UNIVERSITY OF NUEVA CACERES

COLLEGE OF LAW

BAR EXAMINATION 2013

MERCANTILE LAW
(Suggested Answers)

In Partial Fulfillment of the Requirements For

Law on Negotiable Instruments

Submitted to:

Atty. Lheila Mozenda Mendoza

Professor

Submitted by:

ACERO, Ronmark

BAUSAS, Kreshia

FELIX, Lalaine

FORMARAN, Juris

FROYALDE, Eugene

GOMEZ, Rene

MARCO, Mark

SARTE, Raiza

BLOCK 2A
BAR EXAMINATION 2013
MERCANTILE LAW
QUESTION NO. 1
Answered by: MARCO, Mark

Antonio issued the following instrument:

August 10,2013
Makati City

P100,000.00

Sixty days after date, I promise to pay Bobby or his designated .representative the sum of ONE
HUNDRED THOUSAND PESOS(P 100,000.00) from my BPI Acct. No. 1234 if, by this due
date, the sun still sets in the west to usher in the evening and rises in the east the following
morning to welcome the day.

(Sgd.) Antonio Reyes

Explain each requirement of negotiability present or absent in the instrument. (8%)

Answer:

(A) The instrument contains a promise to pay and was signed by the maker, Antonio Reyes
(Sec 1(a) of Negotiable Instruments Law).
(B) The promise to pay is unconditional insofar as the reference to the setting of the sun in
the west in the evening and its rising in the east in the morning are concerned. These are
certain to happen (Section 4(c) of Negotiable Instruments Law. However, this promise to pay
is conditional because the money will be taken from a particular fund, BPI Account No. 1234
(Section 3 of Negotiable Instruments Law).
(C) The instrument contains a promise to pay a sum certain in money, P100,000.0 (Sec 1(b)
of the Negotiable Instruments Law).
(D) The money is payable at a determinate future time, sixty days after August 10, 2013 (Sec
4 (a) of the Negotiable Instruments Law).
(E) The instrument is not payable to order or to bearer (Sec 1(d) of Negotiable Instruments
Law).

Metrobank vs. Court of Appeals (In items A, B, C)

An instrument to be negotiable instrument must contain an unconditional promise or orders to

pay a sum certain in money. As provided by Sec 3 of NIL an unqualified order or promise to
pay is unconditional though coupled with: 1st, an indication of a particular fund out of which
reimbursement is to be made or a particular account to be debited with the amount; or 2nd, a
statement of the transaction which give rise to the instrument. But an order to promise to pay
out of particular fund is not unconditional.
 Caltex Philippines, Inc. v. Court of Appeals, et.al, G.R. No. 97753 (Item A)

The negotiability or non-negotiability of an instrument is determined from the writing, that

is, from the face of the instrument itself. The documents provided that the amounts deposited
shall be repayable to the depositor. The amounts are repayable to the bearer of the documents

Ang Tek Lian v. CA (Item E - but)

A check payable to the order of “cash” is a check payable to bearer, and the bank may pay it
to the person presenting it for payment without the drawer‘s indorsement. Of course, if the
bank is not sure of the bearer‘s identity or financial solvency, it has the right to demand
identification and/or assurance against possible complications -for instance,
(a) forgery of drawer‘s signature,
(b) loss of the check by the rightful owner,
(c) raising of the amount payable, etc.

The bank may therefore require, for its protection, that the indorsement of the drawer or of
some other person known to it be obtained. But where the bank is satisfied of the identity
and/or economic standing of the bearer who tenders the check for collection, it will pay the
instrument without further question; and it would incur no liability to the drawer in thus
acting.
BAR EXAMINATION 2013
MERCANTILE LAW
QUESTION NO. 2
Answered by: GOMEZ, Rene

Concealment; Material Concealment

Benny applied for life insurance for Php 1.5 Million. The insurance company approved
his application and issued an insurance policy effective Nov, 6, 2008. Benny named his
children as his beneficiaries. On April 6, 2010, Benny died of hepatoma, a liver ailment.
The insurance company denied the children’s claim for the proceeds of the insurance
policy on the ground that Benny failed to disclose in his application two previous consultations
with his doctors for diabetes and hypertension, and that he had been diagnosed to be suffering
from hepatoma. The insurance company also rescinded the policy and refunded the premiums
paid.
Was the insurance company correct? (8%)

SUGGESTED ANSWER:

Yes, the insurance company is correct in rescinding the policy because Benny has
contravened the provision under Sec. 26 of the PRESIDENTIAL DECREE No. 612 also known
as “The Insurance Code”, against non-concealment of pertinent and material facts regarding
his health condition. To add, Sec. 27 of the aforementioned code provides that when
concealment appears to have been committed by Benny the insurance company is entitled to
rescind a contract of insurance. In the case at bar, Benny failed to disclose in his application
two previous consultations with his doctors for diabetes and hypertension, and that he had been
diagnosed to be suffering from hepatoma. Therefore, the said rescission is well-placed and is
justified.

FLORENDO VS PHILAM PLANS

G.R. No. 186983, February 22, 2012

This case is about an insured’s alleged concealment in his pension plan application of
his true state of health and its effect on the life insurance portion of that plan in case of death.
Section 26 provides that a neglect to communicate that which a party knows and ought to
communicate, is called a concealment.
Petitioner is shifting to Philam Plans the burden of putting on the pension plan
application the true state of Manuel’s health. Petitioner forgets that since Philam Plans waived
medical examination for Manuel, it had to rely largely on his stating the truth regarding his
health in his application. For, after all, he knew more than anyone that he had been under
treatment for heart condition and diabetes for more than five years preceding his submission of
that application. But he kept those crucial facts from Philam Plans.
Besides, when Manuel signed the pension plan application, he adopted as his own the
written representations and declarations embodied in it. It is clear from these representations
that he concealed his chronic heart ailment and diabetes from Philam Plans.
Besides, as already stated, Manuel had been taking medicine for his heart condition and
diabetes when he submitted his pension plan application. These clearly fell within the five-year
period. More, even if Perla’s knowledge of Manuel’s pacemaker may be applied to Philam
Plans under the theory of imputed knowledge,26 it is not claimed that Perla was aware of his
two other afflictions that needed medical treatments. Pursuant to Section 2727 of the Insurance
Code, Manuel’s concealment entitles Philam Plans to rescind its contract of insurance with
him.
Pursuant to Section 27 of the Insurance Code, Manuel’s concealment entitles Philam
Plans to rescind its contract of insurance with him.
BAR EXAMINATION 2013
MERCANTILE LAW
QUESTION NO. 3
Answered by: ACERO, Ron

Banks; Secrecy of Bank Deposit; AMLC

From his first term in 2007, Congressman Abner has been endorsing his pork barrel
allocations to Twin Rivers in exchange for a commission of 40% of the face value of the
allocation. Twin Rivers is a non-governmental organization whose supporting papers, after
audit, were found by the Commission on Audit to be fictitious. Other than to prepare and submit
falsified papers to support the encashment of the pork barrel checks, Twin Rivers does not
appear to have done anything on the endorsed projects and Congressman Abner likewise does
not appear to have bothered to monitor the progress of the projects he endorsed. The
congressman converted most of the commissions he generated into US dollars, and deposited
these in a foreign currency account with Banco de Plata (BDP).
Based on amply-supported tips given by a congressman from another political party,
the Anti-Money Laundering Council sent BDP an order: (1) to confirm Cong. Abner's deposits
with the bank and to provide details of these deposits; and (2) to hold all withdrawals and other
transactions involving the congressman's bank accounts.
As counsel for BDP, would you advise the bank to comply with the order? (8%)

SUGGESTED ANSWER:
I shall advise Banco de Plata not to comply with the order of the Anti-Money
Laundering Council. It cannot inquire into the deposits of Congressman Abner, regardless of
currency, without a bank inquiry order from a competent court, because crimes involved are
not kidnapping for ransom, violations of the Comprehensive Dangerous Drugs Act, hijacking
and other violations of Republic Act No. 6235, destructive arson, murder, and terrorism and
conspiracy to commit terrorism (Section 11 of Anti-Money Laundering Act).
The Anti-Money Laundering Council cannot order Banco de Plata to hold all
withdrawals and other transactions involving the accounts of Congressman Abner. It is the
Court of Appeals which has the power to issue a freeze order over the accounts upon petition
of the Anti-Money Laundering Council.

REPUBLIC v. CABRINI GREEN ROSS

489 SCRA 644

SEC. 10. Freezing of Monetary Instrument or Property.—The Court of Appeals, upon

application ex parte by the AMLC and after determination that probable cause exists that any
monetary instrument or property is in any way related to an unlawful activity as defined in Sec.
3(i) hereof, may issue a freeze order which shall be effective immediately. The freeze order
shall be for a period of twenty (20) days unless extended by the court.”(emphasis supplied)
Section 12 of RA 9194 further provides:
SEC. 12. Transitory Provision.—Existing freeze orders issued by the AMLC shall remain in
force for a period of thirty (30) days after the effectivity of this Act, unless extended by the
Court of Appeals.
The amendment by RA 9194 of RA 9160 erased any doubt on the jurisdiction of the
CA over the extension of freeze orders. As the law now stands, it is solely the CA which has
the authority to issue a freeze order as well as to extend its effectivity. It also has the exclusive
jurisdiction to extend existing freeze orders previously issued by the AMLC vis-à- vis accounts
and deposits related to money-laundering activities.
BAR EXAMINATION 2013
MERCANTILE LAW
QUESTION NO. 4
Answered by: BAUSAS, Kreshia

Rudy is a fine arts student in a university. He stays in a boarding house with Bernie as
his roommate. During his free time, Rudy would paint and leave his finished works lying
around the boarding house. One day, Rudy saw one of his works -an abstract painting entitled
Manila Traffic Jam - on display at the university cafeteria. The cafeteria operator said he
purchased the painting from Bernie who represented himself as its painter and owner.
Rudy and the cafeteria operator immediately confronted Bernie. While admitting that
he did not do the painting, Bernie claimed ownership of its copyright since he had already
registered it in his name with the National Library as provided in the Intellectual Property Code.
Who owns the copyright to the painting? Explain. (8%)

Suggested Answer:
Rudy owns the copyright to the painting because he was the one who actually created
it based on R.A. 3326 Section 178.1. His rights existed from the moment of its creation (Section
172 of R.A. 3326; Unilever Phils. (PRC) vs. Court of Appeals, G.R. No. 119280, August 10,
2006). The registration of the painting by Bernie with the National Library did not confer
copyright upon him. The registration is merely for the purpose of completing the records of the
National Library. (Sec. 191 of R.A. 3326).

UNILEVER PHILIPPINES (PRC), INC., vs. THE HONORABLE COURT OF APPEALS

G.R. No. 119280, August 10, 2006

Petitioner alleges that the writ of preliminary injunction was issued by the trial court
(and affirmed by the CA) without any evidence of private respondent’s clear and unmistakable
right to the writ. Petitioner further contends that the preliminary injunction issued against it
already disposed of the main case without trial, thus denying petitioner of any opportunity to
present evidence on its behalf.
On August 24, 1994, private respondent Procter and Gamble Phils., Inc. filed a
complaint for injunction with damages and a prayer for temporary restraining order and/or writ
of preliminary injunction against petitioner Unilever, alleging that:

1.5. As early as 1982, a P&G subsidiary in Italy used a key visual in the
advertisement of its laundry detergent and bleaching products. This key visual known as the
double-tug or tac-tac demonstration shows the fabric being held by both hands and stretched
sideways.

1.6. The tac-tac was conceptualized for P&G by the advertising agency Milano and
Gray of Italy in 1982. The tac-tac was used in the same year in an advertisement entitled All
aperto to demonstrate the effect on fabrics of one of P&GPs products, a liquid bleach called
Ace.

xxxxxxxxx

1.7. Since then, P&G has used the tac-tac key visual in the advertisement of its
products. In fact, in 1986, in Italy, the tac-tac key visual was used in the television commercial
for Ace entitled Kite.
 1.8. P&G has used the same distinctive tac-tac key visual to local consumers in the
Philippines.

xxxxxxxxx

1.10. Substantially and materially imitating the aforesaid tac-tac key visual of P&GP
and in blatant disregard of P&GPs intellectual property rights, Unilever on 24 July 1993 started
airing a 60 second television commercial TVC of its Breeze Powerwhite laundry product called
Porky. The said TVC included a stretching visual presentation and sound effects almost
[identical] or substantially similar to P&GPs tac-tac key visual.

xxxxxxxxx

1.14. On July 15, 1994, P&GP aired in the Philippines, the same Kite television
advertisement it used in Italy in 1986, merely dubbing the Italian language with Filipino for
the same produce Ace bleaching liquid which P&GP now markets in the Philippines.

1.15. On August 1, 1994, Unilever filed a Complaint with the Advertising Board of
the Philippines to prevent P&GP from airing the Kite television advertisement.
The sole objective of a writ of preliminary injunction is to preserve the status quo until the
merits of the case can be heard fully. A writ of preliminary injunction is generally based solely
on initial and incomplete evidence. Thus, it was impossible for the court a quo to fully dispose
of the case, as claimed by petitioner, without all the evidence needed for the full resolution of
the same. To date, the main case still has to be resolved by the trial court.

Issue:
Whether the issuance of writ of preliminary injunction be issued?

Held:
Yes. The issuance of a preliminary injunction rests entirely on the discretion of the court
and is generally not interfered with except in cases of manifest abuse. There was no such abuse
in the case at bar, especially because petitioner was given all the opportunity to oppose the
application for injunction. The fact was, it failed to convince the court why the injunction
should not be issued. Thus, in Santos v. Court of Appeals, we held that no grave abuse of
discretion can be attributed to a judge or body issuing a writ of preliminary injunction where a
party has not been deprived of its day in court as it was heard and it exhaustively presented all
its arguments and defenses. The court denied the petition.
BAR EXAMINATION 2013
MERCANTILE LAW
QUESTION NO. 6
Answered by: FROYALDE, Eugene

Delano Cruz is in default in the payment of his existing loan from BDP Bank. To
extend and restructure this loan, Delano agreed to execute a trust receipt in the bank’s favor
covering the iron pellets Delano imported from China one year earlier. Delano subsequently
succeeded in selling the iron pellets to a smelting plant, but the proceeds went to the payment
of the separation benefits of his employees who were laid off as he reduced his operations.

When the extended loan period expired without any significant payment from Delano
(not even to the extent of the proceeds of the sale of the iron pellets), BDP Bank consulted you
on how to proceed against Delano. The bank is contemplating the filing of cases pursuant to
the provisions of Presidential Decree No. 115 ( Trust receipts law) to force Delano to turn in at
least the proceeds of the sale of iron pellets.

Would you, as bank counsel and as an officer of the court, advise the bank to proceed
with the contemplated action?

Answer:

Yes, I will advise the Bank to proceed with the contemplated action.Delano as the
entrustee cannot go beyond the terms of the trust receipt agreement he executed to restructure
the loan as no novation was entered to change the terms such as changing the terms which will
allow Delano to apply the payment of proceeds to the separation benefits of his employees.
BDP bank remains the owner of the iron pellets and Delano has the obligation to pay the loan
from the proceeds of sale of the iron pellets. Delano clearly misappropriated the proceeds of
the sale, disposing it as if it were one’s own or use different from that agreed upon.

Sec.13 of Presidential Decree 115 :

“Failure of the an entrustee to turn over the proceeds of the sale of the goods, to the extent of
the amount owing to the entruster if they were not sold or disposed in accordance with the
terms of the trust receipt shall constitute the crime of estafa,punishable under the provisions of
Article Three Hundred Fifteen,Paragraph One(b), of Act numbered Three Thousand Eight
Hundred and Fifteen,as amended,otherwise known as the Revised Penal Code.

In Samo v.People,et ,al G.R. Nos. L-17603-04,May 31 ,1962, it is reiterated that the
ownership of merchandise continues to be vested in the person who has advanced payment,
until he has been paid in full,or if the the merchandise has been sold, the proceeds of the sale
should be turn-overed to him by the importer or his representative or his successor in interest.
Conversions by the importer of goods covered by the trust receipt constitutes misappropriation
underArt.315 (1)(b) of the Revised Penal Code.

In this instant case, Delano clearly has no right to convert the proceeds of the sale as
this in violation of the trust receipt he executed with the bank. Ownership of the iron pellets
remain with the Bank and under the Trust Receipts law, he has obligation to apply the payment
to pay his outstanding loan. As he opt to apply the proceeds, different from the trust agreement
he clearly violated P.D 115 and BDP has the right to file a case for estafa under Sec.13 of
Presidential Decree 115
BAR EXAMINATION 2013
MERCANTILE LAW
QUESTION NO. 7
Answered by: SARTE, Raiza

Stable Insurance Co. (SIC) and St. Peter Manufacturing Co. (SPMC) have had a long-
standing insurance relationship with each other; SPMC secures the comprehensive fire
insurance on its plant and facilities from SIC. The standing business practice between them has
been to allow SPMC a credit period of 90 days from the renewal of the policy within which to
pay the premium.

Soon after the new policy was issued and before premium payments could be made, a
fire gutted the covered plant and facilities to the ground. The day after the fire, SPMC issued a
manager's check to SIC for the fire insurance premium, for which it was issued a receipt; a
week later SPMC issued its notice of loss.

SIC responded by issuing its own manager's check for the amount of the premiums
SPMC had paid, and denied SPMC's claim on the ground that under the "cash and carry"
principle governing fire insurance, no coverage existed at the time the fire occurred because
the insurance premium had not been paid.

Is SPMC entitled to recover for the loss from SIC? (8%)

Suggested Answer:

Yes. Stable Insurance Company granted a credit term to pay the premium. This is not
against the law because the standing business practice of allowing St. Peter Manufacturing
Company to pay the premiums after 60 or 90 days, was relied upon in good faith by SPMC
Stable Insurance Company is now in estoppel. Therefore, St. Peter Manufacturing Company is
entitled to recover for the loss from Stable Manufacturing Company.

UCPB General Insurance Co., Inc. vs Masagana Telemart, Inc.

G.R. No. 137172, 04 April 2001

FACTS
Respondent Masagana Telemart, Inc. obtained from defendant Petitioner UCPB
General Insurance Co. five (5) insurance policies on its properties. All five (5) policies reflect
on their face the effectivity term: "from 4:00 P.M. of 22 May 1991 to 4:00 P.M. of 22 May
1992." On June 13, 1992, respondent’s properties were razed by fire. On July 13, 1992,
Masagana Telemart tendered, and UCPB General Insurance, Co. accepted, five (5) Equitable
Bank Manager's Checks as renewal premium payments for which Official Receipt Direct
Premium was issued by defendant. Masagana made its formal demand for indemnification for
the burned insured properties. On the same day, defendant returned the five (5) manager's
checks stating in its letter) that it was rejecting Masagana's claim on the following grounds:

"a) Said policies expired last May 22, 1992 and were not renewed for another term;
b) Defendant had put plaintiff and its alleged broker on notice of non-renewal earlier; and
c) The properties covered by the said policies were burned in a fire that took place last June 13,
1992, or before tender of premium payment."
ISSUE

Whether Section 77 of the Insurance Code of 1978 (P.D. No. 1460) must be strictly
applied to Petitioner's advantage despite its practice of granting a 60- to 90-day credit term for
the payment of premiums.

HELD
Section 77 of the Insurance Code of 1978 provides:

"An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy
or contract of insurance issued by an insurance company is valid and binding unless and until
the premium thereof has been paid, except in the case of a life or an industrial life policy
whenever the grace period provision applies."

While the import of Section 77 is that prepayment of premiums is strictly required as a

condition to the validity of the contract, We are not prepared to rule that the request to make
installment payments duly approved by the insurer would prevent the entire contract of
insurance from going into effect despite payment and acceptance of the initial premium or first
installment. So is an understanding to allow insured to pay premiums in installments not so
prescribed. At the very least, both parties should be deemed in estoppel to question the
arrangement they have voluntarily accepted.
BAR EXAMINATION 2013
MERCANTILE LAW
QUESTION NO. 10
Answered by: FELIX, LALAINE

Bell Philippines, Inc. (BelPhil) is a public utility company, duly incorporated and
registered with the Securities and Exchange Commission. Its authorized capital stock consists
of voting common shares and non-voting preferred shares, with equal par values of
P100.00/share. Currently, the issued and outstanding capital stock of BelPhil consists only of
common shares shared between Bayani Cruz, a Filipino with 60% of the issued common
shares, and Bernard Fleet, a Canadian, with 40%.
To secure additional working fund, BelPhil issued preferred shares to Bernard Fleet
equivalent to the currently outstanding common shares. A suit was filed questioning the
corporate action on the ground that the foreign equity holdings in the company would now
exceed the 40% foreign equity limit allowed under the Constitution for public utilities.
Rule on the legality of Bernard Fleet's current holdings.
Answer:
The holding of Bernard Fleet equivalent to the outstanding common shares is illegal.
His holdings of preferred shares should not exceed 40%. Since the constitutional requirement
of 60% Filipino ownership of the capital of public utilities applies not only to voting control
but also to beneficial ownership of the corporation. It should also apply to the preferred shares.
Preferred shares are also entitled to vote in certain matters. (Gamboa vs Teves, 682 SCRA
397). The state shall develop a self-reliant and independent national economy effectively
controlled by Filipinos. (Article II Section 19, 1987 Constitution) The effective control here
should be mirrored across the board on all kinds of shares.

Wilson P. Gamboa v. Finance Secretary Margarito Teves, et al.,

G.R. No. 176579, June 28, 2011

FACTS:

This is a petition to nullify the sale of shares of stock of Philippine Telecommunications

Investment Corporation (PTIC) by the government of the Republic of the Philippines, acting
through the Inter-Agency Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc.
(MPAH), an affiliate of First Pacific Company Limited (First Pacific), a Hong Kong-based
investment management and holding company and a shareholder of the Philippine Long
Distance Telephone Company (PLDT).The petitioner questioned the sale on the ground that it
also involved an indirect sale of 12 million shares (or about 6.3 percent of the outstanding
common shares) of PLDT owned by PTIC to First Pacific. With the this sale,
First Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37
percent, thereby increasing the total common shareholdings of foreigners in PLDT to about
81.47%. This, according to the petitioner, violates Section 11, Article XII of the 1987
Philippine Constitution which limits foreign ownership of the capital of a public utility to not
more than 40%, thus: Section 11. No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines, at least sixty per
centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty years. Neither shall any
such franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public utility enterprise shall be
limited to their proportionate share in its capital, and all the executive and managing officers
of such corporation or association must be citizens of the Philippines.

ISSUE:

Does the term “capital” in Section 11, Article XII of the Constitution refer to the total common
shares only, or to the total outstanding capital stock (combined total of common and non-voting
preferred shares) of PLDT, a public utility?

RULING:

The Court partly granted the petition and held that the term “capital” in Section 11,
Article XII of the Constitution refers only to shares of stock entitled to vote in the election of
directors of a public utility, i.e., to the total common shares in PLDT.] Considering that
common shares have voting rights which translate to control, as opposed to preferred shares
which usually have no voting rights, the term “capital” in Section 11, Article XII of the
Constitution refers only to common shares. However, if the preferred shares also have the right
to vote in the election of directors, then the term “capital” shall include such preferred shares
because the right to participate in the control or management of the corporation is exercised
through the right to vote in the election of directors. In short, the term “capital” in Section 11,
Article XII of the Constitution refers only to shares of stock that can vote in the election of
directors.
To construe broadly the term “capital” as the total outstanding capital stock, including
both common and non-voting preferred shares, grossly contravenes the intent and letter of the
Constitution that the “State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos.” A broad definition unjustifiably disregards who owns the
all-important voting stock, which necessarily equates to control of the public utility. Holders
of PLDT preferred shares are explicitly denied of the right to vote in the election of directors.
PLDT’s Articles of Incorporation expressly state that “the holders of Serial Preferred Stock
shall not be entitled to vote at any meeting of the stockholders for the election of directors or
for any other purpose or otherwise participate in any action taken by the corporation or its
stockholders, or to receive notice of any meeting of stockholders.” On the other hand, holders
of common shares are granted the exclusive right to vote in the election of directors. PLDT’s
Articles of Incorporation state that “each holder of Common Capital Stock shall have one vote
in respect of each share of such stock held by him on all matters voted upon by the stockholders,
and the holders of Common Capital Stock shall have the exclusive right to vote for the election
of directors and for all other purposes.”
It must be stressed, and respondents do not dispute, that foreigners hold a majority of
the common shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet (GIS),
which is a document required to be submitted annually to the Securities and Exchange
Commission, foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold
only 66,750,622 common shares. In other words, foreigners hold 64.27% of the total number
of PLDT’s common shares, while Filipinos hold only 35.73%.
Since holding a majority of the common shares equates to control, it is clear that
foreigners exercise control over PLDT. Such amount of control unmistakably exceeds the
allowable 40 percent limit on foreign ownership of public utilities expressly mandated in
Section 11, Article XII of the Constitution.
 As shown in PLDT’s 2010 GIS, as submitted to the SEC, the par value of PLDT
common shares is P5.00 per share, whereas the par value of preferred shares is P10.00 per
share. In other words, preferred shares have twice the par value of common shares but cannot
elect directors and have only 1/70 of the dividends of common shares. Moreover, 99.44% of
the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of
the preferred shares. Worse, preferred shares constitute 77.85% of the authorized capital stock
of PLDT while common shares constitute only 22.15%. This undeniably shows that beneficial
interest in PLDT is not with the non-voting preferred shares but with the common shares,
blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership in a public utility. In short, Filipinos hold less than 60 percent of the
voting stock, and earn less than 60 percent of the dividends, of PLDT. This directly contravenes
the express command in Section 11, Article XII of the Constitution that “[n]o franchise,
certificate, or any other form of authorization for the operation of a public utility shall be
granted except to x x x corporations x x x organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens xxx.”
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of
shares exercises the sole right to vote in the election of directors, and thus exercise control over
PLDT; (2) Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of
the voting stock, and thus do not exercise control over PLDT; (3) preferred shares, 99.44%
owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends
that common shares earn; (5) preferred shares have twice the par value of common shares; and
(6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and common
shares only 22.15%. This kind of ownership and control of a public utility is a mockery of the
Constitution. [Thus, the Respondent Chairperson of the Securities and Exchange Commission
was DIRECTED by the Court to apply the foregoing definition of the term “capital” in
determining the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution,
to impose the appropriate sanctions under the law.
BAR EXAMINATION 2013
MERCANTILE LAW
QUESTION NO. 1 MCQ
Answered by: FELIX, LALAINE

Claude, the registered stockholder of 1 000 shares in ABC Corp., pledged the shares to
Conrad by endorsement in blank of the covering stock certificates and, execution of a Deed of
Assignment of Shares of Stock, intended as collateral for a loan of P1.0 Million that was also
supported by a separate promissory note. (1) Under these facts, is there a valid pledge of the
shares of stock to Conrad? (1%)

(A) No, because shares of stock are intangible personal properties whose possession cannot be
delivered and, hence, cannot be the subject of a pledge.
(B) No, because the pledge of shares of stock requires double registration with the Register of
Deeds of the principal place of business of the corporation and of the residence of the pledgor.
(C) Yes, because endorsement and delivery of the certificates of stock is equivalent to the
transfer of possession of the covered shares to the pledgee.
(D) Yes, because the execution of the Deed of Assignment of Shares of Stock is equivalent to
a lawful pledge of the shares of stock.

Answer:
I.1 (D) Yes, because the execution of the Deed of Assignment of Shares of Stock is equivalent
to a lawful pledge of the shares of stock. (Lopez vs Court of Appeals, 114 SCRA 617)

Lopez vs Court of Appeals

114 SCRA 617

Facts:
Petitioner Benito H. Lopez obtained a loan in the amount of P20,000.00 from the
Prudential Bank and Trust Company. On the same date, he executed a promissory note for the
same amount, in favor of the said Bank, binding himself to repay the said sum one (1) year
after the said date, with interest at the rate of 10% per annum. In addition to said promissory
note, he executed Surety Bond No. 14164 in which he, as principal, and Philippine American
General Insurance Co., Inc. (PHILAMGEN) as surety, bound themselves jointly and severally
in favor of Prudential Bank for the payment of the sum of P20,000.00.
On the same occasion, Lopez also executed in favor of Philamgen an indemnity
agreement whereby he agreed "to indemnify the Company and keep it indemnified and hold
the same harmless from and against any and all damages, losses, costs, stamps, taxes, penalties,
charges and expenses of whatever kind and nature which the Company shall or may at any time
sustain or incur in consequence of having become surety upon the bond." 1 At the same time,
Lopez executed a deed of assignment of 4,000 shares of the Baguio Military Institution entitled
"Stock Assignment Separate from Certificate.
With the execution of this deed of assignment, Lopez endorsed the stock certificate and
delivered it to Philamgen. Lopez' obligation matured without it being settled. Thus, the
Prudential Bank made demands for payment both upon Lopez and Philamgen. In turn,
Philamgen sent Lopez several written demands for the latter to pay his note but Lopez did not
comply with said demands. Hence, the Prudential Bank filed a case against them to enforce
payment on the promissory note plus interest.
Upon receipt of the copies of complaint, Atty. Sumawang confronted Emilio Abello
and Pio Pedrosa regarding their commitment to buy the shares of stock of Lopez in the event
that the latter failed to pay his obligations to the Prudential Bank. Vice-President Abello then
instructed Atty. Sumawang to transfer the shares of stock to Philamgen and made a
commitment that thereafter he (Abello) and Pio Pedrosa will buy the shares of stock from it so
that the proceeds could be paid to the bank, and in the meantime Philamgen will not pay the
bank because it did not want payment under the terms of the bank.
Due to said commitment and instruction of Vice-President Abello, Assistant Treasurer Marcial
C. Cruz requested the transfer of Stock Certificate No. 44 for 4,000 shares to Philamgen in a
letter. Stock Certificate No. 44 in the name of Lopez was accordingly cancelled and in lieu
thereof Stock Certificate No. 171 was issued by the Baguio Military Institute in the name of
Philamgen

ISSUE:
Is the lower court incorrect in finding that the evidence does not bear out the contention
of plaintiff that the shares of stock belonging to defendant were transferred by him to plaintiff
by way of pledge?
RULING:
No. We agree with the holding of the respondent Court of Appeals that the stock
assignment, Exhibit C, is in truth and in fact, a pledge. Indeed, the facts and circumstances
leading to the execution of the stock assignment, Exhibit C, and the admission of Lopez prove
that it is in fact a pledge. The appellate court is correct in ruling that the following requirements
of a contract of pledge have been satisfied: (1) that it be constituted to secure the fulfillment of
a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; and (3)
that the person constituting the pledge has the free disposal of the property, and in the absence
thereof, that he be legally authorized for the purpose. (Article 2085, New Civil Code).
BAR EXAMINATION 2013
MERCANTILE LAW
QUESTION NO. 5 - MCQ
Answered by: FORMARAN, JURIS

Arnold, representing himself as an agent of Brian for the sale of Brian's car, approached
Dennis who appeared interested in buying the car. At Arnold's prodding, Dennis issued a
crossed check payable to Brian for P25,000.00 on the understanding that the check would only
be shown to Brian as evidence of Dennis' good faith and interest in buying the car. Instead,
Arnold used the check to pay for the medical expenses of his wife in Brian's clinic after Brian,
a doctor, treated her.

Is Brian a holder in due course (HI DC)? (1%)

(A) Yes, Brian is a HIDC because he was the payee of the check and he received it for services
rendered.
(B) Yes, Brian is a HIDC because he did not need to go behind the check that was payable to
him.
(C) No, Brian is not a HIDC because Dennis issued the check only as evidence of good faith
and interest in buying the car.
(D) No, Brian is not a HIDC because Brian should have been placed on notice: the check was
crossed in his favor and Arnold was not the drawer.
(E) No, Brian is not a HIDC because the requisite consideration to Dennis was not present.

ANSWER;
(D) No, Brian is not a HIDC because Brian should have been placed on notice: the check was
crossed in his favor and Arnold was not the drawer.

(Vicente R. de Ocampo & Company v. Gatchalian, G.R. No. L-15126, November 30, 1961)
One is such a holder in due course, it is immaterial that he was the payee and an immediate
party to the instrument. Also, the use of the check of another to pay his own or personal debt
cannot be considered holder in due course.

(RCBC Savings Bank v. Noel M. Odrada, G.R. No. 219037, October 19, 2016)
To be a holder in due course, the law requires that a party must have acquired the instrument
in good faith and for value. Good faith means that the person taking the instrument has acted
with due honesty with regard to the rights of the parties liable on the instrument and that at the
time he,took the instrument, the holder has no knowledge of any defect or infirmity of the
instrument. To constitute notice of an infirmity in the instrument or defect in the title of the
person negotiating the same, the person to whom it is negotiated must have had actual
knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the
instrument would amount to bad faith. Value, on the other hand, is defined as any consideration
sufficient to support a simple contract.
BAR EXAMINATION 2013
MERCANTILE LAW
QUESTION NO. 10 – MCQ
Answered by: FORMARAN, JURIS

Under the Anti-Money Laundering Act, a depositor's bank account may be frozen __________.
(1%)
(A) by the bank when the account is the subject of a suspicious or covered transaction report
(B) by the Anti-Money Laundering Council (AMLC) when the account belongs to a person
already convicted of money laundering
(C) by the Regional Trial Court, upon ex parte motion by the AMLC, in a criminal prosecution
for money laundering pending before it
(D) by the Court of Appeals motu proprio in an appeal from a judgment of conviction of a
criminal charge for money laundering
(E) In none of the above.
ANSWER:
(E) In none of the above.
Section 10 of Republic Act No. 9160 (The Anti-Money Laundering Act)
Section 10. Authority to Freeze-
Upon determination that probable cause exists that any deposit or similar account is in any way
related to an unlawful activity, the AMLC may issue a freeze order, which shall be effective
immediately, on the account for a period not exceeding fifteen (15) days. Notice to the
depositor that his account has been frozen shall be issued simultaneously with the issuance of
the freeze order. The depositor shall have seventy-two (72) hours upon receipt of the notice to
explain why the freeze order should be lifted. The AMLC has seventy-two (72) hours to dispose
of the depositor’s explanation. If it fails to act within seventy-two (72) hours from receipt of
the depositor’s explanation, the freeze order shall automatically be dissolved. The fifteen (15)-
day freeze order of the AMLC may be extended upon order of the court, provided that the
fifteen (15)-day period shall be tolled pending the court’s decision to extend the period.
No court shall issue a temporary restraining order or writ of injunction against any freeze order
issued by the AMLC except the Court of Appeals or the Supreme Court.
Section 7 of Republic Act No. 9194 (An Act Amending Republic Act No. 9160, Otherwise
Known as The "Anti-Money Laundering Act Of 2001")
SECTION 7. Section 10 of the same Act is hereby amended to read as follows:
"Sec 10. Freezing of Monetary Instrument or Property. -- The Court of Appeals, upon
application ex parte by the AMLC and after determination that probable cause exists that any
monetary instrument or property is in any way related to an unlawful activity as defined in
Section 3(i) hereof, may issue a freeze order which shall be effective immediately. The freeze
order shall be for a period of twenty (20) days unless extended by the court.

(Republic of the Philippines v. Cabrini Green & Ross Inc, G.R. No. 154522, May 5, 2006)
The Supreme Court cited, Rule 10.1, Revised Implementing Rules And Regulations R.A. No.
9160, As Amended By R.A. No. 9194 which provides:

Rule 10.1. When the AMLC may apply for the freezing of any monetary instrument or property.
(a) after an investigation conducted by the AMLC and upon determination that probable cause
exists that a monetary instrument or property is in any way related to any unlawful activity as
defined under section 3(i). The AMLC may file an ex-parte application before the the Court of
Appeals for the issuance of a freeze order on any monetary instrument or property subject
thereof prior to the institution or in the course of, the criminal proceedings involving the
unlawful activity to which said monetary instrument or property is any way related.

Under Section 10, the implementing rules do expressly provide that the applications for freeze
orders be filed ex parte.