scheme is a form of investment
contract or sale of securities, is not a pure question of law. On the contrary, it involves a
question of fact that falls under the primary jurisdiction of the SEC. (SEC v. CJH
DEVELOPMENT CORPORATION and CJH SUITES CORPORATION, G.R. No. 210316, THIRD
DIVISION, November 28, 2016, PERALTA, J.)

BANKING LAWS

Q: May the Bangko Sentral ng Pilipinas (BSP) be represented by a private counsel?

A: Under Republic Act No. 7653, or the New Central Bank Act, the BSP Governor is
authorized to represent the Bangko Sentral, either personally or through counsel, including
private counsel, as may be authorized by the Monetary Board, in any legal proceedings,
action or specialized legal studies. Under the same law, the BSP Governor may also delegate
his power to represent the BSP to other officers upon his own responsibility. (BANGKO
SENTRAL NG PILIPINAS v. FELICIANO P. LEGASPI, G.R. No. 205966, March 02, 2016,
PERALTA, J.)

Q: Can the closure of a bank upon the BSP's order constitute a fortuitous event in
order to release the bank from its liabilities to creditors?

A: The period during which the bank cannot do business due to insolvency is not a
fortuitous event, unless it is shown that the government's action to place a bank under
receivership or liquidation proceedings is tainted with arbitrariness, or that the regulatory
body has acted without jurisdiction. (SPOUSES JAIME and MATILDE POON vs. PRIME
SAVINGS BANK represented by the PHILIPPINE DEPOSIT INSURANCE CORPORATION as
Statutory Liquidator, G.R. No. 183794, June 13, 2016, SERENO, CJ)

General Banking Law of 2000 (R.A. No. 8791)

Q: Distinguish a deposit substitute under the banking law and deposit substitute
under the tax law.

A: The distinction is on the purpose. If a bank or non-bank financial intermediary sells debt
instruments to 20 or more lenders/placers at any one time, irrespective of outstanding
amounts, for the purpose of relending or purchasing of receivables or obligations, it is
considered to be performing a quasi-banking function. Under the National Internal
Revenue Code, however, deposit substitutes include not only the issuances and sales of
23 | P a g e
banks and quasi-banks for relending or purchasing receivables and other similar
obligations, but also debt instruments issued by commercial, industrial, and other
nonfinancial companies to finance their own needs or the needs of their agents or dealers.
(BANCO DE ORO V. REPUBLIC OF THE PHILIPPINES, G.R. NO. 198756, AUGUST 16, 2016)

Q: Oliver deposited in Postal Savings Bank the amount of Php 10 Million pesos. A few
weeks after, after checking his account, he was aghast to see that his account only
had a balance of Php 3 million pesos. Upon inquiry, Postal Savings Bank argued that
Oliver withdrew Php 7 Million pesos. Oliver denied having withdrawn such amount.
Oliver sued the bank. The bank failed to present in evidence the withdrawal slips for
the Olivers alleged withdrawal. It was further discovered that one of its tellers, Carlo
was the one responsible for the unauthorized withdrawals. What is the liability of
Postal Savings Bank, if any?

A: In the case of banks, the degree of diligence required is more than that of a good father of
a family. Considering the fiduciary nature of their relationship with their depositors, banks
are duty bound to treat the accounts of their clients with the highest degree of care. A bank
was expected to ensure that a substantial withdrawal should only be transacted with the
consent and authority of its depositor. In this case, Postal Savings Bank, reneged on its
fiduciary duty by allowing an encroachment upon its depositor's account without the
latter's permission. Hence, Postal Savings Bank must be held liable for such improper
transaction. (DRA. MERCEDES OLIVER v. PHILIPPINE SAVINGS BANK AND LILIA CASTRO,
G.R. No. 214567, April 04, 2016, MENDOZA, J.)

Q: What is the degree of diligence required of a bank?

A: Banks are expected to exert the highest degree of, if not the utmost, diligence. Stemming
from their primordial duty of diligence, one of a banks prime duties is to ascertain the
genuineness of the drawers signature on check being encashed. This holds especially true
for managers checks. (LAND BANK OF THE PHILIPPINES vs. NARCISO L. KHO, G.R. No.
205839; MA. LORENA FLORES and ALEXANDER CRUZ vs. NARCISO L. KHO, G.R. No. 205840,
July 7, 2016, BRION, J.)

Q: The savings account of Marianne was considered closed due to the oversight
committed by one of the JPF Banks tellers. The closure resulted in the extreme
embarrassment of the respondent, for checks that she had issued could not be
honored although her savings account was sufficiently funded and the accounts were
maintained under the petitioners check-o-matic arrangement (whereby the current
account was maintained at zero balance and the funds from the savings account were
automatically transferred to the current account to cover checks issued by the
depositor like the respondent). Marianne sued the bank for moral damages. If you
were the judge, would you grant Mariannes prayer for moral damages?

A: Yes, the award of moral damages is proper. The bank had the direct obligation to
supervise very closely the employees handling its depositors accounts, and should always
be mindful of the fiduciary nature of its relationship with the depositors. Such relationship
required it and its employees to record accurately every single transaction, and as
promptly as possible, considering that the depositors accounts should always reflect the
amounts of money the depositors could dispose of as they saw fit, confident that, as a bank,
it would deliver the amounts to whomever they directed. If it fell short of that obligation, it
should bear the responsibility for the consequences to the depositors, who, suffered
particular embarrassment and disturbed peace of mind from the negligence in the handling
of the accounts. In several decisions of the Court, the banks were made liable for
negligence, even without sufficient proof of malice or bad faith on their part, and the Court
awarded moral damages of P100,000.00 each time to the suing depositors in proper
consideration of their reputation and their social standing. (CITYTRUST BANKING
CORPORATION v. CRUZ, G.R. No. 157049, 11 August 2010, BERSAMIN J.)

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Q: What is the nature of a certificate of deposit?

A: A certificate of deposit is a written acknowledgment by the bank of the receipt of a sum


of money on deposit which the bank promises to pay to the depositor, to the latters order,
or to some other person or the latters order. To discharge a debt, the bank must pay to
someone authorized to receive the payment. A bank acts at its peril when it pays deposits
evidenced by a certificate of deposit, without its production and surrender after proper
indorsement. The bank is required to assume a degree of diligence higher than that of a
good father of a family. (ANNA MARIE L. GUMABON vs. PHILIPPINE NATIONAL BANK, G.R.
No. 202514, July 25, 2016, BRION, J.)

Q: Sps. Palarca obtained a loan from Traders Bank. The parcel of land mortgaged for
the loan was foreclosed for failure of the spouses to settle their obligation. The
highest bidder however, failed to consolidate the ownership in his name. Sps. Palarca
were allowed to buy back the property and eventually mortgage it again. The same
was foreclosed and sold to PNB. Is PNB a mortgagee in good faith?

A: No. The failure of the PNB to take precautionary steps is negligence on its part and
would thereby preclude it from invoking that it is a mortgagee in good faith. Before
approving a loan application, it is standard operating procedure for banks and financial
institutions to conduct an ocular inspection of the property offered for mortgage and to
determine the real owners thereof. The apparent purpose of an ocular inspection is to
protect the "true owner" of the property as well as innocent third parties with a right,
interest or claim thereon from a usurper who may have acquired a fraudulent certificate of
title thereto. Had the bank been prudent and diligent enough in ascertaining the condition
of the property, it could have discovered that the same was in the possession of Vila.
(PHILIPPINE NATIONAL BANK vs. JUAN F. VILA, G.R. No. 213241, August 1, 2016, PEREZ,J)

Q: Mr. Raymundo, bank manager, deposited amounts corresponding to the checks


presented to him without waiting for clearing process to finish in the drawee bank
considering that it is a foreign bank. Did the bank manager commit any error?

A: Yes. A bank's disregard of its own banking policy amounts to gross negligence, which is
described as "negligence characterized by the want of even slight care, acting or omitting to
act in a situation where there is duty to act, not inadvertently but willfully and
unintentionally with a conscious indifference to consequences insofar as other persons
may be affected." Payment of the amounts of checks without previously clearing them
with the drawee bank, especially so where the drawee bank is a foreign bank and the
amounts involved were large, is contrary to normal or ordinary banking practice.
Before the check shall have been cleared for deposit, the collecting bank can only assume at
its own risk that the check would be cleared and paid out. As a bank Branch Manager,
Raymundo is expected to be an expert in banking procedures, and he has the necessary
means to ascertain whether a check, local or foreign, is sufficiently funded. (PHILIPPINE
NATIONAL BANK v. PABLO V. RAYMUNDO, G.R. No. 208672, THIRD DIVISION, December 7,
2016, PERALTA, J.)

Q: In 1974, Spouses Alonday obtained an agricultural loan from the PNB, and secured
the obligation by constituting a real estate mortgage on their parcel of land in Sta.
Cruz, Davao City (Sta. Cruz property). In 1980, Spouses Alonday again obtained a
commercial loan from the PNB, and constituted a real estate mortgage over their
residential lot situated in Ulas, Davao City (Ulas property). The deeds of mortgage
securing their commercial loan contained the following provision: This mortgage
shall also stand as security for said obligations and any and all other obligations of
the Mortgagor to the Mortgagee of whatever kind and nature, whether such
obligations have been contracted before, during or after the constitution of this
mortgage.

Spouses Alonday defaulted on the first mortgage. This prompted PNB to foreclose the
mortgage constituted on the Sta. Cruz property. It appeared, however, that
notwithstanding such foreclosure, a deficiency balance remained. Relying on the all-
25 | P a g e
embracing provision of the second mortgage contract, PNB foreclosed the mortgage
on the Ulas property. Can an all-embracing or dragnet clause secure prior loans?

A: Yes. There is no question, indeed, that all-embracing or dragnet clauses have been
recognized as valid means to secure debts of both future and past origins. For the all-
embracing or dragnet clauses to secure future loans, therefore, such loans must be
sufficiently described in the mortgage contract. If the requirement could be imposed on a
future loan that was uncertain to materialize, there is a greater reason that it should be
applicable to a past loan, which is already subsisting and known to the parties.
(PHILIPPINE NATIONAL BANK vs. HEIRS OF BENEDICTO AND AZUCENA ALONDAY G.R.
No. 171865, October 12, 2016, BERSAMIN, J.)

Q: Is the foreclosure sale valid?

A: The foreclosure is not valid. The mere fact that the mortgage constituted on the Ulas
property made no mention of the pre-existing loan could only strongly indicate that each of
the loans of the Spouses Alonday had been treated separately by the parties themselves,
and this sufficiently explained why the loans had been secured by different mortgages.
Being the party that had prepared the contract of mortgage, its failure to do so should be
construed that it did not at all contemplate the earlier loan when it entered into the
subsequent mortgage. (PHILIPPINE NATIONAL BANK vs. HEIRS OF BENEDICTO AND
AZUCENA ALONDAY, G.R. No. 171865, October 12, 2016, BERSAMIN, J.)

INTELLECTUAL PROPERTY CODE

Q: EDM Company filed an application for patent for Angiotensin II Receptor Blocking
Imidazole (losartan), an invention related to the treatment of hypertension and
congestive heart failure. Later, EDMs new counsel sent the Intellectual Property
Office (IPO) a letter requesting that an action be issued on its application. The patent
examiner stated that the application was already deemed abandoned for failure to
respond to the first Office Action within the period as prescribed under Rule 112.
EDM filed a petition for revival, arguing that they were not informed by their former
counsel about the abandonment of the application. The IPO denied the revival,
prompting EDM Company to file a petition for review with the CA. Pharm Corp
moved to intervene before the CA in the application alleging that it also filed an
application for a losartan product Lifezar. Was the motion for intervention in
order?

A: It is the Rules of Court, not the 1962 Revised Rules of Practice, which governs the Court
of Appeals' proceedings in appeals from the decisions of the Director-General of the
Intellectual Property Office regarding the revival of patent applications. Rule 19 of the
Rules of Court provides that a court has the discretion to determine whether to give due
course to an intervention. If an administrative agency's procedural rules expressly prohibit
an intervention by third parties, the prohibition is limited only to the proceedings before
the administrative agency. Once the matter is brought before the Court of Appeals in a
petition for review, any prior prohibition on intervention does not apply since the only
question to be determined is whether the intervenor has established a right to intervene
under the Rules of Court. In this case, respondent Therapharma, Inc. filed its Motion for
Leave to Intervene before the Court of Appeals, not before the Intellectual Property Office
and therefore, the intervention of Therapharma, Inc. is not prohibited.

Rule 930 of the Rules and Regulations on Inventions, and Rule 929 of the Revised
Implementing Rules and Regulations for Patents, Utility Models and Industrial Design
provide for a period of four (4) months from the date of abandonment of a patent
application to revive the same. Section 133.4 of the Intellectual Property Code even
provides for a shorter period of three (3) months within which to file for revival. In this
case, petition for revival of the patent application should be denied. The rules do not
provide any exception that could extend this four (4)-month period to 13 years.

The right of priority given to a patent applicant is only relevant when there are two or
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more conflicting patent applications on the same invention. Because a right of priority does
not automatically grant letters patent to an applicant, possession of a right of priority does
not confer any property rights on the applicant in the absence of an actual patent.

A patent is granted to provide rights and protection to the inventor after an invention is
disclosed to the public. It also seeks to restrain and prevent unauthorized persons from
unjustly profiting from a protected invention. However, ideas not covered by a patent are
free for the public to use and exploit. Thus, there are procedural rules on the application
and grant of patents established to protect against any infringement. To balance the public
interests involved, failure to comply with strict procedural rules will result in the failure to
obtain a patent. (E.I. DUPONT DE NEMOURS AND CO. (assignee of inventors Carini, Duncia
and Wong v. DIRECTOR EMMA C. FRANCISCO (in her capacity as DIRECTOR GENERAL OF
THE INTELLECTUAL PROPERTY OFFICE), DIRECTOR EPIFANIO M. EVASCO (in his capacity as
the DIRECTOR OF THE BUREAU OF PATENTS), and THERAPHARMA, INC., GR. No. 174379,
August 31, 2016, SECOND DIVISION, LEONEN,J.)

Trademarks

Q: The Madrid System for the International Registration of Marks (Madrid System)
allows the trademark owner to file one application in one language, and to pay one
set of fees to protect his mark in the territories of up to 97 member-states. The
Madrid System is governed by the Madrid Agreement and the Madrid Protocol,
concluded in 1989. The Intellectual Property Office of the Philippines (IPOPHL)
recommended to the Department of Foreign Affairs (DFA) that the Philippines
should accede to the Madrid Protocol. DFA endorsed to the President accession to
the Madrid Protocol. President Benigno C. Aquino III ratified the Madrid Protocol
through an instrument of accession. IPAP commenced a special civil action for
certiorari and prohibition to challenge the validity of the President's accession
without the concurrence of the Senate. The IPAP argued that the implementation of
the Madrid Protocol in the Philippines conflicts with the IP Code. Is the Presidents
ratification valid?

A: Yes. President's ratification is valid and constitutional because the Madrid Protocol,
being an executive agreement as determined by the Department of Foreign Affairs, does
not require the concurrence of the Senate.

There is no conflict between the Madrid Protocol and the IP Code. The IPOPHL actually
requires the designation of the resident agent when it refuses the registration of a mark.
Local representation is further required in the submission of the Declaration of Actual Use,
as well as in the submission of the license contract. The Madrid Protocol accords with the
intent and spirit of the IP Code, particularly on the subject of the registration of
trademarks. The Madrid Protocol does not amend or modify the IP Code on the acquisition
of trademark rights considering that the applications under the Madrid Protocol are still
examined according to the relevant national law. In that regard, the IPOPHL will only grant
protection to a mark that meets the local registration requirements. (INTELLECTUAL
PROPERTY ASSOCIATION OF THE PHILIPPINES vs. HON. PAQUITO OCHOA et al, G .R. No.
204605, July 19, 2016, BERSAMIN, J.)

Q: Fiesta filed an Application for the mark "PAPA BOY & DEVICE" for lechon sauce.
UFC Phil. filed an opposition contending that "PAPA BOY & DEVICE" is confusingly
similar with its "PAPA" marks. The former incorporates the term "PAPA," which is
the dominant feature of petitioner's "PAPA" marks. Petitioner averred that
respondent's use of "PAPA BOY & DEVICE" mark for its lechon sauce product would
likely lead the consuming public to believe that said lechon sauce product originates
from or is authorized by UFC Phil. Is UFC Phil correct?

A: Yes. The test of dominancy is now explicitly incorporated into law in Section 155.1 of
the Intellectual Property Code which defines infringement as the "colorable imitation of a
registered mark x x x or a dominant feature thereof.

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Under the dominancy test, if the competing trademark contains the main or essential or
dominant features of another, and confusion and deception is likely to result, infringement
takes place. Actual confusion is not required. Only likelihood of confusion on the part of
the buying public is necessary so as to render two marks confusingly similar so as to deny
the registration of the junior mark.

The scope of protection afforded to registered trademark owners is not limited to


protection from infringers with identical goods. The scope of protection extends to
protection from infringers with related goods, and to market areas that are the
normal expansion of business of the registered trademark owners. Respondent's
mark is related to a product, lechon sauce. Since petitioner's product, catsup, is also a
household product found on the same grocery aisle, in similar packaging, the public could
think that petitioner had expanded its product mix to include lechon sauce, and that the
"PAPA BOY" lechon sauce is now part of the "PAPA" family of sauces. Thus, if allowed
registration, confusion of business may set in, and petitioner's hard-earned goodwill may
be associated to the newer product introduced by respondent. (UFC PHILIPPINES, INC.
(NOW MERGED WITH NUTRI-ASIA, INC., WITH NUTRI-ASIA, INC. AS THE SURVIVING
ENTITY) v. FIESTA BARRIO MANUFACTURING CORPORATION, G.R. No. 198889, January 20,
2016, LEONARDO-DE CASTRO, J.)

Q: Distinguish an action for cancellation of trademark from an action for unfair


competition.

A: An action for the cancellation of trademark is a remedy available to a person who


believes that he is or will be damaged by the registration of a mark. On the other hand, the
criminal actions for unfair competition involved the determination of whether or not
Samson had given his goods the general appearance of the goods of Caterpillar, with the
intent to deceive the public or defraud Caterpillar as his competitor. In the suit for the
cancellation of trademark, the issue of lawful registration should necessarily be
determined, but registration was not a consideration necessary in unfair competition.
Indeed, unfair competition is committed if the effect of the act is "to pass off to the public
the goods of one man as the goods of another; it is independent of registration. As fittingly
put in R.F. & Alexander & Co. v. Ang, "one may be declared unfair competitor even if his
competing trade-mark is registered." (CATERPILLAR, INC. v. MANOLO P. SAMSON, G.R.
No. 205972 and G.R. No. 164352, November 9, 2016, FIST DIVISION, BERSAMIN J,.)

Non-Copyrightable Works

Q: LEC was invited to submit design/drawings for hatch doors. The final shop
plans/drawings were submitted, copied and transferred to the title block of Ski-First
Balfour Joint Venture (SKI-FB), the Project's contractor, and then stamped approved
for construction. LEC was thereafter subcontracted by SKI-FB, to manufacture and
install interior and exterior hatch doors for the 7th to 22nd floors of the Project. LEC
learned thereafter that Metrotech was also subcontracted to install interior and
exterior hatch doors for the Project's 23rd to 41st floors. Thus, LEC demanded
Metrotech to cease from infringing its intellectual property rights. Metrotech,
however, insisted that no copyright infringement was committed because the hatch
doors it manufactured were patterned in accordance with the drawings provided by
SKI-FB. LEC was issued a Certificate of Copyright Registration and Deposit showing
that it is the registered owner of the plans/drawings. Is there copyright infringement
in this case?

A: Copyright infringement is committed by any person who shall use original literary or
artistic works, or derivative works, without the copyright owner's consent in such a
manner as to violate the foregoing copy and economic rights. For a claim of copyright
infringement to prevail, the evidence on record must demonstrate: (1) ownership of
a validly copyrighted material by the complainant; and (2) infringement of the
copyright by the respondent.

Certificate of Registration Nos. I-2004-13 and I-2004-14 pertain to class work "I" under
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Section 172 of R.A. No. 8293 which covers "illustrations, maps, plans, sketches, charts and
three-dimensional works relative to geography, topography, architecture or science." As
such, LEC's copyright protection there under covered only the hatch door
sketches/drawings and not the actual hatch door they depict.

A hatch door, by its nature is an object of utility. It is defined as a small door, small gate or
an opening that resembles a window equipped with an escape for use in case of fire or
emergency. It is thus by nature, functional and utilitarian serving as egress access during
emergency. It is not primarily an artistic creation but rather an object of utility designed to
have aesthetic appeal. It is intrinsically a useful article, which, as a whole, is not eligible for
copyright. (SISON OLAO, et al, v. LIM ENG CO, G.R. No. 195835, March 14, 2016, REYES, J.)

Anti Money Laundering

Q: Does an ex-parte application and inquiry by the AMLC into certain bank deposits
and investments violate substantive and procedural due process and the right to
privacy?

A: No. Taken into account Section 11 of the AMLA, the Court found nothing arbitrary in the
allowance and authorization to AMLC to undertake an inquiry into certain bank accounts or
deposits. Instead, the Court found that it provides safeguards before a bank inquiry order is
issued, ensuring adherence to the general state policy of preserving the absolutely
confidential nature of Philippine bank accounts:
a. The AMLC is required to establish probable cause as basis for its ex-parte
application for bank inquiry order;
b. The CA, independent of the AMLC's demonstration of probable cause, itself makes a
finding of probable cause that the deposits or investments are related to an unlawful
activity under Section 3(i) or a money laundering offense under Section 4 of the
AMLA;
c. A bank inquiry court order ex-parte for related accounts is preceded by a bank
inquiry court order ex-parte for the principal account which court order ex-parte for
related accounts is separately based on probable cause that such related account is
materially linked to the principal account inquired into; and
d. The authority to inquire into or examine the main or principal account and the
related accounts shall comply with the requirements of Article III, Sections 2 and 3
of the Constitution.
(SUBIDO PAGENTE CERTEZA MENDOZA and BINAY LAW OFFICES, v. CA, et al., G.R. No.
216914, EN BANC, December 6, 2016, PEREZ,J.)

Financial Rehabilitation and Insolvency Act of 2010 (R.A. No. 10142)

Q: Marivic Inc. and Vic Inc., both of which are close family corporations, filed a
petition for declaration of state of suspension of payments with a proposed
rehabilitation plan before the RTC. The rehabilitation court issued a stay order that
suspended all claims against the two (2) corporations. China Bank, a creditor,
opposed the rehabilitation petition on the ground that it had acquired title to some
of Marivic Inc.s real properties. It argued that since the two (2) corporations are
separate entities, they should have filed separate petitions. The rehabilitation court
still approved the rehabilitation plan. However, the CA granted China Banks petition
for review and dismissed the petition for rehabilitation. Can close family
corporations jointly file a petition for rehabilitation under the Interim Rules?

A: The Court, however, finds no legal basis to retroactively apply the 2008 Rules. Rule 9,
Section 2 of the 2008 Rules allows the retroactive application of the 2008 Rules to pending
rehabilitation proceedings only when these have not yet undergone the initial hearing
stage at the time of the effectivity of the 2008 Rules. In the present case, the rehabilitation
court conducted the initial hearing on January 22, 2007, and approved the rehabilitation
plan on April 15, 2008 - long before the effectivity of the 2008 Rules on January 16, 2009.
Clearly, the 2008 Rules cannot be retroactively applied to the rehabilitation petition filed
by the petitioners. (MERVIC REALTY, INC. AND VICCY REALTY, INC. v. CHINA BANKING
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CORPORATION, G.R. No. 193748, February 03, 2016, BRION, J.)

Q: Viva filed a petition for corporate rehabilitation. The RTC initially denied it for
failure to comply with the requirements. Thus, Viva filed an amended petition. After
which, the RTC issued a stay order. City of Batangas, K Inc. and MBTC filed their
oppositions to the amended petition. Thus, RTC lifted the stay order and dismissed
the amended petition. Aggrieved, Viva filed a petition for review under Rule 43 of the
Rules of Court before the CA. The CA dismissed the petition for review for failure to
comply with the procedural requirements under Rule 43. Was the CA ruling of
dismissal correct?

A: Rule 43 of the Rules of Court prescribes the procedure to assail the final orders and
decisions in corporate rehabilitation cases filed under the Interim Rules of Procedure on
Corporate Rehabilitation. Liberality in the application of the rules is not an end in itself. It
must be pleaded with factual basis and must be allowed for equitable ends. There must be
no indication that the violation of the rule is due to negligence or design. Liberality is an
extreme exception, justifiable only when equity exists.

The Interim Rules of Procedure on Corporate Rehabilitation covers petitions for


rehabilitation filed before the Regional Trial Court. Thus, Rule 2, Section 2 of the Interim
Rules of Procedure on Corporate Rehabilitation, which refers to liberal construction, is
limited to the Regional Trial Court. The liberality was given "to assist the parties in
obtaining a just, expeditious, and inexpensive disposition of the case."

The Regional Trial Court correctly dismissed petitioner's rehabilitation plan. It found that
petitioner's assets are non-performing. Petitioner admitted this in its Amended Petition
when it stated that its vessels were no longer serviceable. In Wonder Book Corporation v.
Philippine Bank of Communications, a rehabilitation plan is infeasible if the assets are
nearly fully or fully depreciated. This reduces the probability that rehabilitation may
restore and reinstate petitioner to its former position of successful operation and solvency.

The plan of selling properties of petitioner's sister company to generate cash flow cannot
be a basis for the approval of the rehabilitation plan. As pointed out by the Regional Trial
Court, this plan requires conformity from the sister company. Even if the two companies
have the same directorship and ownership, they are still two separate juridical entities.
(VIVA SHIPPING LINES, INC. v. KEPPEL PHILIPPINES MINING, INC., et al, G.R. No. 177382,
February 17, 2016, LEONEN, J.)

Q: FS Corp filed a petition for corporate rehabilitation. They submitted a proposed


rehabilitation plan which sought a waiver of all accrued interests and penalties and a
grace period of two (2) years for payment of the principal amount of its outstanding
loans. The RTC dismissed the rehabilitation plan despite favorable recommendation
of its Rehabilitation Receiver. As observed, the rehabilitation plan failed to comply
with the minimum requirements. On appeal, the CA reversed the ruling and declared
the rehabilitation plan feasible. Was the reversal made by the CA correct?

A: No. The failure of the Rehabilitation Plan to state any material financial commitment to
support rehabilitation, as well as to include a liquidation analysis, renders the CA's
considerations for approving the same as actually unsubstantiated, and hence, insufficient
to decree the feasibility of respondents' rehabilitation. It is well to emphasize that the
remedy of rehabilitation should be denied to corporations that do not qualify under the
Rules. Neither should it be allowed to corporations whose sole purpose is to delay the
enforcement of any of the rights of the creditors. (PHILIPPINE ASSET GROWTH TWO, INC.
(Successor-In-Interest of Planters Development Bank) and PLANTERS DEVELOPMENT BANK
vs. FASTECH SYNERGY PHILIPPINES, INC. (Formerly First Asia System Technology, Inc.),
FASTECH MICROASSEMBLY & TEST, INC., FASTECH ELECTRONIQUE, INC., and FASTECH
PROPERTIES, INC. G.R. No. 206528, June 28, 2016, PERLAS-BERNABE, J.)

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