2013 2014 2015 Q and A Commercial Law

August 9, 2017 | Author: Starr Weigand | Category: Negotiable Instrument, Cheque, Promissory Note, Security Interest, Financial Transaction
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Recent Cases on Commercial Law for 2016 Bar Exams...



Trust Receipts Law 1. S Corp. obtained letters of credit from M Bank to cover its purchase of construction materials. M Bank required HTY, representative of S Corp. to sign 24 trust receipts as security for the construction materials and to hold those materials or the proceeds of the sales in trust for M Bank to the extent of the amount stated in the trust receipts. S Corp. defaulted thus M Bank filed a criminal action against HTY for estafa. Can HTY be held liable for estafa under the trust receipts law? No. A trust receipt transaction is one where 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 (entregarla) to the owner of the merchandise sold, while the second refers to the merchandise received under the obligation to “return” it (devolvera) to the owner. When both parties enter into an agreement knowing fully well that the return of the goods subject of the trust receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in relation to Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed upon by the parties would be the return of the proceeds of the sale transaction. This transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the goods. In this case, the dealing between HTY and M Bank was not a trust receipt transaction but one of simple loan. HTY’s admission––that he signed the trust receipts on behalf of S Corp., which failed to pay the loan or turn over the proceeds of the sale or the goods to M Bank upon demand––does not conclusively prove that the transaction was, indeed, a trust receipts Starr Weigand 2016

transaction. In contrast to the nomenclature of the transaction, the parties really intended a contract of loan. It has been ruled that the fact that the entruster bank knew even before the execution of the trust receipt agreements that the construction materials covered were never intended by the entrustee for resale or for the manufacture of items to be sold is sufficient to prove that the transaction was a simple loan and not a trust receipts transaction. [Hur Tin Yang v. People of the Philippines,G.R. No. 195117, August 14, 2013] 2. Spouses dela Cruz was in the business of selling fertilizers and agricultural products, for which they were granted a credit line by PPI, and to secure it, trust receipts were issued covering the goods to be paid for by using the credit line. The trust receipts contained the following: “In the event, I/We cannot deliver/serve to the farmer-participants all the inputs as enumerated above within 60 days, then I/We agree that the undelivered inputs will be charged to my/our credit line, in which case, the corresponding adjustment of price and interests shall be made by PPI.” Is there a trust receipt transaction? No. The contract, its label notwithstanding, was not a trust receipt transaction in legal contemplation or within the purview of the Trust Receipts Law such that its breach would render the Spouses criminally liable for estafa. Under Section 4 of the Trust Receipts Law, the sale of goods by a person in the business of selling goods for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, or who sells the goods to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of the law. The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general 2013 & 2014 Q and A|Commercial Law


property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree. When both parties enter into an agreement knowing that the return of the goods subject of the trust receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt transaction penalized under Section 13 of P.D. 115; the only obligation actually agreed upon by the parties would be the return of the proceeds of the sale transaction. This transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the goods. [Spouses Dela Cruz v. Planters Products, Inc., GR No. 158649, February 18, 2013]

Negotiable Instruments Law 1. W was accused of estafa for using a bum check to defraud another person. The check he issued was payable to cash. Can he be held liable for estafa? No. The check delivered was made payable to cash. Under the Negotiable Instruments Law, this type of check was payable to the bearer and could be negotiated by mere delivery without the need of an indorsement. This rendered it highly probable that W had issued the check not to the person allegedly defrauded, but to somebody else, who then negotiated it to another. Relevantly, the person allegedly defrauded confirmed that he did not himself see or meet W at the time of the transaction and thereafter, and expressly stated that the person who signed for and received the goods in exchange for the check was someone else. It bears stressing that the accused, to be guilty of estafa as charged, must have used the check in order to defraud the complainant. What the law punishes is the fraud or deceit, not the mere issuance of the worthless check. W could not be held guilty of estafa simply because he had issued the check used to defraud a person. The proof of guilt must still clearly show that it had been W as the drawer who had defrauded a person by means of the check. [People of the Philippines v. Gilbert Reyes Wagas, G.R. No. 157943, September 4, 2013] 2. A postdated check with the date October 9, 2003 was issued, drawn against an account of S with BPI, presented for deposit with ABank, on October 10, 2002. Upon presentment, the check was sent to the PCHC. It was cleared by BPI and its amount was debited from the account of S, and credited to the account of the payee. The account of S was closed, but he asked for the return of the amount of the check, which BPI agreed to. When BPI sent a photocopy of the check to ABank saying it was postdated, ABank

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refused to accept it. After the check was sent back and forth between the two banks, ABank filed a complaint saying BPI should solely bear the loss. Is ABank correct? No. ABank and BPI should both bear the loss by allocating the damage on a 60-40 ratio. In light of the contributory negligence of BPI, it should bear 40% of the loss, but ABank should bear 60%. "Contributory negligence is conduct on the part of the injured party, contributing as a legal cause to the harm he has suffered, which falls below the standard to which he is required to conform for his own protection." Admittedly, ABank’s acceptance of the subject check for deposit despite the one year postdate written on its face was a clear violation of established banking regulations and practices. In such instances, payment should be refused by the drawee bank and returned through the PCHC within the 24-hour reglementary period. Abank’s failure to comply with this basic policy regarding post-dated checks was "a telling sign of its lack of due diligence in handling checks coursed through it." It bears stressing that "the diligence required of banks is more than that of a Roman paterfamilias or a good father of a family. The highest degree of diligence is expected," considering the nature of the banking business that is imbued with public interest. While it is true that respondent's liability for its negligent clearing of the check is greater, petitioner cannot take lightly its own violation of the long-standing rule against encashment of post-dated checks and the injurious consequences of allowing such checks into the clearing system. The antecedent negligence of the plaintiff does not preclude him from recovering damages caused by the supervening negligence of the defendant, who had the last fair chance to prevent the impending harm by the exercise of due diligence. Moreover, in situations where the doctrine has been applied, it was defendant’s failure to exercise such ordinary care, having the last clear chance to avoid loss or injury, which was the proximate cause of the occurrence of such loss or injury. If only BPI Starr Weigand 2016

exercised ordinary care in the clearing process, it could have easily noticed the glaring defect upon seeing the date written on the face of the check "Oct. 9, 2003". BPI could have then promptly returned the check and with the check thus dishonored, ABank would have not credited the amount thereof to the payee’s account. Thus, notwithstanding the antecedent negligence of the ABank in accepting the postdated check for deposit, it can seek reimbursement from BPI in the amount credited to the payee’s account covering the check. [Allied Banking Corporation v. Bank of the Philippine Islands, GR No. 188363, 27 February 2013]

3. C and A were engaged in the business

of buying and selling cards, and they had two deposit accounts with E Bank. G ordered a second hand Pajero and a brand new Honda CRV from them who paid them 9 checks payable to different payees, with PV Bank as drawee. P was the branch manager of E Bank, who assisted the transaction. When the checks were deposited, P told C and A that the checks were honored, and the amounts were credited in their accounts. However, the checks were later on returned by the drawee due to alteration of the amounts thereon. When C and A issued a check from their account with E Bank, it was dishonored due to “deposit on hold.” They asked the bank to honor their check, to which the bank refused, and later on closed the account. The intermediary bank, on the other hand, withdrew the amount of the check deposited by C and A which was dishonored due to material alteration. What are the liabilities of the drawee bank, intermediary bank, and C and A in this case?

As for the drawee bank, Section 63 of the Negotiable Instruments Law provides that the acceptor, by accepting the instrument, 2013 & 2014 Q and A|Commercial Law


engages that he will pay it according to the tenor of his acceptance. The acceptor is a drawee who accepts the bill. In Philippine National Bank v. Court of Appeals, the payment of the amount of a check implies not only acceptance but also compliance with the drawee’s obligation. In case the negotiable instrument is altered before acceptance, is the drawee liable for the original or the altered tenor of acceptance? There are two divergent intepretations proffered by legal analysts. The first view is supported by the leading case of National City Bank of Chicago v. Bank of the Republic. In said case, a certain Andrew Manning stole a draft and substituted his name for that of the original payee. He offered it as payment to a jeweler in exchange for certain jewelry. The jeweler deposited the draft to the defendant bank which collectedthe equivalent amount from the drawee. Upon learning of the alteration, the drawee sought to recover from the defendant bank the amount of the draft, as money paid by mistake. The court denied recovery on the ground that the drawee by accepting admitted the existence of the payee and his capacity to endorse. Still, in Wells Fargo Bank & Union Trust Co. v. Bank of Italy, the court echoed the court’s interpretation in National City Bank of Chicago, in this wise: We think the construction placed upon the section by the Illinois court is correct and that it was not the legislative intent that the obligation of the acceptor should be limited to the tenorof the instrument as drawn by the maker, as was the rule at common law,but that it should be enforceable in favor of a holder in due course against the acceptor according to its tenor at the time of its acceptance or certification. The foregoing opinion and the Illinois decision which it follows give effect to the literal words of the Negotiable Instruments Law. As stated in the Illinois case: "The court must take the act as it is written and Starr Weigand 2016

should give to the words their natural and common meaning . . . if the language of the act conflicts with statutes or decisions in force before its enactment the courts should not give the act a strained construction in order to make it harmonize with earlier statutes or decisions." The wording of the act suggests that a change in the common law was intended. A careful reading thereof, independent of any common-law influence, requires that the words "according to the tenor of his acceptance" be construed as referring to the instrument as it was at the time it came into the hands of the acceptor for acceptance, for he accepts no other instrument than the one presented to him — the altered form — and it alone he engages to pay. This conclusion is in harmony with the law of England and the continental countries. It makes for the usefulness and currency of negotiable paper without seriously endangering accepted banking practices, for banking institutions can readily protect themselves against liability on altered instruments either by qualifying their acceptance or certification or by relying on forgery insurance and special paper which will make alterations obvious. All of the arguments advanced against the conclusion herein announced seem highly technical in the face of the practical facts that the drawee bank has authenticated an instrument in a certain form, and that commercial policy favors the protection of anyone who, in due course, changes his position on the faith of that authentication. The second view is that the acceptor/drawee despite the tenor of his acceptance is liable only to the extent of the bill prior to alteration. This view appears to be in consonance with Section 124 of the Negotiable Instruments Law which states that a material alteration avoids an instrument except as against an assenting party and subsequent indorsers, but a holder in due course may enforce payment according to its original tenor. Thus, when the drawee bank pays a materially altered 2013 & 2014 Q and A|Commercial Law


check, it violates the terms of the check, as well as its duty to charge its client’s 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 less, the right to deduct the erroneous payment it made from the drawer’s account which it was expected to treat with utmost fidelity. The drawee, however, still has recourse to recover its loss. It may pass the liability back to the collecting bank which is what the drawee bank exactly did in this case. It debited the account of E Bank for the altered amount of the checks. As for the depositary bank and collecting bank, a depositary/collecting bank where a check is deposited, and which endorses the check upon presentment with the drawee bank, is an endorser. Under Section 66 of the Negotiable Instruments Law, an endorser warrants "that the instrument is genuine and in all respects what it purports to be; that he has good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his endorsement valid and subsisting." It has been repeatedly held that in check transactions, the depositary/collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements. If any of the warranties made by the depositary/collecting bank turns out to be false, then the drawee bank may recover from it up to the amount of the check. The law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness and regularity. The collecting bank being primarily engaged in banking holds itself Starr Weigand 2016

out to the public as the expert and the law holds it to a high standard of conduct.28 As collecting banks, the E Bank and intermediary Bank are both liable for the amount of the materially altered checks. As for C and A, the Bank cannot debit their savings account. A depositary/collecting bank may resist or defend against a claim for breach of warranty if the drawer, the payee, or either the drawee bank or depositary bank was negligent and such negligence substantially contributed to the loss from alteration. In the instant case, no negligence can be attributed to C and A. At the time of the sales transaction, the Bank’s branch manager was present and even offered the Bank’s services for the processing and eventual crediting of the checks. True to the branch manager’s words, the checks were cleared three days later when deposited by petitioners and the entire amount of the checks was credited to their savings account. [Areza v. Express Savings Bank, G.R. No. 176697, September 10, 2014]

4. R obtained a loan from the spouses C,

covered by a promissory note, with R promising to pay spouses C P120,000.00 on December 31, 1995. Failure to pay the said amount on the said date would cause R to pay 5% monthly interest until the entire amount is paid, and in case the matter is referred to a lawyer, R further promised to pay 20% of the amount due as attorney’s fees, which should not be less than P5,000.00, in addition to litigation costs. About three years after the stipulated date of payment, R issued to the spouses C a check as partial payment, drawn against R’s account with PC Bank. Thereafter, the spouses received another check from R duly signed and dated, but with no payee and amount. As per understanding of the parties, 2013 & 2014 Q and A|Commercial Law


the second check was issued in the amount of P133,454.00 with “cash” as payee. When presented for payment, the checks were dishonored. Is demand (presentment for payment) still necessary to make R liable on the checks? No. The subject promissory note is not a negotiable instrument and the provisions of the NIL do not apply to this case. Section 1 of the NIL requires the concurrence of the following elements to be a negotiable instrument: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. On the other hand, Section 184 of the NIL defines what negotiable promissory note is: SECTION 184. Promissory Note, Defined. – A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker’s own order, it is not complete until indorsed by him. The Promissory Note in this case is made out to specific persons, the spouses C, and not to order or to bearer, or to the order of the Spouses C as payees. However, even if R’s Promissory Note is not a negotiable instrument and therefore outside the coverage of Section 70 of the NIL which provides that presentment for payment is not necessary to charge the person liable on the instrument, R is still liable under the terms of the Promissory Note that he issued. Starr Weigand 2016

The Promissory Note is unequivocal about the date when the obligation falls due and becomes demandable—31 December 1995. As of 1 January 1996, R had already incurred in delay when he failed to pay the amount of P120,000.00 due to the Spouses C on 31 December 1995 under the Promissory Note. [Rivera v. Spouses Chua, G.R. No. 184458, January 14, 2015]

5. A and N entered into a business

venture. In the course of their business, A pre-signed several checks to answer for expenses, but these did not indicate any payee, date, nor amount. The checks were entrusted to N with instructions not to fill them out without notice and approval of A. Without the knowledge of A, N went to M to secure a loan in the amount of P200,000.00 on the ground that A needed money for construction of his house, with payment of interest at 5% per month. M agreed, and thereafter, N delivered to M one of the pre-signed blank checks, with the blank portions filled out with the words "Cash" "Two Hundred Thousand Pesos Only", and the amount of "P200,000.00". The upper right portion of the check corresponding to the date was also filled out with the words "May 23, 1994." M was later on told that the loan was not really for A. When M deposited the check, it was dishonored due to “account closed.” When M could not recover from N, he filed a case against A for violation of B.P. 22, while A filed a Complaint for Declaration of Nullity of Loan and Recovery of Damages against N and M. Can A be held liable?

The answer is supplied by the applicable statutory provision found in Section 14 of the Negotiable Instruments Law (NIL) which states: Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in any material 2013 & 2014 Q and A|Commercial Law


particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. This provision applies to an incomplete but delivered instrument. Under this rule, if the maker or drawer delivers a pre-signed blank paper to another person for the purpose of converting it into a negotiable instrument, that person is deemed to have prima facie authority to fill it up. It merely requires that the instrument be in the possession of a person other than the drawer or maker and from such possession, together with the fact that the instrument is wanting in a material particular, the law presumes agency to fill up the blanks. In order however that one who is not a holder in due course can enforce the instrument against a party prior to the instrument’s completion, two requisites must exist: (1) that the blank must be filled strictly in accordance with the authority given; and (2) it must be filled up within a reasonable time. If it was proven that the instrument had not been filled up strictly in accordance with the authority given and within a reasonable time, the maker can set this up as a personal defense and avoid liability. However, if the holder is a holder in due course, there is a conclusive presumption that authority to fill it up had been given and that the same was not in excess of authority.

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In the present case, M is not a holder in due course. The Negotiable Instruments Law (NIL) defines a holder in due course, thus: Sec. 52 — A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. 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." It also provides in Section 52(d) that in order that one may be a holder in due course, it is necessary that at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. 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 the instant case, M knew that A was not a party to the loan. Since he knew that the underlying obligation was not actually for the A, the rule that a possessor of the instrument is prima facie a holder in due course is inapplicable. His inaction and failure to verify, despite knowledge of that the petitioner was not a party to the loan, may be construed as gross negligence amounting to bad faith. Yet, it does not follow that simply because he is not a holder in due course, M is already totally barred from recovery. The NIL does not provide that a holder who is not a holder in due course may not in any case recover on the instrument. 2013 & 2014 Q and A|Commercial Law


The only disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. Among such defenses is the filling up blank not within the authority. And in this case, the check was not completed strictly under the authority of A. While under the law, N had a prima facie authority to complete the check, such prima facie authority does not extend to its use (i.e., subsequent transfer or negotiation) once the check is completed. In other words, only the authority to complete the check is presumed. Further, the law used the term "prima facie" to underscore the fact that the authority which the law accords to a holder is a presumption juris tantumonly; hence, subject to subject to contrary proof. Thus, evidence that there was no authority or that the authority granted has been exceeded may be presented by the maker in order to avoid liability under the instrument. N was only authorized to use the check for business expenses; thus, he exceeded the authority when he used the check to pay the loan he supposedly contracted for the construction of A's house. This is a clear violation of the A's instruction to use the checks for the expenses of their business venture. It cannot therefore be validly concluded that the check was completed strictly in accordance with the authority given by the A. [Patrimonio v. Gutierrez, G.R. No. 187769, June 4, 2014]

Corporation Law 1. What are the current rules on principal office address of corporations and partnerships? Previously, the SEC had allowed corporations and partnerships to indicate in their principal office address only the name of the city, town, or municipality where they conduct business, and considered “Metro Manila” as a principal office address. Thereafter, on 16 February 2006, the SEC issued Memorandum Circular No. 3, series of 2006, directing corporations and partnerships whose articles of incorporation or partnership still indicate a general address as their principal office address, such as a city, town or municipality, or “Metro Manila”, to file, on or before 31 December 2014, and amended articles of incorporation or partnership, in order to specify their complete addresses, such that it has a street number, street name, barangay, city or municipality, and if applicable, the name of the building, the number of the building, and the name or number of the room or unit. To ease the burden imposed on corporations and partnership by SEC Memorandum Circular No. 3, s. 2006, the following guidelines should be observed in the amendment of their articles in case they transfer or move to another location: 1. In the event that a corporation whose principal office address as indicated in its articles is already specific and complete, or fully compliant with the Circulars, has moved or moves to another location within the same city or municipality, the corporation is not required to amend its articles. It must, however, declare its new or current specific address in its General Information Sheet (GIS) within 15 days from transfer of its transfer. For this purpose, “Metro Manila” is no longer considered a city or municipality. 2. A corporation, however, is not precluded from filing an amended articles to

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indicate its new location within the same city or municipality of its former address. 3. In other cases, the corporation must file an amended articles of incorporation to indicate its new location in another city or municipality. 4. In the case of a partnership, considering that it has no obligation to file a GIS, it is required to file an amended articles of partnership every time it transfers to a new location within the same or another city or municipality. 5. Failure of a corporation to do the above will make it liable for violation of Section 16 of the Corporation Code and to the payment of fines imposed by the SEC. [SEC Memorandum Circular No. 16, series of 2013] 2. Can stockholders of a previously dissolved corporation, whose shares are held in trust by another new corporation, be considered as individual subscribers of the latter corporation? Yes. A holder or stockholder includes a person holding stocks in trust, and trustees holding corporate stock are regarded for all legal purposes as stockholders. However, the rights of a beneficial owner will, of course, be recognized and protected in equity in proper cases. In other words, even where legal title to stock is vested in a certain person, equity will treat him as a trustee holding it for the real and beneficial owners, in proper cases. Article 1455 of the Civil Code provides that when any trustee uses trust funds for the purchase of property and causes the conveyance to be made to him or a third person, a trust is established by operation of law in favor of the person to whom the funds belong. Moreover, a trustee must not make investments of funds in their own names but always indicate that they are made in trust capacities. Thus, the trustee merely acts for the stockholders whose stocks are held in trust, with the latter being the owners thereof. thus, they are individual subscribers of shares of Starr Weigand 2016

stock. [SEC OGC September 2013]





3. F jr. filed an action against AT, a tabloid, for publishing an article which was alleged to be libelous. AT, not being incorporated, argued that it cannot be sued since it is not a juridical person. Can AT be sued? AT can be sued for being a corporation by estoppel. AT was a corporation by estoppel as the result of its having represented itself to the reading public as a corporation despite its not being incorporated. The non-incorporation of AT with the Securities and Exchange Commission was of no consequence, for, otherwise, whoever of the public who would suffer any damage from the publication of articles in the pages of its tabloids would be left without recourse. [Macasaet v. Francisco Co, Jr., G.R. No. 156759, June 5, 2013] 4. Can previously incurred indebtedness be used as payment for subscription of shares? Yes. Section 62 of the Corporation Code expressly allows a previously incurred indebtedness to be used as consideration for the issuance of stocks, provided that the valuation of the indebtedness be determined by the board of directors, subject to approval of the SEC, in order to prevent watering of stocks. Watering of stocks is a situation wherein the consideration for subscription is not a fair valuation equal to the par or issue value of the stock. The amount of the indebtedness or liabilities to be settled should be at least equal to the par value of the shares of stock which the corporation intends to issue. However, there must first be an indebtedness incurred in order that a liability may be converted into subscription payment. In this connection, the following requirements are to be submitted to the SEC: 1. Detailed schedule of liabilities being offset, showing all debts and credit to 2013 & 2014 Q and A|Commercial Law

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such liability account, date, nature of account and amount. 2. Deed of assignment executed by the creditor(s] assigning the amount due to him in payment for the unpaid subscription(s]. 3. Company's book of accounts must be kept up to date and be made available for examination by the Commission to determine that the liabilities represent valid and legitimate claims against the company. 4. If the principal office of the corporation is located in the province, a report by an independent certified public accountant must be submitted. [SEC OGC Opinion No. 13-03, 17 April 2013; SEC Opinion, 2 October 1992; SEC Opinion, 24 February 1988] Such payment through previously incurred indebtedness does not violate the stockholders’ preemptive rights, so long the terms are on equal terms as with the owners of the original stocks. A pre-emptive right under Section 39 of the Corporation Code refers to the right of a stockholder of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, and on equal terms with other holders of the original stocks, before subscriptions are received from the general public. Thus, if the payments by other persons or entities are in the form of conversion of the previously incurred indebtedness, while the payments of the other stockholders for their subscriptions shall be in cash, it is still considered to be “on equal terms”. However, even when payment of the debt is in terms required to be made by the corporation in money or cash, a set-off of the debt without going through this unnecessary formality is equivalent to a payment for the stock in cash. [SEC OGC Opinion No. 13-03, 17 April 2013] 5. What shall be done when properties requiring ownership registration, such as land, are used as paid-up capital of a corporation?

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Where payment is made in the form of land, the corporation involved shall submit to the SEC proof of the transfer of the certificate of ownership thereon, in the name of the transferee corporation, within 120 days from the date of approval of the application filed therefor with the SEC. Such period may be extended for justifiable reasons. For properties other than land, the proof of transfer of registration shall be submitted to the SEC within 90 days from approval of the application by the SEC, which period may also be extended for justifiable reasons. [SEC Memorandum Circular No. 14, series of 2013] 6. GSIS acquired a Savings Bank, for which it sought the approval of the SEC to have the name of the bank changed to “GSIS Family Bank.” BPI Family Bank learned of this, and thus, it petitioned the SEC to prevent GSIS from using such name, or any name with the words “Family Bank” in it, claiming that it had exclusive ownership to such name having acquire the same since way back in 1985. The SEC sided with BPI Family Bank. Is the SEC correct? In Philips Export B.V. v. Court of Appeals, the SC has ruled that to fall within the prohibition of the law on the right to the exclusive use of a corporate name, two requisites must be proven, namely: (1)that the complainant corporation acquired a prior right over the use of such corporate name; and (2) the proposed name is either (a) identical or (b) deceptive or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law. In the instant case, BPI appears to have a prior right to the name. Likewise, the second requisite in the Philips Export case is also present because: the proposed name is (a) identical or (b) deceptive or confusingly similar 2013 & 2014 Q and A|Commercial Law

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to that of any existing corporation or to any other name already protected by law. The enforcement of the protection accorded by Section 18 of the Corporation Code to o corporate names is lodged exclusively in the SEC. The jurisdiction of the SEC is not merely confined to the adjudicative functions provided in Section 5 of the SEC Reorganization Act, as amended. By express mandate, the SEC has absolute jurisdiction, supervision and control over all corporations. It is the SEC’s duty to prevent confusion in the use of corporate names not only for the protection of the corporations involved, but more so for the protection of the public. It has authority to deregister at all times, and under all circumstances corporate names which in its estimation are likely to generate confusion. [GSIS Family Bank-Thrift Bank (Formerly Comsavings Bank, Inc.) Vs. BPI Family Bank, G.R. No. 175278. September 23, 2015] 7. A, director and stockholder of Corporation X, filed a complaint for intra-corporate dispute against the other directors and stockholders of the corporation. The complaint arose when A sought to have the real board of directors rectify entries in the Corporation’s General Information Sheet (GIS) and questioned the stockholder’s meeting, and to allow him to inspect the books of the corporation, all of which were not acted upon. Subsequently, the corporation was dissolved by revocation of its franchise. Does the Complaint seek a continuation of business or is it a settlement of corporate affairs? No. Section 122 of the Corporation Code prohibits a dissolved corporation from continuing its business, but allows it to continue with a limited personality in order to settle and close its affairs, including its complete liquidation. Thus: Sec. 122. Corporate liquidation. – Every corporation whose charter Starr Weigand 2016

expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. There is nothing in the prayers in the complaint which shows any intention to continue the corporate business of Corporation X. The Complaint does not seek to enter into contracts, issue new stocks, acquire properties, execute business transactions, etc. Its aim is not to continue the corporate business, but to determine and vindicate an alleged stockholder’s right to the return of his stockholdings and to participate in the election of directors, and a corporation’s right to remove usurpers and strangers from its affairs. There is nothing to show that the resolution of these issues can be said to continue the business of Corporation X. [Vitaliano N. Aguirre II and Fidel N. Aguirre II and Fidel N. Aguirre vs. FQB+, Inc., Nathaniel D. Bocobo, Priscila Bocobo and Antonio De Villa, G.R. No. 170770. January 9, 2013] In relation to Question Number 2, will the dissolution render the complaint moot and academic? No. A corporation’s board of directors is not rendered functus officio by its dissolution. Since Section 122 allows a corporation to continue its existence for a limited purpose, necessarily there must be a board that will continue acting for and on behalf of the dissolved corporation for that purpose. In fact, Section 122 authorizes 2013 & 2014 Q and A|Commercial Law

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the dissolved corporation’s board of directors to conduct its liquidation within three years from its dissolution. Jurisprudence has even recognized the board’s authority to act as trustee for persons in interest beyond the said three-year period. Thus, the determination of which group is the bona fide or rightful board of the dissolved corporation will still provide practical relief to the parties involved. [Ibid.] 8. Can a corporation’s dissolution also bar a stockholder from enforcing or vindicating his property right to his shareholdings? No. A party’s stockholdings in a corporation, whether existing or dissolved, is a property right which he may vindicate against another party who has deprived him thereof. The corporation’s dissolution does not extinguish such property right. Section 145 of the Corporation Code ensures the protection of this right, thus: Sec. 145. Amendment or repeal. – No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof. [Ibid.] 9. B Corp. was dissolved through an amendment of its articles of incorporation shortening and terminating its corporate life. It was issued a SEC certificate of dissolution, and during such time, it had deposit accounts with BPI which were assigned to E Insurance to serve as security for surety bonds issued by the latter to guaranty monetary claims of a complainant in the labor Starr Weigand 2016

case filed against B Corp. with the NLRC. NLRC ordered the release and cancellation of the bonds because the case was terminated. The certificates of deposit covering the deposits with BPI were surrendered by E Insurance to the former director and corporate secretary of B Corp. Who can act as trustees of the corporation even after the expiration of the 3 year windingup period for its final liquidation? The counsel of B Corp. during the labor case before the NLRC can be considered as a trustee of the corporation as to matters related to the labor case. Likewise, the former director and corporate secretary can also act as trustee-inliquidation of B Corp. A corporation can go beyond the three-year period in Section 122 of the Corporation Code to complete its liquidation and to fully dispose of the remaining corporate assets. If the threeyear period expires without a trustee being appointed, the board of directors or trustees itself, may be permitted to continue as trustees by legal implication to complete corporate liquidation. Likewise, counsel who prosecuted and defended the corporation in a labor case, when there was no trustee appointed, and who in fact in behalf of the corporation may be considered as a trustee of the corporation at least with respect to the matter in litigation only. As to which of them is the proper trustee, the SEC cannot determine that. Section 122 of the Corporation Code governing corporate liquidation does not require SEC approval for the distribution of the corporate assets of a dissolved corporation. The liquidation process is an internal concern of the corporation and falls within the power of the directors and stockholders to determine. [SEC OGC Opinion No. 14-02, 21 February 2014] 10. Bank A granted loans to Corporation X, which were secured by promissory notes and mortgages over properties owned by another corporation. The transactions were entered into by Corporation X’s president and 2013 & 2014 Q and A|Commercial Law

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General Manager. Since Corporation X defaulted in paying its loans, then the mortgage was foreclosed and eventually sold. Because there was still remaining amount to be paid, an action was filed against Corporation X, its President, and the latter’s wife, who signed a surety agreement in favor of the bank, which the lower court had declared as falsified. Can the wife of the President be held liable? No. Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation.24 Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.25 This is consistent with the provisions of the Corporation Code of the Philippines, which states: Sec. 31. Liability of directors, trustees or officers. – Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. Starr Weigand 2016

Solidary liability will then attach to the directors, officers or employees of the corporation in certain circumstances, such as: a. When directors and trustees or, in appropriate cases, the officers of a corporation: (1) vote for or assent to patently unlawful acts of the corporation; (2) act in bad faith or with gross negligence in directing the corporate affairs; and (3) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons; b. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto; c. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; or d. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action. Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the following requisites must concur: (1) the complainant must allege 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) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith. In this case, it was not proven that the wife of the president of Corporation X committed an act of an officer of the said corporation that would permit the piercing of the corporate veil. A reading of the complaint reveals that the Bank did not demand that she be held liable for the obligations of Hammer because she was a corporate officer who committed bad faith or gross negligence in the performance of her 2013 & 2014 Q and A|Commercial Law

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duties such that the lifting of the corporate mask would be merited. What the complaint simply stated is that she, together with her errant husband acted as surety, as evidenced by her signature on the Surety Agreement which was later found by the RTC to have been forged. 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. Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application. [Heirs of Fe Tan Uy (Represented by her heir, Manling Uy Lim) vs. International Exchange Bank/Goldkey Development Corporation vs. International Exchange Bank, G.R. No. 166282/G.R. No. 166283, February 13, 2013.] In relation to Question Number 5, can the corporation, whose property was mortgaged to secure the loans of Corporation X, be held liable for the said loans? Note that the two corporations are owned by the same family, sharing the same office space, with their assets being comingled. The President of Corporation X is also the Chief Operating Officer of the other corporation involved. Yes. Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and the same. Starr Weigand 2016

While the conditions for the disregard of the juridical entity may vary, the following are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, as laid down in Concept Builders, Inc. v NLRC: (1) Stock ownership by one or common ownership of both corporations; (2) Identity of directors and officers; (3) The manner of keeping corporate books and records, and (4) Methods of conducting the business. In this case, both corporations are family corporations, who share the same office, with the same set of officers, and their assets are comingled. Likewise, when the President of Corporation X went missing, the other corporation ceased its operations. Based on these, it is apparent that the said corporation was merely an adjunct of Corporation X and, as such, the legal fiction that it has a separate personality from that of Hammer should be brushed aside as they are, undeniably, one and the same. [Ibid.] 11. Spouses F entered into a contract to sell with G Corp, covering a parcel of land, in G Corp’s subdivision. Spouses F full paid the purchase price, but G Corp. failed to execute the deed of sale and deliver the title to the spouses. Thus, the spouses filed an action for specific performance or rescission against G Corp and its Board of Directors. Can the Board of Directors be held liable? No. There is no basis to hold the members of the board solidarily liable with G Corp for the payment of damages in favor of Sps. F since it was not shown that they acted maliciously or dealt with the latter in bad faith. Settled 1s the rule that in the absence of malice and bad faith, as in this case, officers of the corporation cannot be made personally liable for liabilities of the corporation which, by legal fiction, has a personality separate and distinct from its officers, stockholders, and members. [Gotesco 2013 & 2014 Q and A|Commercial Law

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Properties, Inc. v. SpousesFajardo, G.R. No. 201167, 27 February 2013] 12. DBP and PNB foreclosed mortgages on the properties of MMIC, a corporation. As a result, they acquired substantially all the assets of NMIC and resumed its business operations. NMIC engaged the services of H Corporation for which it paid the latter. But, NMIC still had an unpaid balance of around 8 million pesos. Can DBP and PNB be held liable for such amount? No. A corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected. As a consequence of its status as a distinct legal entity and as a result of a conscious policy decision to promote capital formation, a corporation incurs its own liabilities and is legally responsible for payment of its obligations. In other words, by virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder. This protection from liability for shareholders is the principle of limited liability. Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons. However, the rule is that a court should be careful in assessing the milieu where the doctrine of the corporate veil may be applied. Otherwise an injustice, although unintended, may result from its erroneous Starr Weigand 2016

application. Thus, cutting through the corporate cover requires an approach characterized by due care and caution: Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Sarona v. National Labor Relations Commission has defined the scope of application of the doctrine of piercing the corporate veil: The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. In this connection, case law lays down a threepronged test to determine the application of the alter ego theory, which is also known as the instrumentality theory, namely: (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant to commit fraud or wrong, 2013 & 2014 Q and A|Commercial Law

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to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and (3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of. The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the control and domination of the parent. It examines the parent corporation’s relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent corporation such that its separate existence as a distinct corporate entity will be ignored. It seeks to establish whether the subsidiary corporation has no autonomy and the parent corporation, though acting through the subsidiary in form and appearance, "is operating the business directly for itself." The second prong is the "fraud" test. This test requires that the parent corporation’s conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing of "an element of injustice or fundamental unfairness." The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendant’s exercise of control and Starr Weigand 2016

improper use of the corporate form and, thereby, suffer damages. To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil. In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation. With respect to the control element, it refers not to paper or formal control by majority or even complete stock control but actual control which amounts to "such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal." In addition, the control must be shown to have been exercised at the time the acts complained of took place. While ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may serve as indicia of control, by themselves and without more, however, these circumstances are insufficient to establish an alter ego relationship or connection between DBP and PNB on the one hand and NMIC on the other hand, that will justify the puncturing of the latter’s corporate cover. "Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality." Likewise, the "existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations." [Phil. National Bank vs. Hydro 2013 & 2014 Q and A|Commercial Law

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Resources Contractors Corp., .G.R. Nos. 167530, 167561, 16760311. March 13, 2013]

Yes. 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 transferee has consequently inherited the liabilities of M Corp. because they acquired all the assets of the latter corporation. The continuity of M Corp.’s land developments is now in the hands of the Y Corp., with all its assets and liabilities. There is absolutely no certainty that Y can still claim its refund from M Corp. with the latter losing all its assets. 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 Y to recover his money would be to assert his claim against the Y Corp. as transferees of the assets. Jurisprudence has held that in a business-enterprise transfer, the transferee is liable for the debts and liabilities of his transferor arising from the business enterprise conveyed. Many of the application of the business-enterprise transfer have been related by the Court to the application of the piercing doctrine. Fraud is not an essential element for the application of the businessenterprise transfer.

corporation assumes the debts and liabilities of the transferor corporation because it is merely a continuation of the latter’s business. A cursory reading of the exception shows that it does not require the existence of fraud against the creditors before it takes full force and effect. Section 40 of the Corporation Code refers to the sale, lease, exchange or disposition of all or substantially all of the corporation's assets, including its goodwill. The sale under this provision does not contemplate an ordinary sale of all corporate assets; the transfer must be of such degree that the transferor corporation is rendered incapable of continuing its business or its corporate purpose. Section 40 suitably reflects the business-enterprise transfer under the exception of the Nell Doctrine because the purchasing or transferee corporation necessarily continued the business of the selling or transferor corporation. Given that the transferee corporation acquired not only the assets but also the business of the transferor corporation, then the liabilities of the latter are inevitably assigned to the former. It must be clarified, however, that not every transfer of the entire corporate assets would qualify under Section 40. It does not apply (1) if the sale of the entire property and assets is necessary in the usual and regular course of business of corporation, or (2) if the proceeds of the sale or other disposition of such property and assets will be appropriated for the conduct of its remaining business. Thus, the litmus test to determine the applicability of Section 40 would be the capacity of the corporation to continue its business after the sale of all or substantially all its assets. [Y-I Leisure Philippines, Inc., Yats International Ltd. and Y-I Clubs and Resorts, Inc. Vs. Yame Yu, G.R. No. 207161. September 8, 2015]

The Nell Doctrine states the general rule that the transfer of all the assets of a corporation to another shall not render the latter liable to the liabilities of the transferor. If any of the abovecited exceptions are present, then the transferee corporation shall assume the liabilities of the transferor. The exception of the Nell doctrine, which finds its legal basis under Section 40, provides that the transferee

14. M filed a complaint against the Cuencas for collection of sum of money, for which the court issued a writ of preliminary attachment, with M posting a bond issued by S Insurance. The properties of A C Inc. were levied upon in the execution of the writ. The Cuencas sought to quash the writ alleging that (1) the action

13. Y bought several country club shares from M Corp. but the latter failed to develop the supposed project. Y then demanded return of his payment for the shares, but M Corp. could no longer do so since it had transferred all its assets to Y Corp. Can Y Corp. now be held liable by Y?

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2013 & 2014 Q and A|Commercial Law

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involved intra-corporate matters that were within the original and exclusive jurisdiction of the Securities and Exchange Commission (SEC); and (2) there was another action pending in the SEC as well as a criminal complaint in the Office of the City Prosecutor of Parañaque City. This was denied by the CA. Thus, the Cuencas filed an action for damages against the S Insurance as a result of the wrongful attachment. Can the action prosper? No. The complaint of the Cuencas lacks a cause of action. It is true that the Cuencas could bring in behalf of AC Inc. a proper action to recover damages resulting from the attachment, however, such action would be one directly brought in the name of the corporation. In the instant case, the Cuencas presented the claim in their own names. The Cuencas were only stockholders of AC Inc., which had a personality distinct and separate from that of any or all of them. The damages occasioned to the properties by the levy on attachment, wrongful or not, prejudiced AC Inc., not them. As such, only AC Inc. had the right under the substantive law to claim and recover such damages. This right could not also be asserted by the Cuencas unless they did so in the name of the corporation itself. But that did not happen herein, because AC Inc. was not even joined in the action either as an original party or as an intervenor. The Cuencas were clearly not vested with any direct interest in the personal properties coming under the levy on attachment by virtue alone of their being stockholders in AC Inc. Their stockholdings represented only their proportionate or aliquot interest in the properties of the corporation, but did not vest in them any legal right or title to any specific properties of the corporation. Without doubt, AC Inc. remained the owner as a distinct legal person. [Stronghold Insurance v. Cuenca, G.R. No. 173297, March 6, 2013] 15. SMP Corp paid local business taxes to the city of Manila, but they wrote a letter to the latter claiming a refund Starr Weigand 2016

of the amount paid on the ground of double taxation. The letter was not acted upon, thus SMP filed and action in the RTC for refund of taxes. The verification and certification of forum shopping attached to the petition filed by SMP was signed by B, but there was no secretary’s certificate to show her authority to file the action on behalf of SMP. Can B file the case on behalf of SMP? No. The power of a corporation to sue and be sued is lodged in the board of directors, which exercises its corporate powers. It necessarily follows that “an individual corporate officer cannot solely exercise any corporate power pertaining to the corporation without authority from the board of directors.” Thus, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors. Consequently, a verification signed without an authority from the board of directors is defective. However, the act of B in filing the action may be ratified by a subsequent board resolution passed by the corporation. [Swedish Match Philippines v. Treasurer of the City of Manila, G.R. No. 181277, 3 July 2013] 16. H Corp. filed a petition for certiorari against the Esguerras, but they did not secure and/or attach a certified true copy of a board resolution authorizing any of its officers to file said petition, but it attached a secretary’s certificate. Should the case be dismissed? No. The general rule is that a corporation can only exercise its powers and transact its business through its board of directors and through its officers and agents when authorized by a board resolution or its bylaws. The power of a corporation to sue and be sued is exercised by the board of directors. The physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate bylaws 2013 & 2014 Q and A|Commercial Law

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or by a specific act of the board. Absent the said board resolution, a petition may not be given due course. H Corp attached all the necessary documents for the filing of a petition for certiorari before the court. While the board resolution may not have been attached, H Corp complied just the same when it attached the Secretary’s Certificate, thus proving that its representative had the authority from the board of directors to appoint the counsel to represent them in the case. [Esguerra v. Holcim Philippines, Inc., G.R. No. 182571, 2 September 2013 17. SMBI is a family owned and run corporation. One of the family members agreed to loan money to SMBI and other corporations owned by the same family to settle the corporate obligations. A check was thus issued in the name of the family members. SMBI thereafter increased its capital stock. Thereafter, a series of events transpired, which lead one of the stockholders to file a derivative suit, claiming he has been illegally excluded from management and participation in the business of SMBI and that some of the family members refuse to settle their obligations with the corporation. Is the complaint a derivative suit? No. A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce corporate rights against the corporation’s directors, officers or other insiders. Under Sections 23 and 36 of the Corporation Code, the directors or officers, as provided under the by-laws, have the right to decide whether or not a corporation should sue. Since these directors or officers will never be willing to sue themselves, or impugn their wrongful or fraudulent decisions, stockholders are permitted by law to bring an action in the name of the corporation to hold these directors and officers accountable. In derivative suits, the real party in interest is the corporation, while the stockholder is a mere nominal party.

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The Court, in Yu v. Yukayguan, explained: The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to make suitable measures for its protection. The basis of a stockholder’s suit is always one in equity. However, it cannot prosper without first complying with the legal requisites for its institution. Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative suits: (1) The person filing the suit must be a stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed; (2) He must have exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit is not a nuisance or harassment suit. Applying the foregoing, the Complaint is not a derivative suit. The Complaint failed to show how the acts of some of the family members 2013 & 2014 Q and A|Commercial Law

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resulted in any detriment to SMBI. The loan was not a corporate obligation, but a personal debt. The check was issued to specific persons and not SMBI. The proceeds of the loan were used for payment of the obligations of the other corporations owned by the family as well as the purchase of real properties for the brothers. SMBI was never named as a co-debtor or guarantor of the loan. Both loan instruments were executed by two of the family members in their personal capacity, and not in their capacity as directors or officers of SMBI. Thus, SMBI is under no legal obligation to satisfy the obligation. The fact that the family members attempted to constitute a mortgage over "their" share in a corporate asset cannot affect SMBI. The Civil Code provides that in order for a mortgage to be valid, the mortgagor must be the "absolute owner of the thing x x x mortgaged." Corporate assets may be mortgaged by authorized directors or officers on behalf of the corporation as owner, "as the transaction of the lawful business of the corporation may reasonably and necessarily require." However, the wording of the Mortgage reveals that it was signed by two of the family members in their personal capacity as the "owners" of a proindiviso share in SMBI’s land and not on behalf of SMBI. [Juanito Ang, for and in behalf of Sunrise Marketing (Bacolod), Inc. v. Sps. Roberto and Rachel Ang, G.R. No. 201675, June 19, 2013] 18. FEGDI is a stock corporation involved in developing golf courses, while FELI is engaged in real estate development. FEGDI obtained shares of stock in one of FELI’s projects as a result of its financing support and construction efforts. It sold some of its shares to RSACC, which the latter later sold to VST. However, the shares remained under the name of FEGDI. Can VST be considered as owner of the shares of stock? No. In a sale of shares of stock, physical delivery of a stock certificate is one of the essential requisites for the transfer of ownership of the Starr Weigand 2016

stocks purchased. Here, FEGDI clearly failed to deliver the stock certificates, representing the shares of stock purchased by Vertex, within a reasonable time from the point the shares should have been delivered. This was a substantial breach of their contract that entitles VST the right to rescind the sale under Article 1191 of the Civil Code. It is not entirely correct to say that a sale had already been consummated as VST already enjoyed the rights a shareholder can exercise. The enjoyment of these rights cannot suffice where the law, by its express terms, requires a specific form to transfer ownership. [Fil-Estate Gold and Development, Inc., et al. v. Vertex Sales and Trading, Inc., G.R. No. 202079, June 10, 2013] 19. AP is a domestic corporation with G as its President, and C, the latter’s wife, as its General Manager. AT is also a Domestic corporation, with T as its President and U as its treasurer. AT purchased notebooks from AP on credit. Loans were also obtained by AT from AP upon the representation of T and U. To pay for its purchases, AT gave AP 82 postdated checks signed T and U. the check were dishonored for having been drawn against insufficient funds. A complaint for collection of sum of money was filed AT, U, T, and its other officers. Can AT be held liable? Yes. The acts of T and U clearly bound the corporation, and thus, it could be made liable therefor under the doctrine of apparent authority. The doctrine of apparent authority provides that a corporation will be estopped from denying the agent’s authority if it knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, and it holds him out to the public as possessing the power to do those acts. The doctrine of apparent authority does not apply if the principal did not commit any acts or conduct which a third party knew and relied upon in good faith as a result of the exercise of reasonable prudence. Moreover, the agent’s

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acts or conduct must have produced a change of position to the third party’s detriment. Under Section 23 of the Corporation Code, the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of law. However, just as a natural person who may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business, viz.: A corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that [the] authority to do so has been conferred upon him, and this includes powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused person dealing with the officer or agent to believe that it has conferred. [A]pparent authority is derived not merely from practice. Its existence 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, within or beyond the scope of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation.

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In People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, the Court ruled that the doctrine of apparent authority is applied when the petitioner, through its president Antonio Punsalan Jr., entered into the First Contract without first securing board approval. Despite such lack of board approval, petitioner did not object to or repudiate said contract, thus “clothing” its president with the power to bind the corporation. “Inasmuch as a corporate president is often given general supervision and control over corporate operations, the strict rule that said officer has no inherent power to act for the corporation is slowly giving way to the realization that such officer has certain limited powers in the transaction of the usual and ordinary business of the corporation.” In the absence of a charter or bylaw provision to the contrary, the president is presumed to have the authority to act within the domain of the general objectives of its business and within the scope of his or her usual duties. [Advance Paper Corporation and George Haw, in his capacity as President of Advance Paper Corporation v. Arma Traders Corporation, Manuel Ting, et al., G.R. No. 176897, December 11, 2013] 20. P, the OIC of an Aircraft Hangar executed a Memorandum of Agreement with Capt. A, the president of a company, whereby for a period of 4 years the hangar space was allowed to be used by the company exclusively for the company helicopter/aircraft. The said hangar space was previously leased to LA Corp. which assigned the same to P. An issue arose when P insisted that Capt. A was using the hangar space for purposes other than for the company aircraft/helicopter, resulting in the company filing a complaint in court against P. P insists that the case filed by the company should be dismissed for failure of the company to satisfy the essential requisites of being a party to an 2013 & 2014 Q and A|Commercial Law

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action, i.e., legal personality, legal capacity to sue or be sued, and real interest in the subject matter of the action. Decide. Section 21 of the Corporation Code explicitly provides that one who assumes an obligation to an ostensible corporation, as such, cannot resist performance thereof on the ground that there was in fact no corporation. Clearly, P is bound by his obligation under the MOA not only on estoppel but by express provision of law. [Paz v. New International Environmental Universality, G.R. No. 203993, April 20, 2015] 21. L filed a complaint for recovery of ownership of land against R, alleging that the latter encroached on a quarter of her property by arbitrarily extending his concrete fence beyond the correct limits. R alleged that this was the fault of OLFI, a corporation, after the latter trimmed his property for the construction of the subdivision road. He thus filed a third party complaint against OLFI. Acting on the third party complaint, the court ordered OLFI to reimburse R, and issued a writ of execution. The sheriff then proceeded to garnish the accounts of the general manager of OLFI in UCPB. Can the funds of the general manager be garnished to satisfy the judgment against OLFI? No. In order to hold the general manager personally liable alone for the debts of the corporation and thus pierce the veil of corporate fiction, it is required that the bad faith of the officer must first be established clearly and convincingly. However, there is nothing to indicate any wrongdoing of the general manager. Necessarily, it would be unjust to hold the latter personally liable. Any piercing of the corporate veil has to be done with caution. There is no evidence that would prove OLFI's status as a dummy corporation. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent Starr Weigand 2016

that injustice, fraud, or crime was committed against another, in disregard of rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application. [Roxas v. Our Lady’s Foundation, Inc., G.R. No. 182378, 6 March 2013] 22. P granted loans to NSI. On the part of NSI, the loan agreement between the two parties was signed by its president, N. Payments were made by N, however, NSI still defaulted on its loan obligation to P, for which the latter filed a collection suit against N and NSI. Can N be held jointly and severally liable for the loan obligation of NSI? No. The rule is settled that a corporation is vested by law with a personality separate and distinct from the persons composing it. Following this principle, a stockholder, generally, is not answerable for the acts or liabilities of the corporation, and vice versa. The obligations incurred by the corporate officers, or other persons acting as corporate agents, are the direct accountabilities of the corporation they represent, and not theirs. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation9 and while there may be instances where solidary liabilities may arise, these circumstances are exceptional. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks of the corporation is not, by itself, a sufficient ground for disregarding the separate corporate personality. Other than mere ownership of capital stocks, circumstances showing that the corporation is being used to commit fraud or proof of existence of absolute control over the corporation have to be proven. In short, before the corporate fiction can be disregarded, alterego elements must first be sufficiently established. The mere fact that it was N who, in 2013 & 2014 Q and A|Commercial Law

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behalf of the corporation, signed the loan agreement is not sufficient to prove that he exercised control over the corporation’s finances. Neither the absence of a board resolution authorizing him to contract the loan nor NSI’s failure to object thereto supports this conclusion. These may be indicators that, among others, may point the proof required to justify the piercing the veil of corporate fiction, but by themselves, they do not rise to the level of proof required to support the desired conclusion. It should be noted in this regard that while N was the signatory of the loan and the money was delivered to him, the proceeds of the loan were unquestionably intended for NSI’s proposed business plan. There is no sufficient evidence in the instant case to justify a piercing, in the absence of proof that the business plan was a fraudulent scheme geared to secure funds from the respondent for the petitioners’ undisclosed goals. [Saverio v. Puyat, G.R. No. 186433, November 27, 2013] 23. PTA is a GOCC which administers tourism zones. It allowed PTC Cooperative to operate a restaurant business in one of its main buildings, but in 1993, its CALABARZON area manager notified the latter to cease its operations as a result of the rehabilitation of its tourism complex. Thus, PTC Cooperative filed an action in court to stop PTA from evicting and preventing it from carrying out the restaurant business in the main building of PTA. Can the area manager be held liable? No. As a general rule the officer cannot be held personally liable with the corporation, whether civilly or otherwise, for the consequences of his acts, if acted for and in behalf of the corporation, within the scope of his authority and in good faith. [Rodolfo Laborte, et al. v. Pagsanjan Tourism Consumers’ Cooperative, et al., G.R. No. 183860, January 15, 2014] 24. C was a salesman of A, engaged in the selling of broadcasting equipment. When A created B Corp. C was made Starr Weigand 2016

an Assistant Vice President (AVP) for sales, while AA was then appointed as VP for sales. C accused AA of several irregularities which were made the subject of a memo sent to A. Allegedly, C was asked by A to tender his resignation, to which he refused. He received a memo, signed by A, charging him with serious misconduct and willful breach of trust. He was later on barred from entering company premises, and allegedly suspended. Thus, he filed a complaint for illegal dismissal before the NLRC against B Corp. and A. Does the labor arbiter of the NLRC have jurisdiction? Yes. C, although an officer of B Corp. for being its AVP for Sales, was not a "corporate officer" as the term is defined by law. ‘Corporate officers’ in the context of Presidential Decree No. 902-A are those officers of the corporation who are given that character by the Corporation Code or by the corporation’s bylaws. There are three specific officers whom a corporation must have under Section 25 of the Corporation Code. These are the president, secretary and the treasurer. The number of officers is not limited to these three. A corporation may have such other officers as may be provided for by its by-laws like, but not limited to, the vice-president, cashier, auditor or general manager. The number of corporate officers is thus limited by law and by the corporation’s by-laws." It has been held that an "office" is created by the charter of the corporation and the officer is elected by the directors and stockholders. On the other hand, an "employee" usually occupies no office and generally is employed not by action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. As may be deduced from the foregoing, there are two circumstances which must concur in order for an individual to be considered a corporate officer, as against an ordinary employee or officer, namely: (1) the creation of 2013 & 2014 Q and A|Commercial Law

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the position is under the corporation’s charter or by-laws; and (2) the election of the officer is by the directors or stockholders. It is only when the officer claiming to have been illegally dismissed is classified as such corporate officer that the issue is deemed an intra-corporate dispute which falls within the jurisdiction of the trial courts. Under B Corp.’s By-laws only provide the following as corporate officers: the President, Vice-President, Treasurer and Secretary. Although a blanket authority provides for the Board’s appointment of such other officers as it may deem necessary and proper, the respondents failed to sufficiently establish that the position of AVP for Sales was created by virtue of an act of B Corp’s board, and that C was specifically elected or appointed to such position by the directors. No board resolutions to establish such facts form part of the case records. Also, an enabling clause in a corporation’s bylaws empowering its board of directors to create additional officers, even with the subsequent passage of a board resolution to that effect, cannot make such position a corporate office. The board of directors has no power to create other corporate offices without first amending the corporate by-laws so as to include therein the newly created corporate office. "To allow the creation of a corporate officer position by a simple inclusion in the corporate by-laws of an enabling clause empowering the board of directors to do so can result in the circumvention of that constitutionally well-protected right [of every employee to security of tenure]." Likewise, the mere fact that C was a stockholder of B Corp. at the time of the case’s filing did not necessarily make the action an intra- corporate controversy. "Not all conflicts between the stockholders and the corporation are classified as intra-corporate. There are other facts to consider in determining whether the dispute involves corporate matters as to consider them as intra-corporate controversies." In determining the existence of an intra-corporate Starr Weigand 2016

dispute, the status or relationship of the parties and the nature of the question that is the subject of the controversy must be taken into account. An intra-corporate controversy, which falls within the jurisdiction of regular courts, has been regarded in its broad sense to pertain to disputes that involve any of the following relationships: (1) between the corporation, partnership or association and the public; (2) between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned; (3) between the corporation, partnership or association and its stockholders, partners, members or officers; and (4) among the stockholders, partners or associates, themselves. Settled jurisprudence, however, qualifies that when the dispute involves a charge of illegal dismissal, the action may fall under the jurisdiction of the LAs upon whose jurisdiction, as a rule, falls termination disputes and claims for damages arising from employer-employee relations as provided in Article 217 of the Labor Code. Considering that the pending dispute particularly relates to C’s rights and obligations as a regular officer of B Corp., instead of as a stockholder of the corporation, the controversy cannot be deemed intra-corporate. This is consistent with the "controversy test", which provides that the incidents of that relationship must also be considered for the purpose of ascertaining whether the controversy itself is intra-corporate. The controversy must not only be rooted in the existence of an intra-corporate relationship, but must as well pertain to the enforcement of the parties’ correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory rules of the corporation. If the relationship and its incidents are merely incidental to the controversy or if there will still be conflict even if the relationship does not exist, then no intracorporate controversy exists. [Raul C. Cosare v.

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Broadcom Asia, Inc., et al., G.R. No. 201298, February 5, 2014] 25. The janitors and their supervisors of the maintenance department of PCCr, a non-stock educational institution, were dismissed from employment as a result of the termination of the contract PCCr had with their agency. The contract was terminated as a result of the discovery of the revocation of the certificate of incorporation of the agency. The said dismissed employees executed quitclaims and waivers in favor of the agency, which was already dissolved. Can the janitors and supervisors hold its agency liable even if it had already been dissolved? Are the quitclaims and waivers valid even if executed 6 years after dissolution? Yes. The revocation does not result in the termination of its liabilities. Section 122 of the Corporation Code provides for a three-year winding up period for a corporation whose charter is annulled by forfeiture or otherwise to continue as a body corporate for the purpose, among others, of settling and closing its affairs. Even if said documents six (6) years after the dissolution, the same are still valid and binding upon the parties and the dissolution will not terminate the liabilities incurred by the dissolved corporation pursuant to Sections 122 and 145 of the Corporation Code. A corporation is allowed to settle and close its affairs even after the winding up period of three (3) years. Section 145 of the Corporation Code clearly provides that "no right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation." Even if no trustee is appointed or designated during the three-year period of the liquidation of the corporation, it has been held that the Starr Weigand 2016

board of directors may be permitted to complete the corporate liquidation by continuing as "trustees" by legal implication. [Vigilla v. College of Criminology, G.R. No. 200094, June 10, 2013] 26. What can be done in case the board refuses to recognize the legitimacy of newly elected board members? An outgoing President or the Board which refuses to recognize the legitimacy of those newly-elected and who continue to exercise their functions may be the subjects of an intracorporate case filed with the regular courts. [SEC OGC Opinion No. 14-09, 2 June 2014] 27. What constitutes a quorum for purposes of election of directors or trustees of a corporation? Section 24 of the Corporation requires the presence in person or by proxy of “the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote.” This section governs since it is the provision which is specifically applicable to quorum of election of directors or trustees. The phrase “entitled to vote” should be interpreted to apply to both stock and nonstock corporations. This does not include shares under litigation. However, not all shares under litigation cannot vote. For example, stock owned by the estate of a decedent may be voted by the estate’s executor or administrator. If there is no executor or administrator, then the shares of a decedent cannot be voted. Also, if there is a dispute as to who owns the shares, and thus, who has the right to vote such shares, then the general rule is that “the registered owner of the shares of the corporation exercises the right and the privilege of voting.” [SEC-OGC Opinion No. 13-11, 20 November 2013] 28. Does cumulative voting apply to election of trustees of a non-stock condominium corporation? The general rule for the election of trustees of a non-stock corporation is that members may 2013 & 2014 Q and A|Commercial Law

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cast as many votes as there are trustees to be elected but may cast only one vote per candidate. By way of exception, a non-stock corporation may adopt other modes of casting votes, including, but not limited to, cumulative voting, if the same is authorized in its articles or by-laws, or the master deed or the declaration of restrictions (in case of a non-stock condominium corporation). otherwise, the general rule that members may not cast more than one vote for any candidate will apply. [SEC OGC Opinion No. 14-10, 2 June 2014] 29. What is cumulative voting? Cumulative voting is a mode of casting votes during the elections of directors in a stock corporation. this is in line with Section 24 of the Corporation Code, which provides that every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected. Under this provision, there are two methods of cumulative voting: Cumulative voting for one candidate, and cumulative voting by distribution. Under the first method, a stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected, multiplied by the number of his shares shall equal. For example, supposing a stockholder owns 200 shares and Starr Weigand 2016

there are five directors to be elected, he is entitled to 1,000 votes, all of which he may cast in favor of one candidate. Under the second method, a stockholder may cumulate his shares by multiplying also the number of his shares by the number of directors to be elected, and distribute the same among as many candidates as he shall see fit. For example, a stockholder with 100 shares is entitled to 500 votes if there are five directors to be elected. He may cast his votes in any combination desired by him, provided that the total number of votes cast by him does not exceed 500, which is the number of shares owned by him multiplied by the total number of directors to be elected. [SEC OGC Opinion No. 14-10, 2 June 2014] 30. Can a hold-over director appoint another director to fill a vacancy caused by the resignation of another hold-over director? No. a vacancy caused by resignation of a holdover director or a trustee cannot be filled by the vote of the directors or trustees, but rather, by the vote of the stockholders or members in a regular or special meeting called for the purpose, as provided by Section 29 of the Corporation Code. Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by majority of the remaining directors or trustees, if still constituting a quorum, otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in officer. Thus, in a situation where directors or trustees are acting in a hold-over capacity, there are actually vacancies caused by expiration of terms, and the resignation of a hold-over director or trustee cannot change the nature of the vacancy. [Valle Verde Country Club v. Africa, GR No. 151696, September 4, 2009; SEC-OGC Opinion No. 13-11, 20 November 2013]

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31. Is it required that, in order to be elected as a member of the board of trustees of a non-stock corporation, majority of the votes of the members be obtained? No. While the Corporation Code requires the presence of at least majority of the members of the non-stock corporation for the election of its Board, it does not require such number of votes for one to be declared elected. under the Code, the candidates receiving the highest number of votes shall be declared elected. Thus, for a candidate to be elected as trustee, such candidate must be among the group of candidates who received the highest number of votes. In case the number of candidates does not exceed the number of seats in the board, said candidates, provided they received votes, can be said to have received the highest number of votes, as the law requires only plurality of the votes to cast at the election. [SEC OGC Opinion No. 14-09, 2 June 2014] 32. Can there be an election of members of the board which is less than the number of director/trustees as fixed in the articles of incorporation? Yes. An election of less number of directors than the number which the meeting was called to elect is valid as to those elected. Thus, the stockholders or members may opt to elect a number of directors/trustees less than the number of directors/trustees as fixed in the articles of incorporation. Such a situation would merely give rise to vacancy in the board, which may be later filled up. The power of the board is not suspended by vacancies in the board unless the number is reduced below a quorum. This is so since the board can only transact business if it reaches a quorum, which is at least a majority of the number of trustees as fixed in the articles of incorporation or by-laws, unless the Articles, by-laws, or Master Deed, in the case of a condominium corporation provide for a greater number. For decisions of the board to be valid as a corporate act, at least a majority of such majority or quorum has to concur. However, for the election of officers, the vote of the majority Starr Weigand 2016

of all the members of the board as fixed in the articles of incorporation, rather than majority of the quorum, shall be required. [SEC OGC Opinion No. 14-09, 2 June 2014] 33. Can notices of stockholders’ or directors’ meetings be sent through electronic mail (e-mail)? Are the resolutions passed during such meetings valid? Yes. Generally and as a default rule, written notice of the meeting, sent through regular post mail, must be given to stockholders/directors/ trustees in relation to the holding of meetings within the periods provided in the Corporation Code. However, Section 47(1), (2), and (6) allows the corporation to provide a different mode of notice in the by-laws. Thus, since the Corporation Code requires notice to be sent “in writing”, an e-mail notice may be included as a mode of notice in the by-laws of a corporation, since an e-mail is considered “in writing”. In such a case, the by-laws must, likewise, provide for mechanics of such sending of notices through e-mail, including indication, recording, changing, and recognition of e-mail addresses of each stockholder/director. However, it must be stressed that absent such specific provisions on notice requirements in a corporation’s current and standing by-laws, the general or default rule – written notice sent through regular postal mail – applies. Since such notice is allowed, provided it is in accordance with a corporation’s by-laws, then resolutions passed during such meetings are also valid. [SEC OGC Opinion No. 13-10, 25 October 2013] 34. APO’s by-laws, a non-stock non-profit corporation, provide that its members are those that are issued certificates of ownership, with only one certificate being issued for one member. The same by-laws provide that not more than 500 certificates of ownership will be issued. However, its articles of incorporation provide that members enjoy membership rights, upon payment of a membership fee, upon payment of 2013 & 2014 Q and A|Commercial Law

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which, they will be issued a membership fee certificate, which shall not be issued in excess of 250, with only one certificate being issued per member. What is the authorized membership of APO, 500 or 250? The maximum number of members allowed for APO is 250. The question arose from what appears to be a conflict between the articles and the by-laws. When the by-laws of a corporation are inconsistent with the articles of incorporation, the latter shall be controlling, as the by-laws are subordinate to, and cannot contravene, the corporate charter. As provided for in the articles of APO, the maximum permitted number of Certificates of Membership issued by it is limited to 250, and no member shall be issued more than one certificate. Hence, the maximum number of members is the maximum number of certificates that may be issued, that is 250, by virtue of the articles of incorporation, and not 500 as provided by the by-laws. [SEC OGC Opinion No. 14-25, 4 September 2014] 35. L was hired as a Director of CBB, who was later on appointed as managing director. Alleging failure to pay a significant portion of his salary, after closure of CBB and the incorporation of a new corporation, he filed a complaint for illegal dismissal against CBB and its president. Can CBB’s president be held liable? Yes. There is indubitable link between closure of CBB and the incorporation of the new corporation, which was done to avoid payment of the obligations to L. CBB ceased to exist only in name; it re-emerged in the person of the new corporation for an urgent purpose — to avoid payment by CBB of the last two installments of its monetary obligation to L, as well as its other financial liabilities. Freed of CBB’s liabilities, especially that owing to L, the new corporation can continue, as it did continue, CBB’s business. It has long been settled that the law vests a corporation with a personality distinct and separate from its stockholders or Starr Weigand 2016

members. In the same vein, a corporation, by legal fiction and convenience, is an entity shielded by a protective mantle and imbued by law with a character alien to the persons comprising it. Nonetheless, the shield is not at all times impenetrable and cannot be extended to a point beyond its reason and policy. Circumstances might deny a claim for corporate personality, under the “doctrine of piercing the veil of corporate fiction.” Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. Under the doctrine, the corporate existence may be disregarded where the entity is formed or used for non–legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the individuals composing it and the two corporations will be treated as identical. [Eric Godfrey Stanley Livesey v. Binswanger Philippines, Inc. and Keith Elliot, G.R. No. 177493, March 19, 2014] 36. M was hired by S Tech as the head and manager of one of its units. Subsequently, N was employed as her manager. M's hard disk crashed causing her to lose files, and she informed N. M’s position was downgraded twice and later on, she was informed that her position was redundant. An action for illegal dismissal was filed by M against S Tech and its HR Director. Can the case prosper against the HR Director? No. It is hornbook principle that personal liability of corporate directors, trustees or officers attaches only when: (a) they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders 2013 & 2014 Q and A|Commercial Law

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or other persons; (b) they consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (c) they agree to hold themselves personally and solidarily liable with the corporation; or (d) they are made by specific provision of law personally answerable for their corporate action. In the case of M, there is no evidence to show that the aboveenumerated exceptions when a corporate officer becomes personally liable for the obligation of a corporation to this case. [SPI Technologies, Inc., et al. v. Victoria K. Mapua, G.R. No. 191154, April 7, 2014] 37. Is the presentation of a stock certificate a condition sine qua non for proving one's shareholding in a corporation? No. A stock certificate is prima facie evidence that the holder is a shareholder of the corporation, but the possession of the certificate is not the sole determining factor of one’s stock ownership. To establish stock ownership, other documents may be presented, such as official receipts of payments of subscription of shares, certification from the SEC stating that the company issued shares in favor of the particular stockholder. [Insigne v. Abra Valley Colleges, Inc., G.R. No. 204089, July 29, 2015] 38. M Corp employed B, who was later on dismissed from employment after having tested positive during a random drug test conducted in the office. B thus filed an action for illegal dismissal against M Corp and E, its president. Should the case prosper against E? No. A corporation has a personality separate and distinct from its officers and board of directors who may only be held personally liable for damages if it is proven that they acted with malice or bad faith in the dismissal of an employee. Absent any evidence on record that petitioner E acted maliciously or in bad faith in Starr Weigand 2016

effecting the termination of respondent, plus the apparent lack of allegation in the pleadings E acted in such manner, the doctrine of corporate fiction dictates that only petitioner corporation should be held liable for the illegal dismissal of respondent. [Mirant (Philippines) Corporation, et al. v. Joselito A. Caro, G.R. No. 181490, April 23, 2014] 39. A mortgage his property to Bank A, predecessor of Bank B. However, A defaulted in his payments, so the mortgage was foreclosed and Bank B bought the property. A offered to repurchase the property, but no agreement was reached. With A insisting that a purchase agreement was reached, he sold portions of the property after being subdivided, and offered to pay for the entire property. Bank B however sold the remaining portions of the property to another person, which prompted A to cause an annotation of his adverse claim on the title thereof. Thereafter, the property was sold by Bank B to other persons, without A’s knowledge. Thus, A filed an action for specific performance against the bank. Was there a perfected repurchase agreement between A and Bank B, even if no acceptance was made by Bank B’s representatives? No. No such agreement was reached. Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations shall be exercised by the board of directors. Just as a natural person may authorize another to do certain acts in his behalf, so may the board of directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it. Thus, contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized by the board. Absent such valid delegation/authorization, the rule is that the declarations of an individual director relating to the affairs of the corporation, but not in the course of, or connected with, the performance 2013 & 2014 Q and A|Commercial Law

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of authorized duties of such director, are held not binding on the corporation. Thus, a corporation can only execute its powers and transact its business through its Board of Directors and through its officers and agents when authorized by a board resolution or its by-laws. In the absence of conformity or acceptance by properly authorized bank officers of petitioner’s counter-proposal, no perfected repurchase contract was born out of the talks or negotiations between petitioner and Bank B’s representatives. Petitioner therefore had no legal right to compel respondent bank to accept the P600,000 being tendered by him as payment for the supposed balance of repurchase price. [Heirs of Fausto C. Ignacio vs. Home Bankers Savings and Trust Co., et al., G.R. No. 177783. January 23, 2013] 40. TRB sold to BOC its banking business which was later on approved by the BSP monetary board. Later, as a result of previous court litigation, TRB was order to pay RPN, IBB and BBC damages, for which a writ of execution was issued, which included properties covered by the covered by the sale to BOC. Can BOC be held liable for the damages to be paid to RPN, IBB and BBC? No. Merger is a re-organization of two or more corporations that results in their consolidating into a single corporation, which is one of the constituent corporations, one disappearing or dissolving and the other surviving. To put it another way, merger is the absorption of one or more corporations by another existing corporation, which retains its identity and takes over the rights, privileges, franchises, properties, claims, liabilities and obligations of the absorbed corporation(s). The absorbing corporation continues its existence while the life or lives of the other corporation(s) is or are terminated. The Corporation Code requires the following steps for merger or consolidation: Starr Weigand 2016

(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must include any amendment, if necessary, to the articles of incorporation of the surviving corporation, or in case of consolidation, all the statements required in the articles of incorporation of a corporation. (2) Submission of plan to stockholders or members of each corporation for approval. A meeting must be called and at least two (2) weeks’ notice must be sent to all stockholders or members, personally or by registered mail. A summary of the plan must be attached to the notice. Vote of two-thirds of the members or of stockholders representing two thirds of the outstanding capital stock will be needed. Appraisal rights, when proper, must be respected. (3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by the corporate officers of each constituent corporation. These take the place of the articles of incorporation of the consolidated corporation, or amend the articles of incorporation of the surviving corporation. (4) Submission of said articles of merger or consolidation to the SEC for approval. (5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks before. (6) Issuance of certificate of merger or consolidation. Indubitably, it is clear that no merger took place between BOC and TRB as the requirements and procedures for a merger were absent. A merger does not become effective upon the mere agreement of the constituent corporations. All the requirements specified in the law must be 2013 & 2014 Q and A|Commercial Law

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complied with in order for merger to take effect. Section 79 of the Corporation Code further provides that the merger shall be effective only upon the issuance by the Securities and Exchange Commission (SEC) of a certificate of merger. Here, BOC and TRB remained separate corporations with distinct corporate personalities. What happened is that TRB sold and BOC purchased identified recorded assets of TRB in consideration of BOC’s assumption of identified recorded liabilities of TRB including booked contingent accounts. In strict sense, no merger or consolidation took place as the records do not show any plan or articles of merger or consolidation. More importantly, the SEC did not issue any certificate of merger or consolidation. [Bank of Commerce v. Radio Philippines Network, Inc., et al., G.R. No. 195615, April 21, 2014] 41. A special meeting was held by the stockholders of MSC Corp. where several directors were removed and some new directors were elected. The meeting was called by MSC Corp.’s management committee. Is the special meeting valid, and can the elections held during such meeting be considered as valid? No. The Corporation Code provides that a special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock. In this case, the meeting was not called in accordance with the requirements of the Corporation Code. The board of directors is the directing and controlling body of the corporation. It is a creation of the stockholders and derives its power to control and direct the affairs of the corporation from them. The board of directors, in drawing to itself the power of the corporation, occupies a position of trusteeship in relation to the stockholders, in the sense that Starr Weigand 2016

the board should exercise not only care and diligence, but utmost good faith in the management of the corporate affairs. A corporation's board of directors is understood to be that body which (1) exercises all powers provided for under the Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all the property of the corporation. Its members have been characterized as trustees or directors clothed with fiduciary character. Relative to the powers of the Board of Directors, nowhere in the Corporation Code or in the MSC by-laws can it be gathered that the Oversight Committee is authorized to step in wherever there is breach of fiduciary duty and call a special meeting for the purpose of removing the existing officers and electing their replacements even if such call was made upon the request of shareholders. Needless to say, the MSCOC is neither · empowered by law nor the MSC by-laws to· call a meeting and the subsequent ratification made by the stockholders did not cure the substantive infirmity, the defect having set in at the time the void act was done. The defect goes into the very authority of the persons who made the call for the meeting. It is apt to recall that illegal acts of a corporation which ·contemplate the doing of an act which is contrary to law, morals or public order, or contravenes some rules of public policy or public duty, are, like similar transactions between individuals, void. They cannot serve as basis for a court action, nor acquire validity by performance, ratification or estoppel. A distinction should be made between corporate acts or contracts . which are illegal and those which are merely ultra vires. The former contemplates the doing of an act which are contrary to law, morals or public policy or public duty, and are, like similar transactions between individuals, void: They cannot serve as basis of a court action nor acquire validity by performance, ratification or estoppel. Mere ultra vires acts, on the other hand, or those which are not illegal or void ab initio, but are not merely within· the scope of the articles of incorporation, are merely voidable and ·may become binding and enforceable when ratified by the stockholders. In this case, the meeting 2013 & 2014 Q and A|Commercial Law

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belongs to the category of the latter, that is, it is void ab initio and cannot be validated. The elected officers are not de facto officers of the corporation and they are without colorable authority to authorize corporate acts. [Bernas v. Cinco, G.R. No. 163356-57, July 1, 2015] 42. F and S were incorporators of A Corp., along with their daughter, A. F and S died, and thus, A inherited their shares, resulting in her obtaining 70.82% of A Corp.’s shares of stock. A became the chairman of the board, but late on died without any children, but left M, her spouse. M executed an affidavit of self-adjudication covering A’s shares of stock in A Corp. Thinking that he is already the controlling stockholder, M called for a stockholders’ meeting. On the other hand, the current corporate secretary also called a special stockholders’ meeting. During the two meetings, new board of directors and a new set of officers were elected, resulting in A Corp. having two sets of directors and officers. During the hearing called by the corporate secretary, only two board members attended. Which meeting is valid? Both meetings are not valid. The meeting called by the corporate secretary is invalid for lacking a quorum. On the other hand, the meeting called by M, is likewise invalid since he cannot yet be considered a stockholder at the time considering that the transfer of A’s shares to him had not yet been recorded in the corporate books. M's inheritance of A's shares of stock does not ipso facto afford him the rights accorded to such majority ownership of FA Corp.’s shares of stock. Section 63 of the Corporation Code governs the rule on transfers of shares of stock. It is stated that no transfer, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. erily, all Starr Weigand 2016

transfers of shares of stock must be registered in the corporate books in order to be binding on the corporation. Specifically, this refers to the Stock and Transfer Book. An owner of shares of stock cannot be accorded the rights pertaining to a stockholder -such as the right to call for a meeting and the right to vote, or be voted for -if his ownership of such shares is not recorded in the Stock and Transfer Book. This is so even if he is reflected as a stockholder in the General Information Sheet (GIS). The contents of the GIS should not be deemed conclusive as to the identities of the registered stockholders of the corporation, as well as their respective ownership of shares of stock, as the controlling document should be the corporate books, specifically the Stock and Transfer Book. [F & S Velasco Company, Inc., et al. v. Dr. Rommel L. Madrid, et al., G.R. No. 208844, November 10, 2015] 43. KMBI’s by-laws and articles of incorporation provide that its board of trustees shall consist of 9 members to serve for one year. But, due to resignation of five of them, and the death of another, only 3 members of the board remain. Can the remaining 3 members continue the regular business of the corporation and fill up the vacancies in the board? The general rule is well-settled that the power of the board is not suspended by vacancies in the board unless the number is reduced to below a quorum, the rule being that the number necessary to constitute a quorum under a bylaw which provides that a majority of the directors shall be necessary and sufficient to constitute a quorum, is a majority of the entire board, notwithstanding that there may be vacancies in the board at a time. In the case of KMBI, the presence of 9 members would be required to constitute a quorum. There being no quorum with only 3 remaining members of the board, then the board has no authority to transact business. Also, they do not have authority to fill-up vacancies in the board. Not only is there no quorum, but the circumstances are not one of those which would allow the 2013 & 2014 Q and A|Commercial Law

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remaining directors to fill in a vacancy. Based on 29 of the Corporation Code, the remaining directors/trustees can fill-up the vacancies in the board when: (1) such vacancies were occasioned by reasons other than removal by the stockholders/members or expiration of term; and (2) such remaining director/trustees still constitute a quorum of the Board. These conditions must concur; otherwise, the fillingup of vacancies must be done by the stockholders or members in a regular or special meeting called for the purpose. [SEC OGC Opinion No. 13-06, 6 May 2013] 44. Does the President of a close corporation have the authority to decide on matters concerning the corporation even without the approval of the Board? Yes. A close corporation is one where the articles of incorporation provide that: (1) all the corporation’s issued stocks of all classes, exclusive of treasury shares, shall be held of records by not more than a specified number of persons, not exceeding 20; (2) all of the issued stocks of all classes shall be subject to restrictions on transfer permitted by the Corporation Code; and (3) the corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. The main difference between a close corporation and other corporations is the identity of stock ownership and active management, that is, all or most of the stockholders of a close corporation are active in the corporate business either as directors, officers or other key men in management. Where business associates belong to a small, closely-knit group, they usually prefer to keep the organization exclusive and would not welcome strangers. Since it is through their efforts and managerial skills that they expect the business to grow and prosper, it is quite understandable why they would not trust outsiders to come in and interfere with their management of business, and much less share whatever fortune, big or small, that the business may bring.

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In an ordinary corporation, the President’s power of general control and supervision over the corporate business grants him an apparent authority to enter into transactions on behalf o the corporation in the ordinary course of business, unless prohibited by the Articles of Incorporation or the By-laws. The acts, even if priorly unauthorized, may be later ratified by the Board of Directors or Trustees, which ratification cleanses the transaction of defects. In the case of close corporations, the act of the President, who is also a Director, may not need later ratification of the Board, provided that any of the following conditions are present: 1. Before the action is taken, written consent thereto is signed by all the directors; 2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. [SEC OGC Opinion No. 14-23, 26 August 2014] 45. What is the current limit on the shareholdings of an Independent Director? Paragraphs 2 and 6, Rule 38 of the Amended IRR of the Securities Regulation Code are the controlling provisions on the definition, qualification and disqualification of an independent director. In other words, a person is qualified to be elected as an independent director provided he is independent of management and free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director in 2013 & 2014 Q and A|Commercial Law

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any covered company, and includes, among others, any person who does not own more than 2% of the shares of the covered company and/or its related companies or any of its substantial shareholders. The 10% limit on beneficial ownership in the covered company's equity security in which an independent director is to be elected no longer holds true. [SEC OGC Opinion No. 13-04, 18 April 2013; Emphasis supplied] 46. M Corp. was engaged in the business of selling medical equipment, and has A as one of its directors. A had a daughter, B, who owns 80% of E Corp., also engaged in the selling of medical equipment. Some of the clients of M Corp. stopped doing business with it, allegedly due to the intervention of A, in favor of his daughter’s interest in E Corp. Is there a conflict of interest on the part of A, which would disqualify him from continuing to be a director in M Corp? If the by-laws of M Corp. provides as a qualification for directors that “a director shall not be the immediate member of the family of any stockholder in any other firm, company, or association which competes with the subject corporation”, then A can be disqualified. Every corporation has the inherent power to adopt by-laws for its internal government, and to regulate the conduct and prescribe the rights of its members towards itself and among themselves in reference to the management of its affairs. Thus, under Section 47(5) of the Corporation Code, a corporation may prescribe in its by-laws the qualifications of its directors, officers, and employees. The qualification that “a director shall not be the immediate member of the family of any stockholder in any other firm, company, or association which competes with the subject corporation” is a qualificational by-law provision which may be added to those specified in the Corporation Code (Sections 23 and 27), pursuant to the case of Gokongwei v. SEC, GR No. L-45911, 11 April 1979). Thus, corporations have the power to make by-laws declaring a person employed in the service of a Starr Weigand 2016

rival company to be ineligible for the Corporation’s Board of Directors and a provision which renders ineligible, or if elected, subjects to removal, a directors if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid. However, these qualifications become effective only when the by-laws expressly provide for the same. However, A may be held liable for damages for bad faith in directing the affairs of the corporation, under Section 31 of the Corporation Code, or to account for any profit obtained to the prejudice of the corporation by acquiring business opportunity which should have belonged to the corporation, pursuant to Section 34 of the Corporation Code. [SEC OGC Opinion No. 14-04, 21 April 2014] 47. M Corp, T Corp and N Corp applied for Mineral Production Sharing Agreements (MPSA) with the DENR. This was opposed by R Corp because it alleged that at least 60% of the capital stock of the corporations are owned and controlled by MBMI, a 100% Canadian corporation. R Corp reasoned that since MBMI is a considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of the MPSAs over the areas covered by applications since it knows that it can only participate in mining activities through corporations which are deemed Filipino citizens. R Corp argued that given that petitioners’ capital stocks were mostly owned by MBMI, they were likewise disqualified from engaging in mining activities through MPSAs, which are reserved only for Filipino citizens. Decide. It is quite safe to say that petitioners M Corp, T Corp and N Corp are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests.

2013 & 2014 Q and A|Commercial Law

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Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides: Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens. The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent grandfather rule. Prior to this recent change of events, petitioners were constant in advocating the Starr Weigand 2016

application of the "control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments Act (FIA), rather than using the stricter grandfather rule. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution and pertinent laws, then it becomes illegal. Sec. 2, Article XII of the Constitution focuses on the State entering into different types of agreements for the exploration, development, and utilization of natural resources with entities who are deemed Filipino due to 60 percent ownership of capital is pertinent to this case, since the issues are centered on the utilization of our country’s natural resources or specifically, mining. Thus, there is a need to ascertain the nationality of petitioners since, as the Constitution so provides, such agreements are only allowed corporations or associations "at least 60 percent of such capital is owned by such citizens." Elementary in statutory construction is when there is conflict between the Constitution and a statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no place of application. As decreed by the honorable framers of our Constitution, the grandfather rule prevails and must be applied. Paragraph 7, DOJ Opinion No. 020, Series of 2005 provides: The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation for purposes, among others, of determining compliance with nationality requirements (the ‘Investee Corporation’). Such manner of computation is necessary since the shares in the Investee Corporation may be owned both by individual stockholders (‘Investing Individuals’) and by corporations and partnerships (‘Investing Corporation’). The said rules thus provide for the determination of 2013 & 2014 Q and A|Commercial Law

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nationality depending on the ownership of the Investee Corporation and, in certain instances, the Investing Corporation. Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.’ Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino. The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership. Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation and added to the shares directly owned in the Investee Corporation. In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Starr Weigand 2016

Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply. The “control test” is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipinoequity ownership in the corporation, then it may apply the “grandfather rule.” After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate ownership of petitioners. Here, doubt is present in the 60-40 Filipino equity ownership the corporations, since their common investor, the 100% Canadian corporation––MBMI, funded them. [Narra Nickel Mining and Development Corp., et al. v. Redmont Consolidated Mines, G.R. No. 195580, April 21, 2014] N.B. Primarily, it is the incorporation test which should be applied in determining the nationality of a corporation. "Under Philippine jurisdiction, the primary test is always the Place of Incorporation Test since we adhere to the doctrine that a corporation is a creature of the State whose laws it has been created. A corporation organized under the laws of a foreign country, irrespective of the nationality of the persons who control it is necessarily a foreign corporation. The control test and the principal place of business test (siege social), are merely adjunct tests, when the place of incorporation test indicates that the subject corporation is organized under Philippine laws.” However, based upon the foregoing, while the incorporation test serves as the primary test under Philippine jurisdiction, other tests such as the control test must be used for purposes of compliance with the 2013 & 2014 Q and A|Commercial Law

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provisions of the Constitution and of other laws on nationality requirements. Even if the corporation is a creature of the State, there is a need to further safeguard/regulate certain areas of investment and activities for the protection of the interests of Filipinos. For instance, the control test is used to determine the eligibility of a corporation, which has foreign equity participation in its ownership structure, to engage in nationalized or partly nationalized activities. [SEC-OGC Opinion No. 11-42, 12 October 2011; Underscoring supplied] Also note the following 2015 case: The Grandfather Rule is used as a “supplement” to the Control Test so that the intent underlying the averted Sec. 2, Art. XII of the Constitution be given effect. The use of the Grandfather Rule as a “supplement” to the Control Test is not proscribed by the Constitution or the Philippine Mining Act of 1995. To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development, and utilization of natural resources to Filipino citizens and “corporations or associations at least sixty per centum of whose capital is owned by such citizens.” Similarly, Section 3(aq) of the Philippine Mining Act of 1995 considers a “corporation x x x registered in accordance with law at least sixty per cent of the capital of which is owned by citizens of the Philippines” as a person qualified to undertake a mining operation. Consistent with this objective, the Grandfather Rule was originally conceived to look into the citizenship of the individuals who ultimately own and control the shares of stock of a corporation for purposes of determining compliance with the constitutional requirement of Filipino ownership. It cannot, therefore, be denied that the framers of the Constitution have not foreclosed the Grandfather Rule as a tool in verifying the nationality of corporations for purposes of ascertaining their right to participate in nationalized or partly nationalized activities. Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining compliance with the minimum Filipino equity Starr Weigand 2016

requirement vis-à-vis the Control Test. This confusion springs from the erroneous assumption that the use of one method forecloses the use of the other. As exemplified by the above rulings, opinions, decisions and this Court’s April 21, 2014 Decision, the Control Test can be, as it has been, applied jointly with the Grandfather Rule to determine the observance of foreign ownership restriction in nationalized economic activities. The Control Test and the Grandfather Rule are not, as it were, incompatible ownershipdeterminant methods that can only be applied alternative to each other. Rather, these methods can, if appropriate, be used cumulatively in the determination of the ownership and control of corporations engaged in fully or partly nationalized activities, as the mining operation involved in this case or the operation of public utilities as in Gamboa or Bayantel. The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a corporation, as it could result in an otherwise foreign corporation rendered qualified to perform nationalized or partly nationalized activities. Hence, it is only when the Control Test is first complied with that the Grandfather Rule may be applied. Put in another manner, if the subject corporation’s Filipino equity falls below the threshold 60%, the corporation is immediately considered foreign-owned, in which case, the need to resort to the Grandfather Rule disappears. On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement can be considered a Filipino corporation if there is no doubt as to who has the “beneficial ownership” and “control” of the corporation. In that instance, there is no need for a dissection or further inquiry on the ownership of the corporate shareholders in both the investing and investee corporation or the application of the Grandfather Rule. As a corollary rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by the subject or investee corporation, a resort to the 2013 & 2014 Q and A|Commercial Law

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Grandfather Rule is necessary if doubt exists as to the locus of the “beneficial ownership” and “control.” In this case, a further investigation as to the nationality of the personalities with the beneficial ownership and control of the corporate shareholders in both the investing and investee corporations is necessary. As explained in the April 21, 2012 Decision, the “doubt” that demands the application of the Grandfather Rule in addition to or in tandem with the Control Test is not confined to, or more bluntly, does not refer to the fact that the apparent Filipino ownership of the corporation’s equity falls below the 60% threshold. Rather, “doubt” refers to various indicia that the “beneficial ownership” and “control” of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders. As provided in DOJ Opinion No. 165, Series of 1984, which applied the pertinent provisions of the Anti-Dummy Law in relation to the minimum Filipino equity requirement in the Constitution, “significant indicators of the dummy status” have been recognized in view of reports “that some Filipino investors or businessmen are being utilized or [are] allowing themselves to be used as dummies by foreign investors” specifically in joint ventures for national resource exploitation. These indicators are: 1. That the foreign investors provide practically all the funds for the joint investment undertaken by these Filipino businessmen and their foreign partner; 2. That the foreign investors undertake to provide practically all the technological support for the joint venture; 3. That the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies. (However) Suffice it to say in this regard that, while the Grandfather Rule was originally intended to trace the shareholdings to the point where natural persons hold the shares, the SEC had already set up a limit as to the number of corporate layers the attribution of the Starr Weigand 2016

nationality of the corporate shareholders may be applied. In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels of corporate relations for publicly-held corporations or where the shares are traded in the stock exchanges, and to three (3) levels for closely held corporations or the shares of which are not traded in the stock exchanges.14 These limits comply with the requirement in Palting v. San Jose Petroleum , Inc. that the application of the Grandfather Rule cannot go beyond the level of what is reasonable. [Narra Nickel Mining and Development Corp. v. Redmont Consolidated, GR No. 195580, January 28, 2015] 48. For purposes of determining compliance with ownership requirements under the Constitution and existing laws, for corporations engaged in areas of activities or enterprises specifically reserved, wholly or partly, to Philippine Nationals, what should be considered? For this purpose, ‘capital’ under Section 11, Article XII of the 1987 Constitution refers to shares of stock entitled to vote in the election of directors. [Heirs of Gamboa v. Teves, G.R.No.176579, October 9, 2012] Thus, 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. [SEC Memorandum Circular no. 8, series of 2013] Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a corporation is a “Philippine national.” [Heirs of Gamboa v. Teves, G.R.No.176579, October 9, 2012] 2013 & 2014 Q and A|Commercial Law

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49. Y was the newly elected president of S Corp. who, during a meeting, demanded the turnover of the corporate records from Q. The said records, however, were with C, the corporate accountant, who kept them for Q. Later on, C and Q caused the removal of the corporate records from the company premises. B, the corporate secretary, also demanded for the turnover of the stock and transfer book from P. P however said it will be deposited in a safety deposit but with E Bank. But, this was also taken by Q. Q brought the book to the company office and demanded that entries be made therein. A court had already ordered that the said entries be deleted, but Q refused to do so, and he still kept custody of the corporate records. Thus, a criminal complaint was filed against C, Q, and P. Should the case be dismissed? Yes. A criminal action based on the violation of a stockholder's right to examine or inspect the corporate records and the stock and transfer book of a corporation under the second and fourth paragraphs of Section 74 of the Corporation Code-such as this criminal case-can only be maintained against corporate officers or any other persons acting on behalf of such corporation. However, the instant case clearly suggest that respondents are neither in relation to S Corp. While Section 74 of the Corporation Code expressly mentions the application of Section 144 only in relation to the act of "refus[ing] to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from [the corporation's] records or minutes," the same does not mean that the latter section no longer applies to any other possible violations of the former section. It must be emphasized that Section 144 already purports to penalize "[v]iolations" of "any provision" of the Corporation Code "not otherwise specifically penalized therein." It is inconsequential the fact that that Section 74 Starr Weigand 2016

expressly mentions the application of Section 144 only to a specific act, but not with respect to the other possible violations of the former section. There is no cogent reason why Section 144 of the Corporation Code cannot be made to apply to violations of the right of a stockholder to inspect the stock and transfer book of a corporation under Section 74(4) given the already unequivocal intent of the legislature to penalize violations of a parallel right, i.e., the right of a stockholder or member to examine the other records and minutes of a corporation under Section 74(2). Certainly, all the rights guaranteed to corporators under Section 74 of the Corporation Code are mandatory for the corporation to respect. All such rights are just the same underpinned by the same policy consideration of keeping public confidence in the corporate vehicle thru an assurance of transparency in the corporation's operations. Refusing to allow inspection of the stock and transfer book when done in violation of Section 74(4) of the Corporation Code, properly falls within the purview of Section 144 of the same code and thus may be penalized as an offense. A criminal action based on the violation of a stockholder's right to examine or inspect the corporate records and the stock and transfer hook of a corporation under the second and fourth paragraphs of Section 74 of the Corporation Code can only he maintained against corporate officers or any other persons acting on behalf of such corporation. A perusal of the second and fourth paragraphs of Section 74, as well as the first paragraph of the same section, reveal that they are provisions that obligates a corporation: they prescribe what books or records a corporation is required to keep; where the corporation shall keep them; and what are the other obligations of the corporation to its stockholders or members in relation to such books and records. Hence, by parity of reasoning, the second and fourth paragraphs of Section 74, including the first paragraph of the same section, can only be 2013 & 2014 Q and A|Commercial Law

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violated by a corporation. It is clear then that a criminal action based on the violation of the second or fourth paragraphs of Section 74 can only be maintained against corporate officers or such other persons that are acting on behalf of the corporation. Violations of the second and fourth paragraphs of Section 74 contemplates a situation wherein a corporation, acting thru one of its officers or agents, denies the right of any of its stockholders to inspect the records, minutes and the stock and transfer book of such corporation. The problem the instant case and the evidence submitted during preliminary investigation is that they do not establish that respondents were acting on behalf of S Corp. Quite the contrary, the scenario painted by the complaint is that the respondents are merely outgoing officers of S Corp who, for some reason, withheld and refused to tum-over the company records of S Corp; that it is the petitioners who are actually acting on behalf of S Corp; and that S Corp is actually merely trying to recover custody of the withheld records. In other words, petitioners are not actually invoking their right to inspect the records and the stock and transfer book of S Corp under the second and fourth paragraphs of Section 74. What they seek to enforce is the proprietary right of S Corp to be in possession of such records and book. Such right, though certainly legally enforceable by other means, cannot be enforced by a criminal prosecution based on a violation of the second and fourth paragraphs of Section 74. That is simply not the situation contemplated by the second and fourth paragraphs of Section 74 of the Corporation Code. [Aderito Z. Yujuico and Bonifacio C. Sumbilla v. Cezar T. Quiambao and Eric C. Pilapil, G.R. No. 180416, June 2, 2014] 50. Can a corporation prevent a stockholder from inspecting corporate books on the ground that she only holds 0.001% of the shares of the said corporation? No. The Corporation Code has granted to all stockholders the right to inspect the corporate Starr Weigand 2016

books and records, and in so doing has not required any specific amount of interest for the exercise of the right to inspect. Ubi lex non distinguit nec nos distinguere debemos. When the law has made no distinction, we ought not to recognize any distinction. Under Section 74, third paragraph, of the Corporation Code, the only time when the demand to examine and copy the corporation’s records and minutes could be refused is when the corporation puts up as a defense to any action that “the person demanding” had “improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand.” The right of the shareholder to inspect the books and records of the petitioner should not be made subject to the condition of a showing of any particular dispute or of proving any mismanagement or other occasion rendering an examination proper, but if the right is to be denied, the burden of proof is upon the corporation to show that the purpose of the shareholder is improper, by way of defense. [Terelay Investment and Development Corporation v. Yulo, G.R. No. 160924, August 5, 2015] 51. Which court has jurisdiction over a stockholders’ suit to enforce its right of inspection under Section 74 of the Corporation Code, when the corporation involved is a sequestered corporation under the PCGG? It is the RTC and not the Sandiganbayan which has jurisdiction over cases which do not involve a sequestration-related incident but an intracorporate controversy. Originally, Section 5 of Presidential Decree (P.D.) No. 902-A vested the original and exclusive jurisdiction over cases involving the following in the SEC, to wit: x




(a) Devices or schemes employed by, or any acts of the board of directors, business associates, its officers or 2013 & 2014 Q and A|Commercial Law

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partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of associations or organization registered with the Commission; (b) Controversies arising out of intracorporate or partnership relations, between and among stockholders, members or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the State insofar as it concerns their individual franchise or right as such entity; (c) Controversies in the election or appointment of directors, trustees, officers or managers of such corporations, partnership or associations; (d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payment in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respective fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities but is under the management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree. Upon the enactment of Republic Act No. 8799 (The Securities Regulation Code), effective on August 8, 2000, the jurisdiction of the SEC over intra-corporate controversies and the other cases enumerated in Section 5 of P.D. No. 902-A was transferred to the Regional Trial Court Starr Weigand 2016

pursuant to Section 5.2 of the law, which provides: 5.2. The Commission’s jurisdiction over all cases enumerated in Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court; Provided,That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed. To implement Republic Act No. 8799, the Court promulgated its resolution of November 21, 2000 in A.M. No. 00-11-03-SC designating certain branches of the RTC to try and decide the cases enumerated in Section 5 of P.D. No. 902-A. Among the RTCs designated as special commercial courts was the RTC (Branch 138) in Makati City, the trial court for Civil Case No. 041049. On March 13, 2001, the Court adopted and approved the Interim Rules of Procedure for Intra-Corporate Controversies under Republic Act No. 8799 in A.M. No. 01-2-04-SC, effective on April 1, 2001, whose Section 1 and Section 2, Rule 6 state: Section 1. Cases covered. – The provisions of this rule shall apply to election contests in stock and non-stock corporations. Section 2. Definition. – An election contest refers to any controversy or dispute involving title or claim to any elective office in a stock or non-stock corporation, the validation of proxies, the manner and validity of elections, and the qualifications of candidates, including 2013 & 2014 Q and A|Commercial Law

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the proclamation of winners, to the office of director, trustee or other officer directly elected by the stockholders in a close corporation or by members of a non-stock corporation where the articles of incorporation or by-laws so provide. Conformably with Republic Act No. 8799, and with the ensuing resolutions of the Court on the implementation of the transfer of jurisdiction to the Regional Trial Court, the RTC (Branch 138) in Makati had the authority to hear and decide the election contest between the parties herein. There should be no disagreement that jurisdiction over the subject matter of an action, being conferred by law, could neither be altered nor conveniently set aside by the courts and the parties. The dispute concerns acts of the board of directors claimed to amount to fraud and misrepresentation which may be detrimental to the interest of the stockholders, or is one arising out of intra-corporate relations between and among stockholders, or between any or all of them and the corporation of which they are stockholders. Moreover, the jurisdiction of the Sandiganbayan has been held not to extend even to a case involving a sequestered company notwithstanding that the majority of the members of the board of directors were PCGG nominees. [Abad et al. v. Philippine Communications Satellite Corporation, G.R. No. 200620, March 18, 2015] 52. What happens when an intracorporate dispute has been properly filed in the official station of the designated Special Commercial Court but is, however, later wrongly assigned by raffle to a regular branch of that station? The erroneous raffling to a regular branch instead of to a Special Commercial Court is only a matter of procedure – that is, an incident related to the exercise of jurisdiction – and, thus, should not negate the jurisdiction which the RTC had already acquired. In such a Starr Weigand 2016

scenario, the proper course of action was not for the commercial case to be dismissed; instead, the branch where the case is raffled should have first referred the case to the Executive Judge for re-docketing as a commercial case; thereafter, the Executive Judge should then assign said case to the only designated Special Commercial Court in the station. Note that the procedure would be different where the RTC acquiring jurisdiction over the case has multiple special commercial court branches; in such a scenario, the Executive Judge, after re-docketing the same as a commercial case, should proceed to order its re-raffling among the said special branches. Meanwhile, if the RTC acquiring jurisdiction has no branch designated as a Special Commercial Court, then it should refer the case to the nearest RTC with a designated Special Commercial Court branch within the judicial region.48 Upon referral, the RTC to which the case was referred to should re-docket the case as a commercial case, and then: (a) if the said RTC has only one branch designated as a Special Commercial Court, assign the case to the sole special branch; or (b) if the said RTC has multiple branches designated as Special Commercial Courts, raffle off the case among those special branches. In all the abovementioned scenarios, any difference regarding the applicable docket fees should be duly accounted for. On the other hand, all docket fees already paid shall be duly credited, and any excess, refunded. [Gonzales v. GJH Land, Inc., G.R. No. 202664, November 10, 2015] 53. A complaint for injunction and damages was filed by ADC Corp against AHV Association and its president. This arose as ADC alleged that AHV Association constructed a multi-purpose hall and swimming pool on one of the parcels of land owned by ADC which were to be sold without its consent and approval. However, its SEC registration had been revoked more than three years prior to the institution of the action. Can it still file the instant case?

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No. It is to be noted that the time during which the corporation, through its own officers, may conduct the liquidation of its assets and sue and be sued as a corporation is limited to three years from the time the period of dissolution commences; but there is no time limit within which the trustees must complete a liquidation placed in their hands. It is provided only (Corp. Law, Sec. 78 [now Sec. 122]) that the conveyance to the trustees must be made within the three-year period. It may be found impossible to complete the work of liquidation within the three-year period or to reduce disputed claims to judgment. The authorities are to the effect that suits by or against a corporation abate when it ceased to be an entity capable of suing or being sued (7 R.C.L., Corps., par. 750); but trustees to whom the corporate assets have been conveyed pursuant to the authority of Sec. 78 [now Sec. 122] may sue and be sued as such in all matters connected with the liquidation. Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representations with the Securities and Exchange Commission, which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns. The trustee of a corporation may continue to prosecute a case commenced by the corporation within three years from its dissolution until rendition of the final judgment, even if such judgment is rendered beyond the three-year period allowed by Section 122 of the Corporation Code. However, there is nothing in the said cases which allows an already defunct corporation to initiate a suit after the lapse of the said threeyear period. [Alabang Development Corporation v. Alabang Hills Village Association and Rafael Tinio, G.R. No. 187456, June 2, 2014] 54. INC, a religious corporation, had been in existence since 1914. Has its corporate term expired in line with the provisions of the Corporation Code? Starr Weigand 2016

No. Religious corporations may be allowed to exist perpetually. While the Corporation Code has specific provisions for religious corporations, set out in Title XIII on Special Corporations, particularly Sections 110 and 116, both of which do not provide for a term of existence for religious corporations, whether classified as a corporation sole or religious society. The law never intended to limit the corporate life of religious corporations, hence, they may be allowed to exist perpetually. Religious corporations may limit their corporate term by providing a specific term in their articles of incorporation. However, absent such specification, it shall be understood that the corporation intended to exist for an indefinite period. [SEC OGC Opinion No. 14-18, 10 July 2014] 55. What is the corporate term of an educational institution incorporated under the Corporation Code? The corporate terms of such should also be 50 years in accordance with the provisions of the Corporation Code. However, if the corporation was incorporated under the older Corporation Law, which did not require a maximum corporate term for corporations, then they should amend their articles of incorporation to comply with the applicable provisions of the Corporation Code on or before May 1, 1982, the expiry date of the two (2) year period, the SEC will consider the provisions of the latter law as written into the articles of incorporation as of May 1, 1980, the date of effectivity of the Corporation Code." Hence, based on the said pronouncement, the 50-year period should be counted from 01 May 1980, in accordance with the Corporation Code. The 50-year period should not be counted from the date of registration as this would adversely affect the operations of pre-war schools which were established more than fifty (50) years from the date of effectivity of the Corporation Code since it would result in the dissolution of said corporations as the 50-year period had already lapsed. [SEC-OGC Opinion No. 13-05, 24 April 2013]

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56. Is a foreign corporation required to obtain a license to transact business in the Philippines if such becomes a member of a petroleum consortium, but is not the operator thereof, and will hold only a minority and noncontrolling interest therein? Yes, if the corporation is not a mere limited partner, then the subject foreign corporation still needs to obtain a license to do business in the Philippines under the Foreign Investments Act (FIA) of 1991, notwithstanding the fact that it holds a minority and non-controlling interest in the consortium. A consortium or joint venture is a form of partnership, governed by the laws of partnership. Doing business is, among others, the participation in the management, supervision, or control of any domestic business, firm, entity, or corporation. in order to be exempted from obtaining a license to do business in the Philippines, the foreign corporation must prove that it merely invested as a shareholder in a domestic corporation. This is limited to ‘investment in a corporation’, which does not necessarily include ‘investment in a partnership’. There being differences between the two, the effects of such investments should be differentiated. Investment in a partnership will only be akin to an investment in a corporation that is exempt from the doing of business rule only when the foreign corporation is exclusively a limited partner and takes no part in the management and control of the business operation of the limited partnership. If the corporation is not a limited partner and actively takes part in the control of the business, then the corporation is doing business in the Philippines as provided in Section 3(d) of the FIA, thus, must secure a license to do business in the Philippines. [SEC Opinion No. 14-01, 21 February 2014]

Securities Regulation Code 1. A complaint was filed by joint account holders, G, T, and L, against Citibank NA and its officials for violation of the Revised Securities Act (RSA) and the Securities Regulation Code. It was alleged that G, T, and L were induced by the bank’s VP and Director to sign a subscription agreement to purchase income notes. Later on, they were again made to purchase other income notes. They found out that the investments declined and that the notes were not registered with the SEC in accordance with the law. Citibank and its officials alleged that the action had already prescribed. What is the prescriptive period applicable in the instant case? The SRC does not provide for a prescriptive period for the enforcement of criminal liability, thus, RA 3362 would come into play. Under Section 73 of the SRC, violation of its provisions or the rules and regulations is punishable with imprisonment of not less than seven (7)years nor more than twenty-one (21) years. Applying Section 1 of Act No.3326, a criminal prosecution for violations of the SRC shall, therefore, prescribe in twelve (12) years. Hand in hand with Section 1, Section 2 of Act No. 3326 states that "prescription shall begin to run from the day of the commission of the violation of the law, and if the same be not known at the time, from the discovery thereof and the institution of judicial proceedings for its investigation and punishment." [Citibank N.A. v. Tanco-Gabaldon, G.R. No. 198444, September 4, 2013] 2. What is the nature of the power of the SEC to revoke registration of securities and permits to sell them to the public under the SRC?

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The revocation of registration of securities and permit to sell them to the public is not an exercise of the SEC's quasi-judicial power, but of its regulatory power. A "quasi-judicial function" is a term which applies to the action, discretion, etc., of public administrative officers or bodies, who are required to investigate facts, or ascertain the existence of facts, hold hearings, and draw conclusions from them, as a basis for their official action and to exercise discretion of a judicial nature. Although the SRC requires due notice and hearing before issuing an order of revocation, the SEC does not perform such quasi-judicial functions and exercise discretion of a judicial nature in the exercise of such regulatory power. It neither settles actual controversies involving rights which are legally demandable and enforceable, nor adjudicates private rights and obligations in cases of adversarial nature. Rather, when the SEC exercises its incidental power to conduct administrative hearings and make decisions, it does so in the course of the performance of its regulatory and law enforcement function. [SEC v. Universal Rightfield Property Holdings, G.R. No. 181381, July 20, 2015]

Transportation Laws 1. M. Corp. and MT Corp. entered into an agreement whereby the latter bought several buses from the former, but until M Corp. would retain ownership of the buses until certain conditions are met, while MT Corp. would operate the buses in Metro Manila. One of the buses however met an accident causing damage and injury to R and J. R and J sued M Corp. for damages. M Corp. denied liability alleging that though it is still the owner of the bus, the actual operator and employer of the bus driver involved in the accident was that of MT Corp. Who should be held liable? M Corp. cannot escape liability. This is because of the registered-owner rule, whereby the registered owner of the motor vehicle involved in a vehicular accident could be held liable for the consequences. The registered-owner rule has remained good law in this jurisdiction. But, although the registered-owner rule might seem to be unjust towards M Corp., the law did not leave it without any remedy or recourse. M Corp. could recover from MT Corp, the actual employer of the negligent driver, under the principle of unjust enrichment, by means of a cross-claim seeking reimbursement of all the amounts that it could be required to pay as damages arising from the driver’s negligence. A cross-claim is a claim by one party against a coparty arising out of the transaction or occurrence that is the subject matter either of the original action or of a counterclaim therein, and may include a claim that the party against whom it is asserted is or may be liable to the cross-claimant for all or part of a claim asserted in the action against the cross-claimant. [Metro Manila Transit Corporation v. Cuevas, G.R. No. 167797, June 15, 2015] 2. N Corp. shipped goods to UMC from Japan to Manila. The goods were insured by P Insurance against all risks. When they arrived in Manila, it was found that one package was in

Starr Weigand 2016

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bad order. UMC declared the damaged goods as a total loss. P insurance paid UMC for the loss, and filed a complaint against N Corp. and the brokers. The goods were delivered to UMC on May 12, 1995, and it filed a bad order survey on that same day. The action was filed by the insurer on January 18, 1996. Has the action prescribed? No. The prescriptive period for filing an action for the loss or damage of the goods under the COGSA is found in paragraph (6), Section 3, thus: (6) Unless notice of loss or damage and the general nature of such loss or damage be given in writing to the carrier or his agent at the port of discharge before or at the time of the removal of the goods into the custody of the person entitled to delivery thereof under the contract of carriage, such removal shall be prima facie evidence of the delivery by the carrier of the goods as described in the bill of lading. If the loss or damage is not apparent, the notice must be given within three days of the delivery. Said notice of loss or damage maybe endorsed upon the receipt for the goods given by the person taking delivery thereof. The notice in writing need not be given if the state of the goods has at the time of their receipt been the subject of joint survey or inspection. In any event the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered: Provided, That if a notice of loss or damage, either apparent or concealed, is not given as provided for in this section, that fact shall not affect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered. Starr Weigand 2016

A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of his goods before paying. However, letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the issuing bank but mainly for the benefit of the parties to the original transaction, in these cases, N Corp. as the seller and UMC as the buyer. Hence, the latter, as the buyer of the goods, should be regarded as the person entitled to delivery of the goods. Accordingly, for purposes of reckoning when notice of loss or damage should be given to the carrier or its agent, the date of delivery to UMC is controlling. A request for, and the result of a bad order examination, done within the reglementary period for furnishing notice of loss or damage to the carrier or its agent, serves the purpose of a claim. A claim is required to be filed within the reglementary period to afford the carrier or depositary reasonable opportunity and facilities to check the validity of the claims while facts are still fresh in the minds of the persons who took part in the transaction and documents are still available. Here, UMC filed a request for bad order survey on May 12, 1995, even before all the packages could be unloaded to its warehouse. Moreover, paragraph (6), Section 3 of the COGSA clearly states that failure to comply with the notice requirement shall not affect or prejudice the right of the shipper to bring suit within one year after delivery of the goods. The insurer, as subrogee of UMC, filed the Complaint for damages on January 18, 1996, just eight months after all the packages were delivered to its possession on May 17, 1995. Evidently, the action was seasonably filed. [Asian Terminals, Inc. v. Philam Insurance Co., Inc. (now Chartis Philippines Insurance Inc.)/ Philam Insurance Co., Inc. (now Chartis Philippines Insurance Inc.) v. Westwind Shipping 2013 & 2014 Q and A|Commercial Law

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Corporation and Asian Terminals, Inc./ Westwind Shipping Corporation v. Philam Insurance Co., Inc. and Asian Terminals, Inc., G.R. Nos. 181163/181262/181319, July 24, 2013] 3. S Corp. shipped goods on board a vessel owned by E Shipping, to be delivered to the consignee, C Steel. The goods were insured by MS Insurance. The shipment arrived in Manila, but it was found that some of the goods were in bad condition. When delivered to C Steel, the latter rejected the goods being unfit for their intended purpose. S Corp thereafter shipped another batch of goods under similar circumstances, which when they arrived in Manila, were also found to be in bad order. Again, C Steel rejected the goods. C Steel was paid by MS Insurance for the damage to the goods, and thus, MS Insurance filed an action for damages against E Shipping and the stevedore. Can E Shipping be held liable? Yes. It is settled in maritime law jurisprudence that cargoes while being unloaded generally remain under the custody of the carrier. Based evidence presented, the goods were damaged even before they were turned over to the stevedore. Such damage was even compounded by the negligent acts of E Shipping and the Stevedore which both mishandled the goods during the discharging operations. Thus, it bears stressing unto E Shipping that common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods transported by them. Subject to certain exceptions enumerated under Article 1734 of the Civil Code, common carriers are responsible for the loss, destruction, or deterioration of the goods. The extraordinary responsibility of the common carrier lasts from the time the goods are unconditionally placed in the possession of, and received by the carrier for transportation until the same are delivered, actually or constructively, by the carrier to the consignee, or to the person who has a right to Starr Weigand 2016

receive them. Owing to this high degree of diligence required of them, common carriers, as a general rule, are presumed to have been at fault or negligent if the goods they transported deteriorated or got lost or destroyed. That is, unless they prove that they exercised extraordinary diligence in transporting the goods. In order to avoid responsibility for any loss or damage, therefore, they have the burden of proving that they observed such high level of diligence. In this case, E Shipping failed to hurdle such burden. [Eastern Shipping Lines v. BPI/MS Insurance Corporation, G.R. No. 193986, 15 January 2014] 4. A shipped soybean meal on board a chartered vessel M/V C to consignees in the Philippines. While the soybean meal was being unloaded, the unloader hit a steel bar in the middle of the soybean, causing two of the screws of the unloader to break off. The arrastre operator, owner of the unloader, claimed for damages from the ship owner and the shipping agent, but was rejected. This being the case, the claim was brought to court. Can they be held liable by the arrastre operator for the damage sustained by the unloader? Yes. The ship owner and the ship agent are liable to the arrastre operator on the basis of quasi-delict, and not breach of contract, there being no contractual relation between them. The arrastre operator’s contractual relation is not with the ship owner and ship agent, but with the consignee of the goods shipped and with the Philippine Ports Authority (PPA). They may be held liable in view of Article 2176 of the Civil Code, which provides “[w]hoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.” And, by the failure of the ship owner and the ship agent to explain the circumstances that attended the accident, when knowledge of such 2013 & 2014 Q and A|Commercial Law

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circumstances is accessible only to them, they failed to overcome the prima facie presumption that the accident arose from or was caused by their negligence or want of care. The res ipsa loquitur doctrine is based in part upon the theory that the defendant in charge of the instrumentality which causes the injury either knows the cause of the accident or has the best opportunity of ascertaining it and that the plaintiff has no such knowledge, and therefore is compelled to allege negligence in general terms and to rely upon the proof of the happening of the accident in order to establish negligence. The prima facie evidence of the ship owner and ship agent’s negligence, being unexplained and uncontroverted, is sufficient to maintain the proposition affirmed. Hence, the negligence of the Master of the Vessel is conclusively presumed to be the proximate cause of the damage sustained by the unloader. Moreover, since the Master’s liability is ultimately that of the shipowner because he is the representative of the shipowner, the shipowner and its agents are solidarily liable to pay the arrastre operator the amount of damages actually proved. [Unknown Owner of M/V China Joy v. Asian Terminals, G.R. No. 195661, March 11, 2015] 5. S Corp. shipped steel sheets to Manila for CS, the consignee, on board E’s vessel. The steel sheets arrived in Manila, and were turned over to the arrastre operator of safe keeping, but when withdrawn, they were found to have been damaged, prompting the consignee to reject the entire shipment. Another shipment of steel was made by S Corp. for the same consignee on board another vessel owned by E. but, when the sheets arrived in Manila, they were damaged, and sustained further damage upon discharge from vessel. Thus, the consignee again rejected them. The consignee was able to recover from the cargo insurers, who then sought to recover damages from the E. E argued that as the carrier, his liability was limited to $500.00 per Starr Weigand 2016

package, since the bills of lading covering the damaged goods did not state the value of the cargo, but only made reference to invoices. The invoices, in turn, specified the value of the cargoes and bore the notation “Freight Prepaid” and “As Arranged.” Is E correct? No. Both Bills of Lading complied with the requirements provided by the COGSA. The bills of lading represent the formal expression of the parties’ rights, duties and obligations. It is the best evidence of the intention of the parties which is to be deciphered from the language used in the contract, not from the unilateral post facto assertions of one of the parties, or of third parties who are strangers to the contract. Thus, when the terms of an agreement have been reduced to writing, it is deemed to contain all the terms agreed upon and there can be, between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement. The declaration requirement does not require that all the details must be written down on the very bill of lading itself. It must be emphasized that all the needed details are in the invoice, which “contains the itemized list of goods shipped to a buyer, stating quantities, prices, shipping charges,” and other details which may contain numerous sheets. Compliance can be attained by incorporating the invoice, by way of reference, to the bill of lading provided that the former containing the description of the nature, value and/or payment of freight charges is as in this case duly admitted as evidence. [Eastern Shipping Lines v. BPI/MS Insurance Corp., G.R. No. 182864, January 12, 2015] 6. What is the effect of a time charter entered into by a carrier who also does business as a common carrier? If the intent of the parties to the time charter, as evidenced by their agreement itself, appears to be that they had intended that they enter into a bareboat agreement, such that control not only 2013 & 2014 Q and A|Commercial Law

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of the ship but also of the entire crew is transferred, then the common carrier would be converted into a private carrier. [Federal Phoenix Assurance v. Fortune Sea Carrier, G.R. No. 188118, November 23, 2015] 7. R made travel reservations with S Travel for his family’s trip to Australia. Upon booking and confirmation of his flight schedule, R paid the airfare and was issued Cathay Pacific round-trip plane tickets for Manila-HongKongAdelaide-HongKong-Manila. Their flight to Australia went smoothly. Before the flight back to Manila, the booking was reconfirmed and it was said that the reservation was still Ok as scheduled. They were only able to take a flight out back to Manila on the next day. When R and his family were at the airport to catch the flight back to Manila, they were informed by S Travel that they did not have confirmed reservations. Cathay, however, said that S Travel failed to input the ticket numbers of R, and made fictitious bookings for the other members of R’s family. In Manila, R was informed that it was Cathay that cancelled the bookings. A complaint for damages was filed against Cathay and S Travel. Can Cathay and S Travel be held liable? The determination of whether or not the award of damages is correct depends on the nature of R’s contractual relations with Cathay Pacific and S Travel. The cause of action against Cathay Pacific stemmed from a breach of contract of carriage. A contract of carriage is defined as one whereby a certain person or association of persons obligate themselves to transport persons, things, or news from one place to another for a fixed price. Under Article 1732 of the Civil Code, this "persons, corporations, firms, or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or

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air, for compensation, offering their services to the public" is called a common carrier. R and his family entered into a contract of carriage with Cathay Pacific. As far as R and his family are concerned, they were holding valid and confirmed airplane tickets. The ticket in itself is a valid written contract of carriage whereby for a consideration, Cathay Pacific undertook to carry respondents in its airplane for a round-trip flight from Manila to Adelaide, Australia and then back to Manila. In fact, R called the Cathay Pacific office before his return flight to re-confirm his booking. He was even assured by a staff of Cathay Pacific that he does not need to reconfirm his booking. Cathay Pacific breached its contract of carriage with respondents when it disallowed them to board the plane to go back to Manila on the date reflected on their tickets. Thus, Cathay Pacific opened itself to claims for compensatory, actual, moral and exemplary damages, attorney’s fees and costs of suit. In contrast, the contractual relation between S Travel and R is a contract for services. The object of the contract is arranging and facilitating the latter’s booking and ticketing. It was even S Travel which issued the tickets. Since the contract between the parties is an ordinary one for services, the standard of care required of respondent is that of a good father of a family under Article 1173 of the Civil Code. This connotes reasonable care consistent with that which an ordinarily prudent person would have observed when confronted with a similar situation. The test to determine whether negligence attended the performance of an obligation is: did the defendant in doing the alleged negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of negligence. There was indeed failure on the part of S Travel to exercise due diligence in performing its obligations under the contract of services. It was established by Cathay Pacific, that S Travel failed to input the correct ticket number for R’s ticket. Cathay Pacific even asserted that S Travel made two fictitious bookings for the 2013 & 2014 Q and A|Commercial Law

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members of R’s family. The negligence of S Travel renders it also liable for damages. [Cathay Pacific Airways v. Juanita Reyes, et al., G.R. No. 185891, June 26, 2013]

Insurance Law 1. In a CBA, it was provided that the employer will shoulder hospitalization expenses of the dependents of covered employees subject to certain limitations and restrictions. Accordingly, covered employees pay part of the hospitalization insurance premium through monthly salary deductions while the company, upon hospitalization of the covered employees' dependents, shall pay the hospitalization expenses incurred for the same. The conflict arose when a portion of the hospitalization expenses of the covered employees' dependents were paid/shouldered by the dependent's own health insurance. While the company refused to pay the portion of the hospital expenses already shouldered by the dependents' own health insurance, the union insists that the covered employees are entitled to the whole and undiminished amount of said hospital expenses. Decide. The covered employees are not entitled to full payment of the hospital expenses incurred by their dependents, including the amounts already paid by other health insurance companies based on the theory of collateral source rule. As part of American personal injury law, the collateral source rule was originally applied to tort cases wherein the defendant is prevented from benefiting from the plaintiff’s receipt of money from other sources. Under this rule, if an injured person receives compensation for his injuries from a source wholly independent of the tortfeasor, the payment should not be deducted from the damages which he would otherwise collect from the tortfeasor. In a recent Decision by the Illinois Supreme Court, the rule has been described as “an established exception to the general rule that damages in negligence actions must be compensatory.” The

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Court went on to explain that although the rule appears to allow a double recovery, the collateral source will have a lien or subrogation right to prevent such a double recovery. The collateral source rule applies in order to place the responsibility for losses on the party causing them. Its application is justified so that “the wrongdoer should not benefit from the expenditures made by the injured party or take advantage of contracts or other relations that may exist between the injured party and third persons.” Thus, it finds no application to cases involving no-fault insurances under which the insured is indemnified for losses by insurance companies, regardless of who was at fault in the incident generating the losses. Here, it is clear that the employer is a no-fault insurer. Hence, it cannot be obliged to pay the hospitalization expenses of the dependents of its employees which had already been paid by separate health insurance providers of said dependents. [Mitsubishi Motors Philippines Salaried Employees Union v. Mitsubishi Motors Philippines Corporation, G.R. No. 175773, June 17, 2013] 2. M Insurer insured PAP’s machineries and equipment against fire, for a period of one year, for the amount of 15 million pesos. This was procured by PAP for its mortgagee, RCBC. The insurance policy was renewed before the lapse of one year, on an ‘as is’ basis, and it was agreed that the things insured will not be moved to another location, without the consent of M insurer. The machineries and equipment were thereafter lost in a fire, which prompted PAP to claim from M insurer. The claim was denied on the ground that the things insured were transferred to a different location from that indicated in the policy. Can M insurer be held liable for the loss? No. Here, by the clear and express condition in the renewal policy, the removal of the insured property to any building or place required the Starr Weigand 2016

consent of the insurer. Any transfer effected by the insured, without the insurer’s consent, would free the latter from any liability. Considering that the original policy was renewed on an “as is basis,” it follows that the renewal policy carried with it the same stipulations and limitations. The terms and conditions in the renewal policy provided, among others, that the location of the risk insured against is at PAP’s factory. The subject insured properties, however, were totally burned at another factory. Although it was also located in the same area, the other factory was not the location stipulated in the renewal policy. There being an unconsented removal, the transfer was at PAP’s own risk. Consequently, it must suffer the consequences of the fire. Thus, the Court agrees with the report of an international loss adjuster which investigated the fire incident at the other factory, which opined that “[g]iven that the location of risk covered under the policy is not the location affected, the policy will, therefore, not respond to this loss/claim.” It can also be said that with the transfer of the location of the subject properties, without notice and without M insurer’s consent, after the renewal of the policy, PAP clearly committed concealment, misrepresentation and a breach of a material warranty. Accordingly, an insurer can exercise its right to rescind an insurance contract when the following conditions are present, to wit: 1) the policy limits the use or condition of the thing insured; 2) there is an alteration in said use or condition; 3) the alteration is without the consent of the insurer; 4) the alteration is made by means within the insured’s control; and 5) the alteration increases the risk of loss. In the case at bench, all these circumstances are present. It was clearly established that the renewal policy stipulated that the insured properties were located at PAP’s factory; that PAP removed the properties without the 2013 & 2014 Q and A|Commercial Law

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consent of M insurer; and that the alteration of the location increased the risk of loss. [Malayan Insurance Company, Inc. v. PAP co., Ltd. (Philippine Branch), G.R. No. 200784, August 7, 2013] 3. M Insurance issued a life insurance policy covering the life of S, with A as beneficiary. More than two years after the insurance was issued, S died, thus, A filed a claim for the proceeds. The claim was denied because the claim was spurious, as it appeared after its investigation that S did not actually apply for insurance coverage, was unlettered, sickly, and had no visible source of income to pay for the insurance premiums; and that A was an impostor, posing as S and fraudulently obtaining insurance in the latter’s name without her knowledge and consent. Can M Insurance deny the claim? No. "Fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the contract." In the absence of proof of such fraudulent intent, no right to rescind arises. There being no evidence that there was indeed fraud, except for the selfserving result of M Insurance’s investigation, then the claim cannot be denied. Also, Section 48 of the Insurance Code will prevent the insurer from barring the claim. The results and conclusions arrived at during the investigation conducted unilaterally by petitioner after the claim was filed may simply be dismissed as self-serving and may not form the basis of a cause of action given the existence and application of Section 48, which provides that if the life insurance policy has been in force for at least two years from its date of issuance, the insurer cannot deny the claim on the ground of concealment or misrepresentation by the insured. Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured. Under the provision, an insurer is Starr Weigand 2016

given two years – from the effectivity of a life insurance contract and while the insured is alive – to discover or prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent. After the two-year period lapses, or when the insured dies within the 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. Section 48 prevents a situation where the insurer knowingly continues to accept annual premium payments on life insurance, only to later on deny a claim on the policy on specious claims of fraudulent concealment and misrepresentation, such as what obtains in the instant case. Thus, instead of conducting at the first instance an investigation into the circumstances surrounding the issuance of the subject insurance policy which would have timely exposed the supposed flaws and irregularities attending it as it now professes, M Insurance appears to have turned a blind eye and opted instead to continue collecting the premiums on the policy. For nearly three years, the insurer collected the premiums and devoted the same to its own profit. It cannot now deny the claim when it is called to account. Section 48 must be applied to it with full force and effect. [Manila Bankers v. Crisencia Aban, GR No. 175666, July 29, 2013] 4. V Corp operated a tanker which was chartered by C Inc. to transport petroleum. The petroleum was insured by AHA Co. however, during the course of the voyage, the tanker collided with another vessel and sank along with the petroleum. AHA Co. indemnified C Inc. for the loss, and later sued V Corp for reimbursement. What is the prescriptive period for 2013 & 2014 Q and A|Commercial Law

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filing an action for reimbursement by the insurer as a result of subrogation? The cause of action of the insurer is one which arose out of subrogation by virtue of Article 2207 of the Civil Code, which is based upon an obligation created by law. It comes under Article 1194(2) of the Civil Code and prescribes in ten years. [Vector Shipping v. American Home Insurance, GR No. 159213, 3 July 2013] N.B. If there is a period within which the insured can file a claim with the wrongdoer, the subrogated insurance company is also bound by such period. The subrogated insurance company stands in the place and in substitution of the consignee. [Federal Express v. American Home Assurance, G.R. No. 150094, August 18, 2004] 5. R insured her car with P Insurer in case of loss or damage thereto. The car was to be taken to an auto shop by R’s driver, but the driver no longer return. After efforts to find it failed, R notified the insurer of the loss. The claim of R against the insurer was denied because of a provision in the policy which exempts the insurer from liability in case malicious damage to the car was caused by the employee of the insured. Can the insurer deny R’s claim on such ground? No. A contract of insurance is a contract of adhesion. When the terms of the insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation. The words "loss" and "damage" mean different things in common ordinary usage. The word "loss" refers to the act or fact of losing, or failure to keep possession, while the word "damage" means deterioration or injury to property.

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Therefore, the insurer cannot exclude the loss of vehicle under the exceptions in the insurance policy since the same refers only to "malicious damage," or more specifically, "injury" to the motor vehicle caused by a person under the insured’s service. It clearly does not contemplate "loss of property," as what happened in the instant case. "Malicious damage," as provided for in the subject policy as one of the exceptions from coverage, is the damage that is the direct result from the deliberate or willful act of the insured, members of his family, and any person in the insured’s service, whose clear plan or purpose was to cause damage to the insured vehicle for purposes of defrauding the insurer Theft perpetrated by a driver of the insured is not an exception to the coverage from the insurance policy subject of this case. This is evident from the very provision of the insurance policy. The insurance company, subject to the limits of liability, is obligated to indemnify the insured against theft. Said provision does not qualify as to who would commit the theft. Thus, even if the same is committed by the driver of the insured, there being no categorical declaration of exception, the same must be covered. "(A)n insurance contract should be interpreted as to carry out the purpose for which the parties entered into the contract which is to insure against risks of loss or damage to the goods. Such interpretation should result from the natural and reasonable meaning of language in the policy. Where restrictive provisions are open to two interpretations, that which is most favorable to the insured is adopted." The defendant would argue that if the person employed by the insured would commit the theft and the insurer would be held liable, then this would result to an absurd situation where the insurer would also be held liable if the insured would commit the theft. This argument is certainly flawed. Of course, if the theft would be committed by the insured himself, the same would be an exception to the coverage since in that case there would be fraud on the part of

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the insured or breach of material warranty under Section 69 of the Insurance Code. Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against the insurer; in other words, it should be construed liberally in favor of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from noncompliance with its obligations. [Alpha Insurance and Surety Co. v. Arsenia Sonia Castor, G.R. No. 198174, September 2, 2013] 6. A was a health insurance policy holder of M Inc. He underwent emergency medical appendectomy causing him to incur medical expenses while in the US. However, M In. only approved reimbursement of a portion of the expenses, which was based on the average cost of the procedure if done in Manila. With the denial of his claim for reimbursement, A filed a complaint for breach of contract against M Inc. Should the action prosper? Yes. M Inc.’s liability to A under the subject Health Care Contract should be based on the expenses for hospital and professional fees which he actually incurred, and should not be limited by the amount that he would have incurred had his emergency treatment been performed in an accredited hospital in the Philippines. . For purposes of determining the liability of a health care provider to its members, jurisprudence holds that a 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 Starr Weigand 2016

to the extent agreed upon under the contract. that a health care agreement is in the nature of a non-life insurance. It is an established rule in insurance contracts that when their terms contain limitations on liability, they should be construed strictly against the insurer. These are contracts of adhesion the terms of which must be interpreted and enforced stringently against the insurer which prepared the contract. This doctrine is equally applicable to health care agreements. L]imitations of liability on the part of the insurer or health care provider must be construed in such a way as to preclude it from evading its obligations. Accordingly, they should be scrutinized by the courts with "extreme jealousy" and "care" and with a "jaundiced eye. [Fortune Medicare, Inc. v. David Robert U. Amorin, G.R. No. 195872, March 12, 2014] 7. Can the security deposit of an insurance company under Section 203 of the insurance code be levied upon by a judgment creditor? Can the insurance commissioner bar or prevent such levy? The text of Section 203 indicates that the security deposit is exempt from levy by a judgment or any other claimant. worded, the law and clearly states that the security deposit shall be (1) answerable for all the obligations of the depositing insurer under its insurance' contracts; (2) at all times free from any liens or encumbrance; and (3) exempt from levy by any claimant. A single claimant cannot proceed independently against the security deposit of an insurance company, since to do so would not only prejudice the policy holders and their beneficiaries, but would also annul the very reason for which the law required the security deposit. Under Section 191 and Section 203 of the Insurance Code, the Insurance Commissioner has the specific legal duty to hold the security deposits for the benefit of all policy holders. Undeniably, the Insurance commissioner has been given a wide latitude of discretion to regulate the insurance industry so as to protect the insuring public. The law specifically confers custody over the securities 2013 & 2014 Q and A|Commercial Law

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upon the commissioner, with whom these investments are required to be deposited. An implied trust is created by the law for the benefit of all claimants under subsisting insurance contracts issued by the insurance company. As the officer vested with custody of the security deposit, the insurance commissioner is in the best position to determine if and when it may be released without prejudicing the right of other policy holders. Before allowing the withdrawal or the release of the deposit, the commissioner must be satisfied that the conditions contemplated by the law are met and all policy holders protected. [Capital Insurance and Surety Co., Inc. v. Del Monte Motor Works, Inc., G.R. No. 159979, December 9, 2015]

Intellectual Property Laws 1. “HIPOLITO & SEA HORSE & TRIANGULAR DEVICE," "FAMA," and other related marks were owned by CH S.A. of Portugal to designate kerosene burners. L claimed that the true owner of the marks G corp. assigned them to him. However, he claimed that he bought kerosene burners from W Corp. with the subject marks and indicated thereon that they were made in Portugal. He thus filed a complaint against W Corp. and its officers for false designation of origin. Can W Corp. be held liable? Yes. W Corp. did not have authority from CH S.A. to place the words “Made in Portugal” and “Original Portugal” with the trademarks on the burners produced in the Philippines. W Corp. placed the words "Made in Portugal" and "Original Portugal" with the disputed marks knowing fully well — because of their previous dealings with the Portuguese company — that these were the marks used in the products of CH S.A. Portugal. More importantly, the products that W Corp. sold were admittedly produced in the Philippines, with no authority CH S.A. Portugal. The law on trademarks and trade names precisely precludes a person from profiting from the business reputation built by another and from deceiving the public as to the origins of products. [Uyco v. Lo, G.R. No. 202423, January 28, 2013] 2. Levi’s Inc. was a licensee of Levi’s, a US Corporation owner of trademarks and designs of Levi’s Jeans. It received information that D was selling counterfeit Levi’s jeans, and with the help of the NBI, had seized from D’s shop several fake Levi’s jeans, with the trademark “LS JEANS TAILORING”. It charged D with the crime of trademark infringement. Is D guilty of infringement? No. The elements of the offense of trademark infringement under the

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Intellectual Property Code are, therefore, the following: 1. The trademark being infringed is registered in the Intellectual Property Office; 2. The trademark is reproduced, counterfeited, copied, or colorably imitated by the infringer; 3. The infringing mark is used in connection with the sale, offering for sale, or advertising of any goods, business or services; or the infringing mark is applied to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used upon or in connection with such goods, business or services; 4. The use or application of the infringing mark is likely to cause confusion or mistake or to deceive purchasers or others as to the goods or services themselves or as to the source or origin of such goods or services or the identity of such business; and 5. The use or application of the infringing mark is without the consent of the trademark owner or the assignee thereof. The gravamen of the offense is he likelihood of confusion. There are two tests to determine likelihood of confusion, namely: the dominancy test, and the holistic test. The holistic test is applicable here considering that the herein criminal cases also involved trademark infringement in relation to jeans products. Accordingly, the jeans trademarks of Levi’s and D must be considered as a whole in determining the likelihood of confusion between them. The jeans made and sold by Levi’s, were very popular in the Philippines. The consuming public knew that the original Levi’s jeans were under a foreign brand and quite expensive. Such jeans could be purchased only in malls or boutiques as ready-to-wear items, and were not available in tailoring shops like those of D’s as well as not acquired on a “made-to-order” basis. Under the circumstances, the consuming public could easily discern if the jeans were original or fake Starr Weigand 2016

Levi’s jeans, or were manufactured by other brands of jeans. D used the trademark “LS JEANS TAILORING” for the jeans he produced and sold in his tailoring shops. His trademark was visually and aurally different from the trademark “LEVI STRAUSS & CO” appearing on the patch of original jeans under the trademark LEVI’S. The word “LS” could not be confused as a derivative from “LEVI STRAUSS” by virtue of the “LS” being connected to the word “TAILORING”, thereby openly suggesting that the jeans bearing the trademark “LS JEANS TAILORING” came or were bought from the tailoring shops of D, not from the malls or boutiques selling original Levi’s jeans to the consuming public. [Diaz v. People, G.R. No. 180677, 18 February 2013] 3. A French partnership filed with the IPO a trademark application for the mark "LE CORDON BLEU & DEVICE". This was opposed by Ecole alleging that it was the owner of the mark "LE CORDON BLEU, ECOLE DE CUISINE MANILLE," which it has been using since 1948 in cooking and other culinary activities, including in its restaurant business, it has earned immense and invaluable goodwill such that Cointreau’s use of the subject mark will actually create confusion, mistake, and deception to the buying public as to the origin and sponsorship of the goods, and cause great and irreparable injury and damage to Ecole’s business reputation and goodwill as a senior user of the same. Can the said mark of the French partnership be registered? Yes. Foreign marks which are not registered are still accorded protection against infringement and/or unfair competition. Under the Paris Convention, the Philippines is obligated to assure nationals of the signatory-countries that they are afforded an effective protection against violation of their intellectual property rights in the Philippines in the same way that their own countries are obligated to accord similar protection to Philippine nationals. “Thus, under 2013 & 2014 Q and A|Commercial Law

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Philippine law, a trade name of a national of a State that is a party to the Paris Convention, whether or not the trade name forms part of a trademark, is protected “without the obligation of filing or registration.’” The present law on trademarks, Republic Act No. 8293, otherwise known as the Intellectual Property Code of the Philippines, as amended, has already dispensed with the requirement of prior actual use at the time of registration. Thus, there is more reason to allow the registration of the subject mark under the name of the French partnership as its true and lawful owner. The function of a trademark is to point out distinctly the origin or ownership of the goods (or services) to which it is affixed; to secure to him, who has been instrumental in bringing into the market a superior article of merchandise, the fruit of his industry and skill; to assure the public that they are procuring the genuine article; to prevent fraud and imposition; and to protect the manufacturer against substitution and sale of an inferior and different article as his product. As such, courts will protect trade names or marks, although not registered or properly selected as trademarks, on the broad ground of enforcing justice and protecting one in the fruits of his toil. [Ecole De Cuisine Manille (Cordon Bleu of the Philippines), Inc. v. Renaud Cointreau & CIE and Le Condron Bleu Int’l., B.V., G.R. No. 185830, June 5, 2013] 4. F Manufacturing filed a case against Harvard U, an educational corporation in the US, for the cancellation of its registration of trademark. It alleged that since 1995, it had used the trademark “Harvard” for its goods, for which its predecessor had secured a certificate of registration with the IPO. Can the action prosper? No. F Manufacturing’s registration of the mark "Harvard" should not have been allowed because Section 4(a) of R.A. No. 166 prohibits the registration of a mark "which may Starr Weigand 2016

disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs x x x." its use of the mark "Harvard," coupled with its claimed origin in the US, obviously suggests a false connection with Harvard University. On this ground alone, F Manufacturing’s registration of the mark "Harvard" should have been disallowed. Also, the Philippines and the United States of America are both signatories to the Paris Convention for the Protection of Industrial Property (Paris Convention). The Philippines became a signatory to the Paris Convention on 27 September 1965. The Philippines is obligated to assure nationals of countries of the Paris Convention that they are afforded an effective protection against violation of their intellectual property rights in the Philippines in the same way that their own countries are obligated to accord similar protection to Philippine nationals. Thus, under Philippine law, a trade name of a national of a State that is a party to the Paris Convention, whether or not the trade name forms part of a trademark, is protected "without the obligation of filing or registration." Indeed, Section 123.1(e) of R.A. No. 8293 now categorically states that "a mark which is considered by the competent authority of the Philippines to be well-known internationally and in the Philippines, whether or not it is registered here," cannot be registered by another in the Philippines. Section 123.1(e) does not require that the well-known mark be used in commerce in the Philippines but only that it be well-known in the Philippines. In determining whether a mark is well-known, the following criteria or any combination thereof may be taken into account: (a) the duration, extent and geographical area of any use of the mark, in particular, the duration, extent and geographical area of any promotion of the mark, including advertising or publicity and the presentation, at fairs or exhibitions, of the goods and/or services to which the mark applies; 2013 & 2014 Q and A|Commercial Law

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(b) the market share, in the Philippines and in other countries, of the goods and/or services to which the mark applies; (c) the degree of the inherent or acquired distinction of the mark; (d) the quality-image or reputation acquired by the mark; (e) the extent to which the mark has been registered in the world; (f) the exclusivity of registration attained by the mark in the world; (g) the extent to which the mark has been used in the world; (h) the exclusivity of use attained by the mark in the world; (i) the commercial value attributed to the mark in the world; (j) the record of successful protection of the rights in the mark; (k) the outcome of litigations dealing with the issue of whether the mark is a wellknown mark; and (l) the presence or absence of identical or similar marks validly registered for or used on identical or similar goods or services and owned by persons other than the person claiming that his mark is a well-known mark. Since "any combination" of the foregoing criteria is sufficient to determine that a mark is well-known, it is clearly not necessary that the mark be used in commerce in the Philippines. Thus, while under the territoriality principle a mark must be used in commerce in the Philippines to be entitled to protection, internationally well-known marks are the exceptions to this rule. Thus, the trademark of Harvard U, even if not registered here, is still entitled to protection. "Harvard" is the trade name of the world famous Harvard University, and it is also a trademark of Harvard University. Under Article 8 of the Paris Convention, as well as Section 37 of R.A. No. 166, Harvard University is entitled to protection in the Philippines of its trade name "Harvard" even without registration of such trade name in the Philippines. This means that no educational entity in the Philippines can use Starr Weigand 2016

the trade name "Harvard" without the consent of Harvard University. Likewise, no entity in the Philippines can claim, expressly or impliedly through the use of the name and mark "Harvard," that its products or services are authorized, approved, or licensed by, or sourced from, Harvard University without the latter's consent. [Fredco Manufacturing v. President and Fellows of Harvard College, GR No. 185917, 1 June, 2011] 5. B Corp. was a German company who applied for various trademark registrations with the IPO, which included the mark “Birkenstock”. However, registration proceedings were halted because the IPO found an existing registration for the mark “Birkenstock and Device,” in the name of S Corp. predecessor of PS Marketing. But, PS Marketing did not file a declaration of actual use (DAU) of the said marks. Should the registration of B corp. be allowed? Yes. The law requires the filing of a DAU on specified periods, and failure to file the DAU within the requisite period results in the automatic cancellation of registration of a trademark. In turn, such failure is tantamount to the abandonment or withdrawal of any right or interest the registrant has over his trademark. Also, it must be emphasized that registration of a trademark, by itself, is not a mode of acquiring ownership. If the applicant is not the owner of the trademark, he has no right to apply for its registration. Registration merely creates a prima facie presumption of the validity of the registration, of the registrant’s ownership of the trademark, and of the exclusive right to the use thereof. Such presumption, just like the presumptive regularity in the performance of official functions, is rebuttable and must give way to evidence to the contrary. Clearly, it is not the application or registration of a trademark that vests ownership thereof, but it is the ownership of a trademark that confers the right to register the same. A 2013 & 2014 Q and A|Commercial Law

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trademark is an industrial property over which its owner is entitled to property rights which cannot be appropriated by unscrupulous entities that, in one way or another, happen to register such trademark ahead of its true and lawful owner. The presumption of ownership accorded to a registrant must then necessarily yield to superior evidence of actual and real ownership of a trademark. In the instant case, B Corp. is the owner of the mark "BIRKENSTOCK." There is evidence relating to the origin and history of "BIRKENSTOCK" and its use in commerce long before respondent was able to register the same here in the Philippines. It has been sufficiently proven that "BIRKENSTOCK" was first adopted in Europe in 1774 by its inventor, Johann Birkenstock, a shoemaker, on his line of quality footwear and thereafter, numerous generations of his kin continuously engaged in the manufacture and sale of shoes and sandals bearing the mark "BIRKENSTOCK" until it became the entity now known as the petitioner. Petitioner also submitted various certificates of registration of the mark "BIRKENSTOCK" in various countries and that it has used such mark in different countries worldwide, including the Philippines. This being the case, B Corp. is the true and lawful owner of the mark "BIRKENSTOCK" and entitled to its registration, and that PS Marketing was in bad faith in having it registered in its name. [Birkenstock Orthopaedie GMBH and Co. KG v. Philippine Shoe Expo Maarketing, G.R. No. 194307, November 20, 2013] 6. P Corp and S Corp supply and produce LPG in the Philippines. P Corp is the registered owner of the trademarks “Gasul” and Gasul cylinders, while S Corp was the authorized user of “Shellane” and Shellane cylinders in the Philippines. With the help of the NBI, it was found that R Corp was engaged in the refilling and sale of LPG cylinders bearing the registered marks of the P Corp and S Corp without authority from the latter. Can

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R Corp be held liable for infringement of trademark and unfair competition? Yes. The mere unauthorized use of a container bearing a registered trademark in connection with the sale, distribution or advertising of goods or services which is likely to cause confusion, mistake or deception among the buyers or consumers can be considered as trademark infringement. In the instant case, R Corp committed trademark infringement when they refilled, without the consent of P Corp and S Corp, the LPG containers bearing the latter’s registered marks. R Corp’s acts will inevitably confuse the consuming public, since they have no way of knowing that the gas contained in the LPG tanks bearing the marks of P Corp and S Corp is in reality not the latter’s LPG product after the same had been illegally refilled. The public will then be led to believe that R Corp are authorized refillers and distributors of the LPG products, considering that they are accepting empty containers P Corp and S Corp, and refilling them for resale. Unfair competition has been defined as the passing off (or palming off) or attempting to pass off upon the public of the goods or business of one person as the goods or business of another with the end and probable effect of deceiving the public. Passing off (or palming off) takes place where the defendant, by imitative devices on the general appearance of the goods, misleads prospective purchasers into buying his merchandise under the impression that they are buying that of his competitors. Thus, the defendant gives his goods the general appearance of the goods of his competitor with the intention of deceiving the public that the goods are those of his competitor. In the present case, P Corp and S Corp pertinently observed that by refilling and selling LPG cylinders bearing their registered marks, R Corp was selling goods by giving them the general appearance of goods of another manufacturer. There is a showing that the consumers may be misled into believing that the LPGs contained in the cylinders bearing the marks "GASUL" and "SHELLANE" are those goods or products of the P Corp and S Corps 2013 & 2014 Q and A|Commercial Law

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when, in fact, they are not. Obviously, the mere use of those LPG cylinders bearing the trademarks "GASUL" and "SHELLANE" will give the LPGs sold by R Corp the general appearance of the products of the P Corp and S Corp. [Republic Gas Corporation v. Petron Corporation and Plipinas Shell, G.R. No. 194062, June 17, 2013] 7. TK filed with the IPO an application for trademark registration of “KOLIN” for use on a combination of goods, including colored televisions, refrigerators, window-type and splittype air conditioners, electric fans and water dispensers. Said goods allegedly fall under Classes 9, 11, and 21 of the Nice Classification (NCL). The application was opposed by KE, saying that that trademark being registered by TK is identical, if not confusingly similar, with its previously registered “KOLIN” mark, covering the following products under Class 9 of the NCL: automatic voltage regulator, converter, recharger, stereo booster, AC-DC regulated power supply, step-down transformer, and PA amplified AC-DC. Should TK be allowed to register its trademark? Yes. Mere uniformity in categorization, by itself, does not automatically preclude the registration of what appears to be an identical mark, if that be the case. Whether or not the products covered by the trademark sought to be registered by TK, on the one hand, and those covered by the prior issued certificate of registration in favor of KE on the other, fall under the same categories in the NCL is not the sole and decisive factor in determining a possible violation of KE’s intellectual property right should TK’s application be granted. It is a hornbook doctrine that emphasis should be on the similarity of the products involved and not on the arbitrary classification or general description of their properties or characteristics. The mere fact that one person has adopted and used a trademark on his goods Starr Weigand 2016

would not, without more, prevent the adoption and use of the same trademark by others on unrelated articles of a different kind. And in case of the parties’ products, they are unrelated, and the ordinary buyer would not likely be confused thereby. A certificate of trademark registration confers upon the trademark owner the exclusive right to sue those who have adopted a similar mark not only in connection with the goods or services specified in the certificate, but also with those that are related thereto. In resolving one of the pivotal issues in this case––whether or not the products of the parties involved are related––the doctrine in Mighty Corporation is authoritative. There, the Court held that the goods should be tested against several factors before arriving at a sound conclusion on the question of relatedness. Among these are: (a) the business (and its location) to which the goods belong; (b) the class of product to which the goods belong; (c) the product’s quality, quantity, or size, including the nature of the package, wrapper or container; (d) the nature and cost of the articles; (e) the descriptive properties, physical attributes or essential characteristics with reference to their form, composition, texture or quality; (f) the purpose of the goods; (g) whether the article is bought for immediate consumption, that is, day-today household items; (h) the fields of manufacture; (i) the conditions under which the article is usually purchased; and (j) the channels of trade through which the goods flow, how they are distributed, marketed, displayed and sold. As mentioned, the classification of the products under the NCL is merely part and parcel of the factors to be considered in ascertaining whether the goods are related. It is not 2013 & 2014 Q and A|Commercial Law

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sufficient to state that the goods involved herein are electronic products under Class 9 in order to establish relatedness between the goods, for this only accounts for one of many considerations enumerated in Mighty Corporation. In this case, credence is accorded to TK’s assertions that: a. TK’s goods are classified as home appliances as opposed to KE’s goods which are power supply and audio equipment accessories; b. TK’s television sets and DVD players perform distinct function and purpose from KE’s power supply and audio equipment; and c. TK sells and distributes its various home appliance products on wholesale and to accredited dealers, whereas KE’s goods are sold and flow through electrical and hardware stores. Clearly then, it cannot be concluded that all electronic products are related and that the coverage of one electronic product necessarily precludes the registration of a similar mark over another. In this digital age wherein electronic products have not only diversified by leaps and bounds, and are geared towards interoperability, it is difficult to assert readily, as respondent simplistically did, that all devices that require plugging into sockets are necessarily related goods. It bears to stress at this point that the list of products included in Class 9 can be subcategorized into five (5) classifications, namely: (1) apparatus and instruments for scientific or research purposes, (2) information technology and audiovisual equipment, (3) apparatus and devices for controlling the distribution and use of electricity, (4) optical apparatus and instruments, and (5) safety equipment. From this sub-classification, it becomes apparent that petitioner’s products, i.e., televisions and DVD players, belong to audiovisiual equipment, while that of respondent, consisting of automatic voltage regulator, converter, recharger, stereo booster, AC-DC regulated power supply, step-down transformer, and PA Starr Weigand 2016

amplified AC-DC, generally fall under devices for controlling the distribution and use of electricity. [Taiwan Kolin v. Kolin Electronics, G.R. No. 209843, March 25, 2015] 8. S Corp. filed an application for the issuance of search warrant to search a warehouse of IPI, alleging that the latter engaged in infringement of trademark. Upon implementation of the warrant, it was found that there were more than 6,000 pairs of shoes bearing S Corp’s registered trademark (stylized S with an oval design). Was there infringement? Yes. There is colorable imitation between the shoes of IPI and S Corp. The essential element of infringement under R.A. No. 8293 is that the infringing mark is likely to cause confusion. In determining similarity and likelihood of confusion, jurisprudence has developed tests: the Dominancy Test and the Holistic or Totality Test. The Dominancy Test focuses on the similarity of the prevalent or dominant features of the competing trademarks that might cause confusion, mistake, and deception in the mind of the purchasing public. Duplication or imitation is not necessary; neither is it required that the mark sought to be registered suggests an effort to imitate. Given more consideration are the aural and visual impressions created by the marks on the buyers of goods, giving little weight to factors like prices, quality, sales outlets, and market segments. In contrast, the Holistic or Totality Test necessitates a consideration of the entirety of the marks as applied to the products, including the labels and packaging, in determining confusing similarity. The discerning eye of the observer must focus not only on the predominant words, but also on the other features appearing on both labels so that the observer may draw conclusion on whether one is confusingly similar to the other.

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Relative to the question on confusion of marks and trade names, jurisprudence has noted two (2) types of confusion, viz.: (1) confusion of goods (product confusion), where the ordinarily prudent purchaser would be induced to purchase one product in the belief that he was purchasing the other; and (2) confusion of business (source or origin confusion), where, although the goods of the parties are different, the product, the mark of which registration is applied for by one party, is such as might reasonably be assumed to originate with the registrant of an earlier product, and the public would then be deceived either into that belief or into the belief that there is some connection between the two parties, though inexistent. Applying the Dominancy Test to the case at bar, this Court finds that the use of the stylized "S" by IPI in its shoes infringes on the mark already registered by S Corp. with the IPO. While it is undisputed that S Corp.’s stylized "S" is within an oval design, to this Court's mind, the dominant feature of the trademark is the stylized "S," as it is precisely the stylized "S" which catches the eye of the purchaser. Thus, even if IPI did not use an oval design, the mere fact that it used the same stylized "S", the same being the dominant feature of S Copr.'s trademark, already constitutes infringement under the Dominancy Test. [Sketchers USA v. Inter Pacific Industrial, GR No. 164321, Marche 23, 2011] 9. EYIS corp., a Philippine company, distributes air conditioners and other industrial tools and equipment. SD corp., on the other hand, is a Taiwanese company engaged in the manufacture of air compressors. Both claimed to have the right to register the trademark "VESPA" for air compressors. EYIS buys air compressors from SD, but the documents do not show that the said goods were marked as “VESPA”. EYIS was able to register the mark “VESPA” with the IPO. A month later, SD was also granted registration. SD filed a

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petition to cancel EYIS’ registration. Who is the true owner of the mark? EYIS must be considered as the prior and continuous user of the mark "VESPA" and its true owner. Hence, EYIS is entitled to the registration of the mark in its name. the registration of a mark is prevented with the filing of an earlier application for registration. This must not, however, be interpreted to mean that ownership should be based upon an earlier filing date. While RA 8293 removed the previous requirement of proof of actual use prior to the filing of an application for registration of a mark, proof of prior and continuous use is necessary to establish ownership of a mark. Such ownership constitutes sufficient evidence to oppose the registration of a mark. Sec. 134 of the IP Code provides that "any person who believes that he would be damaged by the registration of a mark x x x" may file an opposition to the application. The term "any person" encompasses the true owner of the mark the prior and continuous user. Notably, the Court has ruled that the prior and continuous use of a mark may even overcome the presumptive ownership of the registrant and be held as the owner of the mark. By itself, registration is not a mode of acquiring ownership. When the applicant is not the owner of the trademark being applied for, he has no right to apply for registration of the same. Registration merely creates a prima facie presumption of the validity of the registration, of the registrants ownership of the trademark and of the exclusive right to the use thereof. Such presumption, just like the presumptive regularity in the performance of official functions, is rebuttable and must give way to evidence to the contrary. In the instant case, EYIS is the prior user of the mark, and is thus the true owner thereof. [E.Y. Industrial Sales v. Shen Dar Electricity and Machinery Co. Ltd., GR No. 184850, 20 October 2010] 10. M Pharmaceuticals registered “Dermalin” as its trademark. Thereafter, D Inc. sought to have “Dermaline” registered as a trademark under its name. this was 2013 & 2014 Q and A|Commercial Law

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opposed to be M Pharmaceuticals allegeing that registration by D Inc. will likely cause confusion, mistake and deception to the purchasing public, as the trademark sought to be registered by D Inc. so resembles its trademark, “Dermalin”. Can the trademark “Dermaline” be registered? No. While there are no set rules that can be deduced as what constitutes a dominant feature with respect to trademarks applied for registration; usually, what are taken into account are signs, color, design, peculiar shape or name, or some special, easily remembered earmarks of the brand that readily attracts and catches the attention of the ordinary consumer. Verily, when one applies for the registration of a trademark or label which is almost the same or that very closely resembles one already used and registered by another, the application should be rejected and dismissed outright, even without any opposition on the part of the owner and user of a previously registered label or trademark. This is intended not only to avoid confusion on the part of the public, but also to protect an already used and registered trademark and an established goodwill. In the instant case, the likelihood of confusion is apparent. The two marks are almost spelled the same way and are even pronounced in practically the same manner in three (3) syllables. Thus, when an ordinary purchaser, for example, hears an advertisement of D Inc.'s applied trademark over the radio, chances are he will associate it with M Pharmaceutical's registered mark. Even if the marks do not refer to the same classification of goods, does not eradicate the possibility of mistake on the part of the purchasing public to associate the former with the latter. Indeed, the registered trademark owner may use its mark on the same or similar products, in different segments of the market, and at different price levels depending on variations of the products for specific segments of the market. The Court is cognizant that the registered trademark owner enjoys protection Starr Weigand 2016

in product and market areas that are the normal potential expansion of his business. Verily, when one applies for the registration of a trademark or label which is almost the same or that very closely resembles one already used and registered by another, the application should be rejected and dismissed outright, even without any opposition on the part of the owner and user of a previously registered label or trademark. This is intended not only to avoid confusion on the part of the public, but also to protect an already used and registered trademark and an established goodwill. [Dermaline, Inc. v. Myra Pharmaceuticals, GR No. 190065, 16 August 2010] 11. ABS-CBN was able to cover the release of a Filipino worker kidnapped in Iraq. The said Filipino was released because of the withdrawal of Filipino troops from the said country. ABS-CBN allowed Reuters Television Service (Reuters) to air the footages it had taken earlier under a special agreement. Under the same agreement, it was stated that any of the footages taken by ABS-CBN would be for the "use of Reuter's international subscribers only, and shall be considered and treated by Reuters under 'embargo' against use by other subscribers in the Philippines. . . . [N]o other Philippine subscriber of Reuters would be allowed to use ABS-CBN footage without the latter's consent. However, GMA received live video feed of the coverage of the arrival of the kidnapped Filipino from Reuters, and immediately carried the same in its “Flash Report.” ABS-CBN thus filed a complaint for copyright infringement against GMA. Is news footage is subject to copyright, and would the prohibited use thereof be punishable under the Intellectual Property Code? Yes. The news footage is copyrightable. The Intellectual Property Code is clear about 2013 & 2014 Q and A|Commercial Law

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the rights afforded to authors of various kinds of work. Under the Code, "works are protected by the sole fact of their creation, irrespective of their mode or form of expression, as well as of their content, quality and purpose." These include "[audio-visual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audiovisual recordings.”

The idea/expression dichotomy has long been subject to debate in the field of copyright law. Abolishing the dichotomy has been proposed, in that non-protectibility of ideas should be reexamined, if not stricken, from decisions and the law:

Contrary to the old copyright law, the Intellectual Property Code does not require registration of the work to fully recover in an infringement suit. Nevertheless, both copyright laws provide that copyright for a work is acquired by an intellectual creator from the moment of creation.

If the underlying purpose of the copyright law is the dual one expressed by Lord Mansfield, the only excuse for the continuance of the ideaexpression test as a judicial standard for determining protectibility would be that it was or could be a truly useful method of determining the proper balance between the creator's right to profit from his work and the public's right that the "progress of the arts not be retarded."

It is true that under Section 175 of the Intellectual Property Code, "news of the day and other miscellaneous facts having the character of mere items of press information" are considered unprotected subject matter. However, the Code does not state that expression of the news of the day, particularly when it underwent a creative process, is not entitled to protection.

. . . [A]s used in the present-day context[,] the dichotomy has little or no relationship to the policy which it should effectuate. Indeed, all too often the sweeping language of the courts regarding the nonprotectibility of ideas gives the impression that this is of itself a policy of the law, instead of merely a clumsy and outdated tool to achieve a much more basic end.

An idea or event must be distinguished from the expression of that idea or event. An idea has been likened to a ghost in that it "must be spoken to a little before it will explain itself." It is a concept that has eluded exact legal definition. There is no one legal definition of "idea" in this jurisdiction. The term "idea" is mentioned only once in the Intellectual Property Code.

The idea/expression dichotomy is a complex matter if one is trying to determine whether a certain material is a copy of another. This dichotomy would be more relevant in determining, for instance, whether a stage play was an infringement of an author's book involving the same characters and setting. In this case, however, GMA admitted that the material under review — which is the subject of the controversy — is an exact copy of the original. GMA did not subject ABS-CBN's footage to any editing of their own. The news footage did not undergo any transformation where there is a need to track elements of the original. News as expressed in a video footage is entitled to copyright protection. Broadcasting organizations have not only copyright on but also neighboring rights over their broadcasts. Copyrightability of a work is different from fair use of a work for purposes of news reporting.

News or the event itself is not copyrightable. However, an event can be captured and presented in a specific medium. As recognized by the court in Joaquin, television "involves a whole spectrum of visuals and effects, video and audio." News coverage in television involves framing shots, using images, graphics, and sound effects. It involves creative process and originality. Television news footage is an expression of the news.

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The mere act of rebroadcasting without authority from the owner of the broadcast gives rise to the probability that a crime was committed under the Intellectual Property Code. Note that, unless clearly provided in the law, offenses involving infringement of copyright protections should be considered malum prohibitum. It is the act of infringement, not the intent, which causes the damage. To require or assume the need to prove intent defeats the purpose of intellectual property protection. Nevertheless, proof beyond reasonable doubt is still the standard for criminal prosecutions under the Intellectual Property Code.[ABS-CBN Corporation v. Gozon et al., G.R. No. 195956, March 11, 2015] 12. K Inc. had the trademarks, trading styles, company names and business names "KENNEX", "KENNEX & DEVICE", "PRO KENNEX" and "PROKENNEX", in its name. S Corp. filed an action against K Inc. alleging trademark infringement, saying that K Inc. is a mere distributor of the goods covered by the marks and it is the actual owner of the marks. However, S Corp.’s registration of the marks was cancelled by in a registration cancellation case. Can the action prosper? Was there unfair competition? No. By operation of law, specifically Section 19 of RA 166, the trademark infringement aspect of S Corp.'s case has been rendered moot and academic in view of the finality of the decision in the Registration Cancellation Case. In short, S Corp. is left without any cause of action for trademark infringement since the cancellation of registration of a trademark deprived it of protection from infringement from the moment judgment or order of cancellation became final. To be sure, in a trademark infringement, title to the trademark is indispensable to a valid cause of action and such title is shown by its certificate of registration. With its certificates of registration over the disputed trademarks Starr Weigand 2016

effectively cancelled with finality, S Corp.'s case for trademark infringement lost its legal basis and no longer presented a valid cause of action. Likewise, there can be no infringement committed by K Inc. who was adjudged with finality to be the rightful owner of the disputed trademarks in the Registration Cancellation Case. Even prior to the cancellation of the registration of the disputed trademarks, S Corp. - as a mere distributor and not the owner – cannot assert any protection from trademark infringement as it had no right in the first place to the registration of the disputed trademarks. In fact, jurisprudence holds that in the absence of any inequitable conduct on the part of the manufacturer, an exclusive distributor who employs the trademark of the manufacturer does not acquire proprietary rights of the manufacturer, and a registration of the trademark by the distributor as such belongs to the manufacturer, provided the fiduciary relationship does not terminate before application for registration is filed. To establish trademark infringement, the following elements must be proven: (1) the validity of plaintiff's mark; (2) the plaintiff's ownership of the mark; and (3) the use of the mark or its colorable imitation by the alleged infringer results in "likelihood of confusion." Based on these elements, it is immediately obvious that the second element – the plaintiff's ownership of the mark - was what the Registration Cancellation Case decided with finality. On this element depended the validity of the registrations that, on their own, only gave rise to the presumption of, but was not conclusive on, the issue of ownership. Likewise, there is also no unfair competition in the instant case. From jurisprudence, unfair competition has been defined as the passing off (or palming off) or attempting to pass off upon the public of the goods or business of one person as the goods or business of another with the end and probable effect of deceiving the public. The essential elements of unfair competition are (1) confusing similarity in the general appearance of the goods; and (2) intent 2013 & 2014 Q and A|Commercial Law

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to deceive the public and defraud a competitor. In the instant case, there is no evidence exists showing that K Inc. ever attempted to pass off the goods it sold (i.e. sportswear, sporting goods and equipment) as those of S Corp. In addition, there is no evidence of bad faith or fraud imputable to K Inc. in using the disputed trademarks. [Superior Commercial Enterprises v. Kunnan Enterprises., GR No. 169974, April 20, 2010] 13. To constitute copyright infringement of computer/software programs, is it required that the computer/software programs involved that the computer programs be first photographed, photo-engraved, or pictorially illustrated? No. Presidential Decree No. 49 already acknowledged the existence of computer programs as works or creations protected by copyright. To hold that the legislative intent was to require that the computer programs be first photographed, photo-engraved, or pictorially illustrated as a condition for the commission of copyright infringement invites ridicule. Such interpretation of Section 5(a) of Presidential Decree No. 49 defies logic and common sense because it focused on terms like “copy,” “multiply,” and “sell,” but blatantly ignored terms like “photographs,” “photo-engravings,” and “pictorial illustrations.” The mere sale of the illicit copies of the software programs was enough by itself to show the existence of probable cause for copyright infringement. There was no need for the petitioner to still prove who copied, replicated or reproduced the software programs. [Microsoft Corporation v. Rolando D. Manansala, et al., G.R. No. 166391, October 21, 2015]

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Banking Laws 1. The BSP, through the Monetary Board is granted the power and authority to prescribe different maximum rates of interest which may be imposed for a loan or renewal thereof or the forbearance of any money, goods or credits, provided that the changes are effected gradually and announced in advance. Thus, it issued CB Circular No. 905, removing all interest ceilings and suspended the usury law. Did the BSP commit grave abuse of discretion in issuing CB Circular No. 905? No. The BSP has the power to do so. It has been held that CB Circular No. 905 “did not repeal nor in anyway amend the Usury Law but simply suspended the latter’s effectivity;” that “a [CB] Circular cannot repeal a law, [for] only a law can repeal another law;” that “by virtue of CB Circular No. 905, the Usury Law has been rendered ineffective;” and “Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.” The law creating the BSP covered only loans extended by banks, whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or credits, including those for loans of low priority such as consumer loans, as well as such loans made by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries. By lifting the interest ceiling, CB Circular No. 905 merely upheld the parties’ freedom of contract to agree freely on the rate of interest. Article 1306 of the New Civil Code provides that the contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. Starr Weigand 2016

Nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for being contrary to morals, if not against the law. Indeed, under Article 1409 of the Civil Code, these contracts are deemed inexistent and void ab initio, and therefore cannot be ratified, nor may the right to set up their illegality as a defense be waived. Nonetheless, the nullity of the stipulation of usurious interest does not affect the lender’s right to recover the principal of a loan, nor affect the other terms thereof. [Advocates for Truth in Lending v. Bangko Sentral Monetary Board, G.R. No. 192986, 15 January 2013] 2. Can the exercise by the BSP Monetary Board of its power under Section 37 of RA No. 7653 and Section 66 of RA No. 8791, imposing, at its discretion, administrative sanctions, upon any bank for violation of any banking law, be the subject of an action for declaratory relief? No, the act of the BSP Monetary Board imposing administrative sanctions is done in the exercise of its quasi-judicial power, which cannot be the subject of an action for declaratory relief. A quasi-judicial agency or body is an organ of government other than a court and other than a legislature, which affects the rights of private parties through either adjudication or rulemaking. The very definition of an administrative agency includes its being vested with quasi-judicial powers. The ever increasing variety of powers and functions given to administrative agencies recognizes the need for the active intervention of administrative agencies in matters calling for technical knowledge and speed in countless controversies which cannot possibly be handled by regular courts. A “quasi-judicial function” is a term which applies to the action, discretion, etc. of public administrative officers or bodies, who are required to investigate facts, 2013 & 2014 Q and A|Commercial Law

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or ascertain the existence of facts, hold hearings, and draw conclusions from them, as a basis for their official action and to exercise discretion of a judicial nature. Undoubtedly, the BSP Monetary Board is a quasi-judicial agency exercising quasi-judicial powers or functions. The BSP Monetary Board is an independent central monetary authority and a body corporate with fiscal and administrative autonomy, mandated to provide policy directions in the areas of money, banking, and credit. It has the power to issue subpoena, to sue for contempt those refusing to obey the subpoena without justifiable reason, to administer oaths and compel presentation of books, records and others, needed in its examination, to impose fines and other sanctions and to issue cease and desist order. Section 37 of Republic Act No. 7653, in particular, explicitly provides that the BSP Monetary Board shall exercise its discretion in determining whether administrative sanctions should be imposed on banks and quasi-banks, which necessarily implies that the BSP Monetary Board must conduct some form of investigation or hearing regarding the same. A priori, having established that the BSP Monetary Board is indeed a quasi-judicial body exercising quasi-judicial functions, then its act in imposing sanctions upon a bank cannot be the proper subject of an action for declaratory relief. [Monetary Board v. Philippine Veterans Bank, G.R. No. 189571, January 21, 2015] 3. The late Mr. G deposited 2 million pesos with PALI. Conflicting claims of his relatives were presented to PALI seeking the release of the money deposited. Pending investigation of the claims, PALI deposited the money with UCPB, in account which was in trust for the heirs of Mr. G. UCPB however allowed PALI to withdraw the money leaving a balance of around 9 thousand pesos. Can UCPB be held liable for the allowing the withdrawal?

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No. UCPB did not become a trustee by the mere opening of the ACCOUNT. While this may seem to be the case, by reason of the fiduciary nature of the bank’s relationship with its depositors, this fiduciary relationship does not “convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied.” It simply means that the bank is obliged to observe “high standards of integrity and performance” in complying with its obligations under the contract of simple loan. Per Article 1980 of the Civil Code, a creditor-debtor relationship exists between the bank and its depositor. The savings deposit agreement is between the bank and the depositor; by receiving the deposit, the bank impliedly agrees to pay upon demand and only upon the depositor’s order. [Joseph Goyanko, Jr., as administrator of the Estate of Joseph Goyanko, Sr. vs. United Coconut Planters Bank, Mango Avenue Branch, G.R. No. 179096. February 6, 2013] 4. BOMC was created by a BSP circular to provide support service for banks, and is a subsidiary of BPI. A service agreement was entered into by BPI and BOMC where the latter provides services to a branch of the former. Later on, the services included those for another branch. As a result, some services of the employees of BPI were transferred to BOMC. This was contested by the Union of BPI, mainly invoking DOLE department order No. 10 which provides what jobs may be contracted out. BSP has a circular on bank service contracts, while the DOLE has a department order governing what jobs may be contracted out. Which administrative issuance should prevail? Both actually apply. There is no conflict between D.O. No. 10 and CBP Circular No. 1388. In fact, they complement each other. Consistent with the maxim, interpretare et concordare leges legibus est optimus interpretandi modus, a statute should be 2013 & 2014 Q and A|Commercial Law

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construed not only to be consistent with itself but also to harmonize with other laws on the same subject matter, as to form a complete, coherent and intelligible system of jurisprudence.35 The seemingly conflicting provisions of a law or of two laws must be harmonized to render each effective.36 It is only when harmonization is impossible that resort must be made to choosing which law to apply. In the case at bench, the Union submits that while the Central Bank regulates banking, the Labor Code and its implementing rules regulate the employment relationship. To this, the Court agrees. The fact that banks are of a specialized industry must, however, be taken into account. The competence in determining which banking functions may or may not be outsourced lies with the BSP. This does not mean that banks can simply outsource banking functions allowed by the BSP through its circulars, without giving regard to the guidelines set forth under D.O. No. 10 issued by the DOLE. While D.O. No. 10, Series of 1997, enumerates the permissible contracting or subcontracting activities, it is to be observed that, particularly in Sec. 6(d) invoked by the Union, the provision is general in character – "x x x Works or services not directly related or not integral to the main business or operation of the principal… x x x." This does not limit or prohibit the appropriate government agency, such as the BSP, to issue rules, regulations or circulars to further and specifically determine the permissible services to be contracted out. CBP Circular No. 138838 enumerated functions which are ancillary to the business of banks, hence, allowed to be outsourced. Thus, sanctioned by said circular, BPI outsourced the cashiering (i.e., cash-delivery and deposit pickup) and accounting requirements of its Davao City branches D.O. No. 10 is but a guide to determine what functions may be contracted out, subject to the rules and established jurisprudence on legitimate job contracting and prohibited labor only contracting. Even if the Court considers D.O. No. 10 only, BPI would still be within the bounds of D.O. No. 10 when it Starr Weigand 2016

contracted out the subject functions. This is because the subject functions were not related or not integral to the main business or operation of the principal which is the lending of funds obtained in the form of deposits. From the very definition of “banks” as provided under the General Banking Law, it can easily be discerned that banks perform only two (2) main or basic functions – deposit and loan functions. Thus, cashiering, distribution and bookkeeping are but ancillary functions whose outsourcing is sanctioned under CBP Circular No. 1388 as well as D.O. No. 10. Even BPI itself recognizes that deposit and loan functions cannot be legally contracted out as they are directly related or integral to the main business or operation of banks. The CBP’s Manual of Regulations has even categorically stated and emphasized on the prohibition against outsourcing inherent banking functions, which refer to any contract between the bank and a service provider for the latter to supply, or any act whereby the latter supplies, the manpower to service the deposit transactions of the former. [BPI Employees Union-Davao City-Fubu (BPIEU-Davao City-Fubu) v. Bank of the Philippine Islands (BPI), et al., G.R. No. 174912, July 24, 2013] 5. A was the corporate secretary of BPI, a bank. He was also the corporate secretary of IPB, a quasi-bank. Does this violate the rule on interlocking directors? No, not exactly. As a general rule, there shall be no concurrent officerships, including secondments, between banks, or between an bank and a quasi-bank or a non-bank financial institution. However, subject to approval of the Monetary Board, concurrent officerships, including secondments, may be allowed for “concurrent officiership positions as corporate secretary or assistance corporate secretary between bank/s, quasi-bank/s and non-bank financial institutions,” provided that proof of disclosure to and consent from all of the involved financial institutions, on the concurrent officership positions, shall be submitted to the BSP. Likewise, concurrent 2013 & 2014 Q and A|Commercial Law

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officership positions in the same capacity which do not involve management functions, i.e. internal auditors, corporate secretary, assistant corporate secretary and security officer, between a quasi-bank and one or more of its subsidiary quasi-banks or non-bank financial institutions, or between a quasi-bank and/or a non-bank financial institution, or between bank/s, quasi-bank/s and non-bank financial institution/s, other than investment houses, may also be allowed. Provides than in the last two instances, at least 20% of the equity of each bank, quasi-bank and non-bank financial institution is owned by a holding company or by any banks or quasi-banks within the group. [BSP Circular No. 851, series of 2014, amending Section X145 of the Manual of Regulations for Banks (MORB) and Section 4145Q of the Manual for Regulations for Non-Bank Financial Institutions (MORNBFI)] 6. BSP Circular No. 799 was issued in 2013, which changed the legal rate of interest for loans and forebearances of money from 12% to 6% per annum. How will this affect the rules governing interest rates laid down by the Court in the case of Eastern Shipping Lines? The guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows: I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasidelicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages” of the Civil Code govern in determining the measure of recoverable damages. II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

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1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 7. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 8. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. And, in addition to the above, judgments that have become 2013 & 2014 Q and A|Commercial Law

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final and executory prior to July 1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein. [Dario Nacar v. Gallery Frames and/or Felipe Bordey, Jr., G.R. No. 189871, August 13, 2013.] 9. M obtained a loan with time deposit from Prubank evidenced by a promissory note, wherein it was stipulated that the loan was subject to 21% p.a., attorney's fees equivalent to 15% of the total amount due but not less than P200.00 and, in case of default, a penalty and collection charges of 12% p.a. of the total amount due, with maturity date of 10 January 1985. The loan was renewed up to 17 February 1985. Through a deed of assignment, M authorized BPI to pay his loan obligations with Prubank. M and his wife again obtained a loan from BPI covered by a promissory note with maturity date of 22 March 1990, to bear interest at 23% p.a., with attorney's fees equivalent to 15% p.a. of the total amount due. To secure such loan, M mortgaged his land in favor of BPI. M failed to pay his loan obligations, thus BPI sought to have the mortgage extrajudicially foreclosed. Thereafter, M and his wife filed an action for annulment of mortgage. Are the interest rate of 23% p.a. and the penalty charge of 12% p.a., excessive or unconscionable? No. Jurisprudence establish that the 24% p.a. stipulated interest rate was not considered unconscionable, thus, the 23% p.a. interest rate imposed on M’s loan in this case can by no means be considered excessive or unconscionable. In Medel v. Court of Appeals, the Court found the stipulated interest rate of 66% p.a. or a 5.5% per month on a P500,000.00 loan excessive, unconscionable and exorbitant, hence, contrary to morals if not against the law and declared such stipulation void. In Toring v. Starr Weigand 2016

Spouses Ganzon-Olan, the stipulated interest rates involved were 3% and 3.81% per month on a P10 million loan, which the Court found under the circumstances excessive and reduced the same to 1% per month. While in Chua v. Timan, where the stipulated interest rates were 7% and 5% a month, which are equivalent to 84% and 60% p.a., respectively, the Court reduced the same to 1% per month or 12% p.a. the Court said that it need not unsettle the principle it had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, unconscionable and exorbitant, hence, the stipulation was void for being contrary to morals. However, in Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and Mortgage Bank, Dagupan City Branch, this Court held that the interest rate of 24% per annum on a loan of P244,000.00, agreed upon by the parties, may not be considered as unconscionable and excessive. As such, the Court ruled that the borrowers cannot renege on their obligation to comply with what is incumbent upon them under the contract of loan as the said contract is the law between the parties and they are bound by its stipulations. Also, in Garcia v. Court of Appeals, the Court sustained the agreement of the parties to a 24% per annum interest on an P8,649,250.00 loan finding the same to be reasonable and clearly evidenced by the amended credit line agreement entered into by the parties as well as two promissory notes executed by the borrower in favor of the lender. Likewise, the stipulated 12% p.a. penalty charge is not excessive or unconscionable. In Ruiz v. CA, the Court has held that 1% surcharge on the principal loan for every month of default is valid. This surcharge or penalty stipulated in a loan agreement in case of default partakes of the nature of liquidated damages under Art. 2227 of the New Civil Code, and is separate and distinct from interest payment. Also referred to as a penalty clause, it is expressly recognized by law. It is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. The obligor would then be bound to pay the stipulated amount of 2013 & 2014 Q and A|Commercial Law

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indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach. The enforcement of the penalty can be demanded by the creditor only when the non-performance is due to the fault or fraud of the debtor. The non-performance gives rise to the presumption of fault; in order to avoid the payment of the penalty, the debtor has the burden of proving an excuse - the failure of the performance was due to either force majeure or the acts of the creditor himself. In the instant case, petitioners defaulted in the payment of their loan obligation with respondent bank and their contract provided for the payment of 12% p.a. penalty charge, and since there was no showing that petitioners' failure to perform their obligation was due to force majeure or to respondent bank's acts, petitioners cannot now back out on their obligation to pay the penalty charge. [Mallari v. Prudential Bank, G.R. No. 197861, 5 June 2013] 10. The Lims obtained a loan from DBP to finance their business. It was covered by a promissory note wherein it was stipulated that the loan is subject to an interest rate of 9% per annum and penalty charge of 11% per annum. Another loan was obtained by the Lim, covered by another promissory note with an interest rate of 12% per annum and a penalty charge of 1/3% per month on the overdue amortization. The loans were covered by mortgages on the properties of the Lims. They failed to pay their loans as a result of the collapse of their business. DBP sought to foreclose the mortgage and sell the properties, but the Lims asked for an extension of the period within which they could pay. They were granted an extension, subject to the condition that they will be liable for an additional interest of 18.5%, and other additional penalties. Is the imposition of additional penalties and interests allowed under the law?

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No. The imposition of additional interest and penalties not stipulated in the Promissory Notes, this should not be allowed. Article 1956 of the Civil Code specifically states that "no interest shall be due unless it has been expressly stipulated in writing." Thus, the payment of interest and penalties in loans is allowed only if the parties agreed to it and reduced their agreement in writing. In this case, the Lims never agreed to pay additional interest and penalties. Hence, the imposition of additional interest and penalties are illegal, and thus, void. [Lim v. Development Bank of the Philiipines, G.R. No. 177050, July 01, 2013] 11. The Spouses J obtained a loan from Chinabank covered by two promissory notes, secured by real estate mortgage over their property in White Plains. They failed to pay their loan, thus the mortgage was foreclosed. Since the proceeds of the sale of the mortgage property did not cover the entire amount of the loan, Chinabank filed and action against the Spouses J for collection of the remaining balance. During the trial it was found that the interest rate on the loan changes every month based on the prevailing market rate and DBP allegedly notified the spouses of the prevailing rate by calling them monthly before their account became past due. DBP also alleged that the spouses agreed to a changing interest rate by signing the promissory note, indicating that they agreed to pay interest at the prevailing rate. Can DBP subject the loan of the spouses to a changing rate of interest? No. It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes an increase in the stipulated rate of interest without the express conformity of the debtor. Such unbridled right given to creditors to adjust the interest independently and upwardly would completely take away from the debtors the right to assent to an important modification in their agreement and 2013 & 2014 Q and A|Commercial Law

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would also negate the element of mutuality in their contracts. While a ceiling on interest rates under the Usury Law was already lifted under Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets." The provision in the promissory notes of the Spouses J authorizing DBP to increase, decrease or otherwise change from time to time the rate of interest and/or bank charges "without advance notice" to the spouses, "in the event of change in the interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines," does not give DBP unrestrained freedom to charge any rate other than that which was agreed upon. Here, the monthly upward/downward adjustment of interest rate is left to the will of respondent bank alone. It violates the essence of mutuality of the contract. Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an agreement between the parties. Unless such important change in the contract terms is mutually agreed upon, it has no binding effect. In the absence of consent on the part of the spouses to the modifications in the interest rates, the adjusted rates cannot bind them. Monthly telephone calls to the spouses advising them of the prevailing interest rates would not suffice. A detailed billing statement based on the new imposed interest with corresponding computation of the total debt should have been provided by the DBP to enable the spouses to make an informed decision. An appropriate form must also be signed by the spouses to indicate their conformity to the new rates. Compliance with these requisites is essential to preserve the mutuality of contracts. For indeed, one-sided impositions do not have the force of law between the parties, because such impositions are not based on the parties’ essential equality. Hence, the interest charged over the interest rate indicated in the promissory notes is invalid. [Juico v. China Banking Corporation, G.R. No. 187678, April 10, 2013]

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12. A is the estranged wife of B, who had several and/or time deposit accounts with a bank. The bank allowed the time deposits to be pre-terminated and released the proceeds to B, without requiring the presentation of the requisite certificates of time deposit. Should the bank be held liable? Yes. A certificate of deposit is defined as a written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created. In particular, the certificates of deposit contain provisions on the amount of interest, period of maturity, and manner of termination. Specifically, they stressed that endorsement and presentation of the certificate of deposit is indispensable to their termination. In other words, the accounts may only be terminated upon endorsement and presentation of the certificates of deposit. Without the requisite presentation of the certificates of deposit, BPI may not terminate them. The bank, thus, may only terminate the certificates of deposit after it has diligently completed two steps. First, it must ensure the identity of the account holder. Second, the bank must demand the surrender of the certificates of deposit. This is the essence of the contract entered into by the parties which serves as an accountability measure to other co-depositors. By requiring the presentation of the certificates prior to termination, the other depositors may rely on the fact that their investments in the interest-yielding accounts may not be indiscriminately withdrawn by any of their codepositors. This protective mechanism likewise benefits the bank, which shields it from liability upon showing that it released the funds in good faith to an account holder who possesses the certificates. Without the presentation of the certificates of deposit, the bank may not validly terminate the certificates of deposit. [Bank of the Philippine Islands v. Tacila Fernandez, G.R. No. 173134, September 2, 2015] 2013 & 2014 Q and A|Commercial Law

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13. Spouses A obtained a loan from PNB, secured by a real estate mortgage, and covered by 12 promissory notes providing for varying interest rates of 17.5% to 27% per interest period. It was agreed upon by the parties that the rate of interest may be increased or decreased for the subsequent interest periods, with prior notice to the spouses in the event of changes in interest rates prescribed by law or the Monetary Board, or in the bank’s overall cost of funds. Can PNB impose varying rates of interest on the loan of the spouses? No. The interest rates imposed by DBP are excessive and arbitrary. Thus, the foregoing interest rates imposed on the Spouse’s loan obligation without their knowledge and consent should be disregarded, not only for being iniquitous and exorbitant, but also for being violative of the principle of mutuality of contracts. In the instant case, it is clear from the contract of loan between the spouses and the bank that the spouses, as borrowers, agreed to the payment of interest on their loan obligation. That the rate of interest was subsequently declared illegal and unconscionable does not entitle the spouses to stop payment of interest. It should be emphasized that only the rate of interest was declared void. The stipulation requiring the Spouses to pay interest on their loan remains valid and binding. They are, therefore, liable to pay interest from the time they defaulted in payment until their loan is fully paid. Pursuant to Circular No. 799, series of 2013, issued by the Office of the Governor of the BSP on 21 June 2013, and in accordance with the ruling of the Supreme Court in the recent case of Dario Nacar v. Gallery Frames and/or Felipe Bordey, Jr., effective 1 July 2013, the rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent (6%) per annum. Accordingly, the rate of interest of 12% per annum on petitioners-spouses’ obligation shall Starr Weigand 2016

apply from the date of default – until 30 June 2013 only. From 1 July 2013 until fully paid, the legal rate of 6% per annum shall be applied to the Spouses’ unpaid obligation. [Andal v. Philippine National Bank, G.R. No. 194201, November 27, 2013] 14. ECBI was a banking institution which underwent BSP’s general examination. It was issued a cease and desist order and enjoined it from pursuing certain acts and transactions that were considered unsafe or unsound banking practices, and from doing such other acts or transactions constituting fraud or might result in the dissipation of its assets. This was the result of the continuing refusal of ECBI’s BOD to allow the examination of the BSP. Thereafter, for defying the cease and desist order, BSP issued as resolution placing it under receivership. Was the action of the BSP proper? Yes. The Monetary Board (MB) may forbid a bank from doing business and place it under receivership without prior notice and hearing. This is called the “close now, hear later” doctrine. It must be emphasized that R.A .No. 7653 is a later law and under said act, the power of the MB over banks, including rural banks, was increased and expanded. The Court, in several cases, upheld the power of the MB to take over banks without need for prior hearing. Prior hearing is not necessary inasmuch as the law entrusts to the MB the appreciation and determination of whether any or all of the statutory grounds for the closure and receivership of the erring bank are present. The MB, under R.A. No. 7653, has been invested with more power of closure and placement of a bank under receivership for insolvency or illiquidity, or because the bank’s continuance in business would probably result in the loss to depositors or creditors. Accordingly, the MB can immediately implement its resolution prohibiting a banking institution to do business in the Philippines 2013 & 2014 Q and A|Commercial Law

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and, thereafter, appoint the PDIC as receiver. The procedure for the involuntary closure of a bank is summary and expeditious in nature. Such action of the MB shall be final and executory, but may be later subjected to a judicial scrutiny via a petition for certiorari to be filed by the stockholders of record of the bank representing a majority of the capital stock. Obviously, this procedure is designed to protect the interest of all concerned, that is, the depositors, creditors and stockholders, the bank itself and the general public. The protection afforded public interest warrants the exercise of a summary closure. Management take-over under Section 11 of R.A. No. 7353 was no longer feasible considering the financial quagmire that engulfed ECBI showing serious conditions of insolvency and illiquidity. Besides, placing ECBI under receivership would effectively put a stop to the further draining of its assets. [Alfeo D. Vivas, on his behalf and on behalf of the Shareholders or Eurocredit Community Bank v. The Monetary Board of the Bangko Sentral ng Pilipinas and the Philippine Deposit Insurance Corporation, G.R. No. 191424, August 7, 2013] 15. What is the nature of liquidation proceedings? A liquidation proceeding is a special proceeding involving the administration and disposition, with judicial intervention, of an insolvent's assets for the benefit of its creditors. Under the Central Bank Act, this proceeding is cognizable by the Regional Trial Courts. But, if liquidation proceedings have already been started in one court, another RTC branch cannot rule on the propriety of the rulings of the liquidation court. Due to the nature of their transactions and functions, the banking industry is affected with public interest and banks can properly be subject to reasonable regulation under the police power of the State. It is the Government's responsibility to see to it that the financial interests of those who deal with banks and banking institutions are protected. Hence, the Monetary Board, under certain Starr Weigand 2016

circumstances, is empowered to (summarily and without need for prior hearing) forbid a banking institution from doing business in the Philippines and designate a Receiver for the institution. Such grounds include: 1) Inability to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; or 2) Has sufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or 3) Cannot continue in business without involving probable losses to its depositors or creditors; or 4) Willful violation of a cease and desist order that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution ... The judicial liquidation is intended to prevent multiplicity of actions against the insolvent bank. The lawmaking body contemplated thaf for convenience only one court, if possible, should pass upon the claims against the insolvent bank and that the liquidation court should assist the Superintendent of Banks and control his operations. The judicial liquidation is a pragmatic arrangement designed to establish due process and orderliness in the liquidation of the bank, to obviate the proliferation of litigations and to avoid injustice and arbitrariness. Notwithstanding this "pragmatic arrangement," claims may, under certain circumstances, be litigated before courts other than the liquidation court. This, however, does not mean that the other courts can interfere with the liquidation proceedings. Adjudicated claims must still be submitted to the liquidators for processing. [The Consolidated Bank and Trust Corporation Vs. The Court of Appeals, United Pacific Leasing and Finance Corporation, G.R. No. 169457, October 19, 2015] 16. G Corp. obtained a loan from DBP bank to finance its development of a resort complex. To secure it, a 2013 & 2014 Q and A|Commercial Law

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promissory note was executed by the G Corp. and mortgages were constituted on its properties. Also, a cash equity was put up. The loan was released to G Corp. in tranches, but DBP eventually refused to release the balance thereof, alleging that it failed to develop the said resort complex. DBP then foreclose the mortgages, which prompted G Corp. to file an action for specific performance against DBP. Was it proper for DBP to foreclose the mortgages? No. Considering that it had yet to release the entire proceeds of the loan, DBP could not yet make an effective demand for payment upon G Corp. to perform its obligation under the loan. Being a banking institution, DBP owed it to G Corp. to exercise the highest degree of diligence, as well as to observe the high standards of integrity and performance in all its transactions because its business was imbued with public interest. The high standards were also necessary to ensure public confidence in the banking system. The stability of banks largely depends on the confidence of the people in the honesty and efficiency of banks. Thus, DBP had to act with great care in applying the stipulations of its agreement with G Corp., lest it erodes such public confidence. Yet, DBP failed in its duty to exercise the highest degree of diligence by prematurely foreclosing the mortgages and unwarrantedly causing the foreclosure sale of the mortgaged properties despite G Corp. not being yet in default. [Development Bank of the Philippines (DBP) v. Guariña Agricultural and Realty Development Corporation, G.R. No. 160758. January 15, 2014] 17. The spouses S applied for a loan which was granted by BPI for a term of six months, secured by a mortgage over land owned by the Spouses S. the Spouses S later on obtained a credit line from BPI in the amount of P5.7 million. The mortgage was released on the representation of the spouses that the proceeds will be used to pay the loans, but the same remained Starr Weigand 2016

unpaid. Having defaulted on their loan obligations, BPI demanded payment. However, the spouses filed a complaint against BPI, to maintain the status quo, and alleged that BPI "deliberately refused to comply with the condition/undertaking of the loan for IGLF endorsement and approval" until the maturity date of the loan lapsed to their great prejudice and irreparable damage. They further alleged they neither executed any P5.7 Million promissory note nor did they receive P5.7 Million from BPI. Thus, there is no existing P5.7 Million Credit Line Facility Agreement as far as they are concerned. Is the contention of the Spouses correct? No. It appears from the allegations that Spouses S have misconstrued the concept of a Credit Line Facility Agreement. A credit line is "that amount of money or merchandise which a banker, merchant, or supplier agrees to supply to a person on credit and generally agreed to in advance." It is the fixed limit of credit granted by a bank, retailer, or credit card issuer to a customer, to the full extent of which the latter may avail himself of his dealings with the former but which he must not exceed and is usually intended to cover a series of transactions in which case, when the customer’s line of credit is nearly exhausted, he is expected to reduce his indebtedness by payments before making any further drawings. Thus, contrary to the belief and understanding of Spouses S, BPI does not have to require the execution of promissory note of the entire P5.7 Million since a credit line as stated above, is merely a fixed limit of credit. Furthermore, still applying the above quoted definition, a credit line usually presupposes a series of transactions until the credit line is nearly exhausted. BPI is not obliged to release the amount of P5.7 Million to Spouses S all at once, in a single transaction. [Spouses Pio Dato and Sonia Y. Sia v. Bank of the Philippine Islands, G.R. No. 181873, November 27, 2013]

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18. ABC is a trust corporation which is a subsidiary of Z Corp., a quasi-bank. Are the assets held in trust by ABC included in the computation of the single borrower’s limit for Z Corp.? No. In case a stand-alone trust corporation is a subsidiary or an affiliate of a quasi-bank, the asset under management of the trust corporation shall not form part of the relevant exposures of the parent quasi-bank for purposes of calculating the single borrower’s limit and the ceilings for accommodation to DOSRI of the parent quasi-bank. Likewise, the purchase by the trust corporation, in behalf of its client, of securities and instruments issued by its parent quasi-bank shall not form part of the relevant exposure of the trust corporation for purposes of the single borrower’s limits and DOSRI ceilings of the said trust corporation. [BSP Circular No. 849, Series of 2014] 19. Can the account of a depositor be made the subject of a waiver of bank secrecy laws, which is a mere provision in a compromise agreement involving parties other than the depositor himself? No. Section 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits enacted in 1955, was first amended by Presidential Decree No. 1792 in 1981 and further amended by R.A. No. 7653 in 1993. It now reads: SEC. 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except when the examination is made in the course of a special or general examination of a bank and is specifically authorized by the Monetary Board after being satisfied that there is Starr Weigand 2016

reasonable ground to believe that a bank fraud or serious irregularity has been or is being committed and that it is necessary to look into the deposit to establish such fraud or irregularity, or when the examination is made by an independent auditor hired by the bank to conduct its regular audit provided that the examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank, or upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation. R.A. No. 1405 provides for exceptions when records of deposits may be disclosed. These are under any of the following instances: (a) upon written permission of the depositor, (b) in cases of impeachment, (c) upon order of a competent court in the case of bribery or dereliction of duty of public officials or, (d) when the money deposited or invested is the subject matter of the litigation, and (e) in cases of violation of the Anti-Money Laundering Act, the Anti-Money Laundering Council may inquire into a bank account upon order of any competent court. In this case, the compromise agreement did not involve the depositor. There was no written consent given by the depositor or its representatives, that it is waiving the confidentiality of its bank deposits. The provision on the waiver of the confidentiality of bank deposits was merely inserted in the agreement. It is clear therefore that the depositor is not bound by the said provision since it was without the express consent of the depositor who was not a party and signatory to the said agreement. Neither can the depositor be deemed to have given its permission by failure to interpose its objection during the proceedings. It is an elementary rule that the existence of a waiver 2013 & 2014 Q and A|Commercial Law

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must be positively demonstrated since a waiver by implication is not normally countenanced. The norm is that a waiver must not only be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness of the relevant circumstances and likely consequences. There must be persuasive evidence to show an actual intention to relinquish the right. Mere silence on the part of the holder of the right should not be construed as a surrender thereof; the courts must indulge every reasonable presumption against the existence and validity of such waiver. [Dona Adela International, Inc. v. Trade Investment Development Corporation, G.R. No. 201931, February 11, 2015]

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Anti-Money Laundering Law 1. The AMLC filed an Urgent Ex-Parte Application for the issuance of a freeze order with the CA against certain monetary instruments and properties of the L et al., pursuant to the Anti-Money Laundering Act of 2001. This application was based on the February 1, 2005 letter of the Office of the Ombudsman to the AMLC, recommending that the latter conduct an investigation on L and his family for possible violation of the law. The CA granted the application and issued the freeze order. Thereafter, an Urgent Motion for Extension of Effectivity of Freeze Order was filed, arguing that if the bank accounts, web accounts and vehicles of L not continuously frozen, they could be placed beyond the reach of law enforcement authorities and the government’s efforts to recover the proceeds of the L’s unlawful activities would be frustrated. In support of the motion, it was alleged that various cases against L were presently being investigated by the Ombudsman. The motion for extension was also granted by the CA. L sought to have the extended freeze order lifted, arguing that there was no evidence to support the extension of the freeze order, and that the extension not only deprived them of their property without due process; it also punished them before their guilt could be proven. The CA subsequently denied this motion. The Rules on Civil Forfeiture took effect and stated that an extension of a freeze order was only for a maximum period of 6 months. Thus, L asked the CA to reconsider its resolution denying his motion, insisting that the freeze order should be lifted considering: (a) no predicate crime has been proven to support the freeze order’s issuance; (b) the freeze order expired six 2013 & 2014 Q and A|Commercial Law

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months after it was issued; and (c) the freeze order is provisional in character and not intended to supplant a case for money laundering. Should L’s Motion for Reconsideration be granted? Yes. A freeze order is an extraordinary and interim relief issued by the CA to prevent the dissipation, removal, or disposal of properties that are suspected to be the proceeds of, or related to, unlawful activities as defined in Section 3(i) of RA No. 9160, as amended. The primary objective of a freeze order is to temporarily preserve monetary instruments or property that are in any way related to an unlawful activity or money laundering, by preventing the owner from utilizing them during the duration of the freeze order. The relief is pre-emptive in character, meant to prevent the owner from disposing his property and thwarting the State’s effort in building its case and eventually filing civil forfeiture proceedings and/or prosecuting the owner. The Anti-Money Laundering Act of 2001, as amended, from the point of view of the freeze order that it authorizes, shows that the law is silent on the maximum period of time that the freeze order can be extended by the CA. The final sentence of Section 10 of the Anti-Money Laundering Act of 2001 provides, "the freeze order shall be for a period of twenty (20) days unless extended by the court." In contrast, Section 55 of the Rule in Civil Forfeiture Cases qualifies the grant of extension "for a period not exceeding six months" "for good cause" shown. Nothing in the law grants the owner of the "frozen" property any substantive right to demand that the freeze order be lifted, except by implication, i.e., if he can show that no probable cause exists or if the 20-day period has already lapsed without any extension being requested from and granted by the CA. Notably, the Senate deliberations on RA No. 9160 even suggest the intent on the part of our legislators to make the freeze order effective until the termination of the case, when necessary.

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The silence of the law, however, does not in any way affect the Court’s own power under the Constitution to "promulgate rules concerning the protection and enforcement of constitutional rights xxx and procedure in all courts." Pursuant to this power, the Court issued A.M. No. 05-11-04-SC, limiting the effectivity of an extended freeze order to six months – to otherwise leave the grant of the extension to the sole discretion of the CA, which may extend a freeze order indefinitely or to an unreasonable amount of time – carries serious implications on an individual’s substantive right to due process. This right demands that no person be denied his right to property or be subjected to any governmental action that amounts to a denial. The right to due process, under these terms, requires a limitation or at least an inquiry on whether sufficient justification for the governmental action. In this case, the law has left to the CA the authority to resolve the issue of extending the freeze order it issued. Without doubt, the CA followed the law to the letter, but it did so by avoiding the fundamental law’s command under its Section 1, Article III. This command sought to implement through Section 53(b) of the Rule in Civil Forfeiture Cases which the CA erroneously assumed does not apply. The extension granted by the CA effectively bars L from using any of the property covered by the freeze order until after an eventual civil forfeiture proceeding is concluded in their favor and after they shall have been adjudged not guilty of the crimes they are suspected of committing. These periods of extension are way beyond the intent and purposes of a freeze order which is intended solely as an interim relief; the civil and criminal trial courts can very well handle the disposition of properties related to a forfeiture case or to a crime charged and need not rely on the interim relief that the appellate court issued as a guarantee against loss of property while the government is preparing its full case. A freeze order is meant to have a temporary effect; it was never intended to supplant or replace the actual forfeiture cases where the provisional remedy which means, the remedy is an adjunct of or an 2013 & 2014 Q and A|Commercial Law

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incident to the main action – of asking for the issuance of an asset preservation order from the court where the petition is filed is precisely available. For emphasis, a freeze order is both a preservatory and preemptive remedy. Thus, as a rule, the effectivity of a freeze order may be extended by the CA for a period not exceeding six months. Before or upon the lapse of this period, ideally, the Republic should have already filed a case for civil forfeiture against the property owner with the proper courts and accordingly secure an asset preservation order or it should have filed the necessary information. Otherwise, the property owner should already be able to fully enjoy his property without any legal process affecting it. However, should it become completely necessary for the Republic to further extend the duration of the freeze order, it should file the necessary motion before the expiration of the six-month period and explain the reason or reasons for its failure to file an appropriate case and justify the period of extension sought. The freeze order should remain effective prior to the resolution by the CA, which is hereby directed to resolve this kind of motion for extension with reasonable dispatch. [Ligot v. Republic of the Philippines, G.R. No. 176944, March 6, 2013]


Starr Weigand 2016

2013 & 2014 Q and A|Commercial Law

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