mem aid merc

LETTERS OF CREDIT (CODE OF COMMERCE, ART 567) (UNIFORM CUSTOMS & PRACTICE OFR DOCUMENTRAY CREDIT)
*A letter of credit is a letter issued by one merchant to another for the purpose of attending to a commercial transaction (art 567, Code of commerce). In banking practice, it is a request by one bank to advance money to a 3rd person on the basis of the letter & on the credit of the person issuing it. (some provisions are still in force but does not have all the requirements of a negotiable instrument law)
The essential conditions of letters of credit shall be:
1)to be issued in favor of a definite person & not to order &
2)to be limited to a fixed & specified amount, or to 1 or more undetermined amounts but w/in a maximum the limits of w/c has to be stated exactly
Note: those that do not posses condition letter (b) shall be considered as mere letters of recommendation (sec 568, Code of Commerce)

*what contracts are involved in a letter of credit transaction?
It involves 3 separate & distinct contracts:
a)the contract of sale between the buyer & the seller
b)the contract of the buyer w/ the issuing bank &
c)the letter of credit proper wherein the bank commits to pay the seller in accordance w/ the terms & conditions in the letter of credit

*What is the rationale behind letters of credit? In international sales transactions there is a time gap between the sale & the receipt by the buyer of the merchandise. This interval poses certain problems regarding prior changes & possible retraction from the agreement between the 2 parties who are remotely situated from one another. A letter of credit tends to facilitate the transaction by giving an assurance to the seller that he will be paid a define amount upon presentation of the required documents. In a letter of credit, the bank deals only w/ the documents, not the merchandise. Any disagreement as to merchandise delivered shall be threshed out later by the seller & the buyer.

*The parties to a letter of credit are the ff: (Banks merely facilitate from 3 to 6)
1)Buyer- the applicant of the letter of credit who obliges himself to reimburse the issuing bank upon receipt of the documents of title over the goods
2)Seller- the beneficiary of the letter of credit who obliges himself to sip the goods to the buyer & deliver the document of title & draft to the issuing bank
3)Notifying bank- approves the application for the letter of credit by the buyer & undertakes to pay the seller upon receipt of the document of title & draft & to surrender the document of title to the buyer upon reimbursement by the latter
4)confirming bank- the bank (usually a large & well-known bank) that gives more credence to the credit by obligating itself jointly w/ the opening bank under the terms of the credit & receiving a commission for its confirmation from the opening bank, w/c in turn passes the charges to the buyer
5)Paying bank- the bank that encashes the draft drawn by the exporter. It may be the opening bank, or a bank located elsewhere than the place of the seller that will buy or discount the draft (negotiating bank), or a bank located in the place of the seller (usually notifying bank)

An irrevocable letter of credit is one that constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented & that the terms & conditions are complied w/ (Art 10 UCP).
Therefore, an irrevocable letter of credit does not necessarily mean that the correspondent bank has confirmed the letter of credit when it accepts the instructions of the issuing bank	A confirmed letter of credit is one whereby the correspondent bank assumes the obligation of giving an absolute assurance to the beneficiary (seller) that it will undertake the obligation of the issuing bank as its own.

*The “independence principle” in letter of credit means that in determining if the beneficiary of the letter of credit complied w/ it, the bank is required to examine only the documents presented. It is precluded from determining whether or not the beneficiary actually complied w/ the underlying contract (bank of America vs CA)
*X opened a letter of credit w/ ABC Bank for the importation of dyestuffs. When the shipment arrived, the goods turned out to be more colored chalks instead of dyestuffs. X refused to reimburse ABC Bank on the ground that he did not receive the goods as ordered from the seller. Is X’s refusal to reimburse ABC bank tenable?
No, X.s refusal to reimburse ABC Bank is not tenable. Under a letter of credit, the bank deals only w/ the necessary documents. It has nothing to do w/ any discrepancy or defect in the goods. (BPI vs De Reny Fabric Industries Inc)

*Assume the same acts in the immediately preceding problem, except that the bills of lading submitted by the seller to collect on the letter of credit are falsified. May X refuse to reimburse ABC Bank?
No, X cannot refuse ANC Bank. If the seller was paid by the bank in good faith w/o knowledge of the falsity of the bills of lading, the buyer must reimburse the issuing bank because the latter assumes no responsibility for the genuineness of the documents of title over the goods (Philippine Banking Corporation vs Choa Tiek Seng)

*Liabilities of parties: (569-572)
1)drawer liable to person on whom it was issued provided identity proven, for the amount paid w/in fixed maximum
2)Bearer has no right of action if not paid by person who issued it
3)drawer may annul letter of credit, informing the bearer & the person to whom addressed
4)bearer shall pay amount received to drawer, otherwise action for execution may be filed w/ interest & amount exchange in place where payment made no place where repaid
5)if bearer does not make use of letter of credit w/in agreed period, or if none, w/in 6 months from the date if in the Phil, & 12    months if outside the Philippines, it should be void
WAREHOUSE RECEIPTS LAW (ACT NO. 2137)
*1)What degree of diligence is required to be exercised by a warehouseman in safekeeping the goods of the depositor?
A warehouseman must exercise the degree of care in the safekeeping of the goods entrusted to him that a reasonably careful man would exercise in regard to similar goods of his own. In other words, ordinary diligence would suffice

2M,ay a warehouse receipt contain a provision relieving the warehouseman from any liability arising from his negligence or that of his employees? No, the warehouseman cannot exempt himself from liability arising from his own negligence or that of his employees by providing such stipulation in the warehouse receipt. Such stipulation is void. But, he may limit the amount of his liability to an agreed value of the goods in the event of loss.

*A, owner of a negotiable warehouse receipt for tobacco, sold & indorsed the receipt to B, w/ the understanding that B would pay 3 days later. B then pledged the receipt to C by indorsement to secure a previous debt. C did not know that B had not yet paid A. B died of an accident before he could pay A. So A sued C to recover the value of the unpaid receipt. Will the suit prosper? No, the suit will not prosper. Since the negotiable warehouse receipt had been duly negotiated by indorsement, C had the right to accept it as security of B’s debt to him.

*A, owner, deposited his goods w/ W, warehouseman, covered by a negotiable warehouse receipt w/c read, among other things, that the goods were deliverable to “A or order”. X stole the document & negotiated it to B by forging A’s signature as indorser. B is a purchaser in good faith & for value. W however, was able to deliver the goods to A, the rightful owner, w/o the surrender of the receipt to him. Is W liable to B?
No, W is not liable to B. Although a warehouseman is obliged by law to demand the surrender of the warehouse receipt for the cancellation thereof upon delivery to the holder, such requirement implies a negotiation that would transfer the right to the possession of the goods. A thief, however, does not transfer title to the purchaser even if he is a purchaser in good faith & for value.

*A is the owner of 1T kilos of corn deposited at the warehouse of W & w/c is covered by a negotiable warehouse receipt. A sells & indorses the receipt to B. Is A liable to B, assuming:
1)W refuses to turn over the corn to B? No, A is not liable to B should W refuse to turn over the corn to B. The indorser of a negotiable warehouse receipt does not warrant that the warehouseman will perform his obligation

2)W delivers the corn to B but the same is unfit & damaged? Yes, A is liable to B should the corn delivered by W to B turn out to be unfit & damaged. The indorser of a negotiable warehouse receipt warrants that the good covered by the receipt are merchantable & fit for the particular purpose intended.

*W, warehouseman, is confronted w/ a problem due to the fact that A, B, & C are all claiming title & possession over the goods deposited to him.
1)What does the law expect W to do under such circumstance? W is not required by law to deliver goods in the event some person or persons other than the depositor or person claiming under him will also exercise his or other claim over the goods. However, he is obliged to ascertain, the validity of the adverse claim or to bring legal proceedings to compel all claimants to interplead w/in a reasonable time. If he delivers the goods to the wrongful owner he is not excused from liability.

2)As W’s counsel, what action will you take to protect your client’s interest? As W’s counsel, I will file a complaint in interpleader as soon as I can in order to comply w/ the legal requirement as to reasonable time, & fro the purpose of requiring A, B, & C to litigate among themselves to determine who is the rightful owner of the goods. I would also require them to interplead in case a suit is filed by any of them against my client

*W, having in his possession certain goods covered by a negotiable warehouse receipt, received a court order of garnishment pursuant to an attachment in favor of X, an attaching creditor, directing him to sell such goods. W disregarded the order & delivered the goods to Y. who produced the warehouse receipt. Assuming the claim or title of X is good, is W liable to X for the value of the goods?
Yes, W is liable to X. The delivery of the goods by a warehouseman to the depositor after receiving notice of the adverse claim or title of a 3rd person renders the warehousemen liable for conversion if such claim or title is good

*The ff acts of a warehouseman constitute criminal offenses:
1)Issuance of receipt knowing that the goods have not been actually received 5 yrs/ 10T
2)Issuance of receipt containing any false statement 1 yr/ 2T
3)Issuance of duplicate receipt w/o marking it to be so 5 yrs/10T
4)Issuance of receipt from goods owned by warehouseman w/o stating it to be so 1 yr/2T
5)delivery of goods w/o obtaining possession of negotiable receipt (Sec 50-54, WRL) 1 yr/2T

However, a warehouseman shall not be punished for any of the above acts when he, in fact, has nothing to do w/ its commission. So he is not criminally liable for the acts committed by his employees, absent his participation therein
Furthermore, any person who deposits goods w/o title thereto or upon w/c there is alien or mortgage & takes up a negotiable receipt thereto & negotiates the same fro value w/ intent to deceive shall also be guilty of the crime punishable under the WRL (Sec 55, WRL)                                           TRUST RECEIPTS LAW (PD NO 115)
*A trust receipt is a document embodying a security transaction whereby the entruster (bank) lends money to the entrustee (borrower) in order to purchase goods (usually imported), w/ the former exercising a lien over all or part of the proceeds of the sale to the extent of the amount owing to the entruster, or the goods themselves in case they are not sold in accordance w/ the conditions in the trust receipt (include the profits)

*X was in possession of certain articles by virtue of a trust receipt transaction w/ RST Bank. Half of the goods were destroyed by fire w/o fault or negligence on the part of X. The other half of the goods were sold to A, B, C & D, all purchasers fro value & in good faith. X failed to remit any amount to RST Bank w/in the period agreed upon by the parties. (beware of charge sales invoice)
1)Is X liable to RST Bank for the value of the goods destroyed by fire? Yes, X is liable to RST Bank for the value of the goods destroyed by fire. Loss of goods, documents or instruments w/c are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entruster (RST Bank) for the value thereof (Sec10, TRL)

2)Are A, B, C, & D liable to RST Bank for the goods they purchased from X? No, A, B, C, & D are not liable to RST Bank for the goods they purchased from X. Any purchase of goods, documents or instruments who buys the same from the entrustee for value & in good faith acquires said goods, documents or instruments free from the entruster’s security interest (Sec11, TRL)

*X Company purchased certain items from Z Company. 2 months after said items were delivered to X Company, it applied for a domestic letter of credit from Y Bank to cover the purchase price of the said items. Y Bank required the president of X Company to sign a trust receipt covering the items. X Company failed to pay Y Bank & so the latter sued the former under trust receipt. Will the action prosper?
No, the action against X Company will not prosper. The transaction entered into between X Company & Y Bank is not a trust receipt transaction because X Company was already the owner of the goods by the time the transaction was entered into. Ownership over the goods was already vested in X Company. This is inconsistent w/ a trust receipt transaction whereby goods belonging to the bank (entruster) are released to the buyer (entrustee) on trust after the loan is granted (Consolidated Bank & Trust Corporation vs Ca)

*X opened a letter of credit w/ ABC Bank for the importation of 1T pieces of wristwatches w/ invoice value of US $150T. When the goods arrived in the Philippines, ABC Bank released the goods to X under a trust receipt agreement. X was able to sell all the goods but failed to turn over the proceeds of the sale to the bank. After repeated demands failed, ABC Bank filed an estafa case against X w/ the city prosecutor’s office. X contended that he could not be held criminally liable because the transaction emanated form a letter of credit that is civil in nature.
1)Can X be held liable for estafa? Yes, X can be convicted of estafa & may also be held for damages. The act punishable is malum prohibitum so that the mere failure to turn over the proceeds of the sale, or the goods if unsold, by the entrustee (X) to the entruster (ABC Bank) w/in the period agreed upon shall warrant conviction of the entrustee (X) in the estafa case under the RPC, notwithstanding any letter of credit thereto.ABC Bank may also file a separate action for damages against X

2)Assuming that X was not able to sell the goods, may he return them over to ABC Bank to relieve himself of any obligation under the trust receipt? No, X cannot simply turn over the goods to ABC Bank in order to extinguish his obligation; a trust receipt is a security transaction. ABC Bank, as entruster, is a mere holder of a security title for the advances it made. It does not become an owner or investor of the goods. So the tender of the goods to the entruster will not extinguish the principal obligation that still has to be complied w/. (Vintola vs Insular Bank)
NEGOTIABLE INSTRUMENTS LAW (ACT NO.2031, JUNE 2, 1911) (FORM & INTERPRETATION
*Sec 1, 2, 5, 6, 32, 52, 57, 124-125 all bar questions
*words of negotiability 1) payable to order sec 8 2)payable to bearer Sec 9
*Non-negotiable instruments
*Ambiguous Instruments Sec 17
*Reasons for abnormality/deficiency:
Lack of essential requisites of contract like consent, consideration, & lawful subject
Lack of regularity in the issuance of the instruments by absence of material particulars & delivery of the instrument w/o the knowledge or conformity of the maker or drawer to make the transferee the holder of the instrument
*sec 14 incomplete/delivered instruments, 15 incomplete/undelivered instruments, 16 complete/undelivered instruments, 28 absence or failure of consideration
*Sec 23 forgery
*negotiability vs validity (if not negotiable only assignment

*Rules on forgery due to negligence of parties
1)If it is the bank’s negligence w/o the negligence on the part of the drawer, the bank shall bear the loss (San Carlos Co vs BPI)
2)If it is the drawer w/o bank’s negligence, the drawer shall suffer the loss (Metropolitan Waterworks vs CA)
3)If the payee’s signature has been forged, the bank will shoulder the loss because it was negligence in paying the check not in accordance w/ its tenor. (Great Eastern Life Insurance Co vs HSB & PNB)
4)If both the drawer & drawee bank are guilty of negligence, both of them shall suffer the loss on  a 5-50% basis (Gempesaw vs CA)
5)If both the drawee & collecting bank’s are guilty of negligence, they shall share the loss in accordance w/ the degree of their negligence (BPI vs CA)
6)Between 2 innocent persons, the one whose negligence is the proximate cause of the loss shall suffer the loss (Doctrine of Comparative Negligence)

*Metropolitan waterworks & sewerage system vs Ca- whether or not PNB was liable for the loss suffered by MWSS because of forgery (23 checks)? Where a depositor was using its own personalized checks, its failure to provide adequate security measures to prevent forgeries of its checks constitutes gross negligence & bars it from setting up the defense of forgery.
*Gempesaw vs Ca- Whether or not the bank committed negligence to the grocery owner? The PBCom must share in the loss suffered by Gempesaw on a 50-50 ration because of its failure to observe a high degree of diligence required by the banking industry
*Ilusorio vs CA- Whether or not Manila bank is liable to ilusorio for the amount of the encashed checks (illusorio vs secretary vs bank)? Ilusorio’s failure to examine his abnk statements appears to be the proximate cause of his own damage. It was not shown that Manila Bank was remiss in its duty so that any error or discrepancies in the entries therein could be brought to the bank’s attention in the earliest opportunity. It is due to his own negligence in entrusting to his secretary his credit cards & checks booking including the verification of his statement of accounts
*Samsung construction company Philippines inc vs CA et al-  Jong kun lee vs Gonzaga, sec 23 applies if a bank pays a forged cjheck, it must be considered as paying out of its funds & cannot charge the amount so paid to the account of the depositor. A bank is liable irrespective of god faith, in paying a forged check. There is no basis to conclude that petitioner was negligent I the safekeeping of its checks
*Westmont Bank vs Eugene Ong- Westmont bank was held to be grossly negligent in performing its duties. Banks have the obligation to treat their client’s account meticulously & w/ the highest degree of care considering the fiduciary nature of their relationship. The diligence required of banks is more than that of a good father of a family. Westmont Bank failed to make verification of the signature of the checks whether they belong to Ong who was a depositor of the bank
*Allied Banking corporation vs Lin Sio Wan-  A collecting bank w/c indorses

*a negotiable instrument is one that conforms to the following (WCP2I)
1. It must be in writing & signed by the maker or drawer;
2. It must contain an unconditional promise or order to pay a sum certain in money;
3. It must be payable on demand,(w/in a reasonable period of time)  or at a fixed or determinable future time;
4. It must be payable to order (can be converted to bearer instrument (when only endorsement is an endorsement in blank : signature only: effect: delivery only) (if there are special indorsement, they are only liable in their respective indorsement. )or to bearer (GR: by delivery, you can still indorse it but not necessary, a bearer instrument will always be a bearer instrument) &;
5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty
Requirements from 1-4 pertain to negotiable promissory notes, whereas requirements 1-5 pertains to negotiable bills of exchange
*it Is a written contract for the payment of money which by its form & on its face  intended as a substitute for money so as to give the holder in due course the right to hold the instrument & collect the sum for himself.

*when is an order or promise said to be unconditional?
An unqualified order or promise said to be unconditional when it is not subject to any condition or contingency. An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount or a statement of the transaction w/c gives rise to the instrument, will not render the instrument conditional (Sec. 3 NIL)
Ex.:
1. “Pay P or order P10, 000 & reimburse yourself with the proceeds of the ring you are selling for me”
2. “Pay P or order P25, 000 & charge payment to my account in your hands”
3. “I promise to pay P or order P20, 000 in consideration of the furniture he sold to me”

*1. A treasury warrant is not a negotiable instrument because it is payable out of a particular fund (Metropolitan Bank & Trust Co. vs. CA)
  2. A money order is likewise a negotiable instrument because the operation of a money order system is not a commercial transaction but a government functions for the public benefit. A money order may be enforced only once, & payment may be refused on a variety of grounds (Philippine Education Co., vs. Soriano)

*I promise to pay the bearer P50, 000 from my share of my profits in X partnership. Is the instrument unconditional? No the instrument is not unconditional because it is a promise to pay out of a particular fund. If the payment is to be made out of a particular fund, the payment becomes dependent on the existence or adequacy of that fund. In the instant case, there may be inadequate profits, or even no profits at all, realized from the partnership business. This situation is to be distinguished from “a particular fund out of which reimbursement is to be made” wherein the fund indicated is not the direct source of payment but merely a source of reimbursement thereby making the instrument still negotiable.

*Is the sum payable a sum certain in money even if it is payable:
1. w/ interest? Yes the sum payable is still certain even if the instrument is interest bearing because the whole amount that will become due at maturity date can be computed. If the interest rate is not specified, the legal rate of 12% per annum applies. Even if the date on w/c the interest shall begin to run is not stated, it shall begin to run on the date of the instrument itself, & if the instrument happens to be undated, then interest shall begin to run on the date of issuance.

2. by installments? Yes the sum payable is still certain even if the instrument is payable by installments, provided that:
       1) The amount due on each installment can be determined &
       2) The due date on each installment must be fixed.
A provision that upon default in payment of any installment or interest the whole obligation shall become due (acceleration clause) will still qualify it to be certain.

3. w/ exchange? Yes, the sum payable is still certain even if it is to be paid w/ exchange, whether at a fixed rate or at the current rate, because such rate can easily be determined at any given time through inquiry at the banks or news reports of the day.

4. w/ costs of collection or attorney’s fee if not paid at maturity? Yes the sum payable is still certain even if there is stipulation for payment of costs of collection or attorney’s fees in case of default at maturity date can be determined. Costs of collection & attorneys’ fees, although they may be uncertain, happen only after the instrument has become overdue & unpaid at w/c time the instrument has already ceased to be negotiable.

*when is an instrument payable:
1. on demand? An instrument is payable on demand in the following cases:
  a. when expressed to be payable on demand (I promise to pay P or order P15, 000 on demand.)
  b. when it is expressed to be payable at sight or on presentation- this applies to bills of exchange when presented to the drawee for acceptance & payment (Pay P or order P10, 000 upon sight)
  c. when no time for payment is expressed (checks) &
  d. when instrument is overdue, as to the person issuing, accepting or indorsing it. (Sec. 7 NIL)
2. at a determinable future time? An instrument is payable at a determinable future time in the following cases:
   a. when payable at a fixed future time (On December 31, 2009)
   b. when payable at a fixed period after date or sight ( 30 days after date or 15 days after sight)
   c. when payable on or before a fixed or determinable future time ( on or before December 31, 2009 or on before the first day of classes of the next school year) &
   d. when payable on or at a fixed period after the occurrence of a specified event that is certain to happen, though the time of happening is uncertain. (On the death of X’s mother or 60 days after the death of X’s father) (Sec.4 NIL)

*is the instrument negotiable if it is payable:
1. before the occurrence of a specified event? No, an instrument that is payable before the occurrence of a specified event (60 days before the death of X) is not negotiable because the date of maturity cannot be determined during the period of negotiability of the instrument. In this instance, the instrument shall have already become overdue upon ascertaining the maturity date.
2. upon a contingency? No, an instrument that is payable upon a contingency is not negotiable, & the happening of the event does not cure the defect. A contingency refers to an uncertain future event that may or may not happen (if X will die of malaria)

*when is an instrument payable to order?
 An instrument payable to order when it is drawn:
1.	Payable to the order of a specified person ( to the order of X) or
2.	Payable to a specified person or his order (to X or order) (Sec. 8, NIL)

*when is an instrument payable to bearer? An instrument payable to bearer:
1. when expressed to be payable to bearer (I promise to pay bearer )
2. when payable to a person named therein or bearer (I promise to pay X or bearer)
3. when payable to the order of a fictitious person, & such fact was known to the person making it so payable (I promise to pay John Doe or order)
4. when the name of the payee does not purport to be the name of any person (Pay to the order of Cash) &
5. when the only or last indorsement is an indorsement in blank (only indorsement “Sgd. P ; or several  indorsements : “Pay to A, Sgd. P, “ “ Pay to B, Sgd. A” & “Sgd. B” (Sec.9 (, NIL)

*what is meant by “fictitious person” in relation to a bearer instrument?
By fictitious person is meant one who, although named as payee in the instrument, is not intended by the maker or drawer to acquire any right on the instrument. It is immaterial whether the name is of a living or dead person, or one who does not exist at all. What is important is that the maker or drawer knows that payee is fictitious person or nonexistent because otherwise, the instrument would become an order instrument.

*Sec. 1-e of the NIL” where the instrument is addressed to a drawee, he must be named or otherwise indicated therein w/ reasonable certainty” does this imply that the payee of an order instrument need not be named or indicated therein w/ reasonable certainty? Although Sec. 1-e, NIL obviously refers only to bills of exchange & checks by virtue of the term “drawee” the payee of an order instrument must likewise be named or indicated w/ reasonable certainty, otherwise, nobody could indorse the instrument. For instance, a promissory note that reads “I promise to pay order P3, 000 is not negotiable because the payee is not named therein.

*Is the instrument still negotiable even if it is not dated, or even if it does specify the place where it is made or drawn, or where it is payable? Yes, the instrument remains to be negotiable. In the case of the former, the date of issue becomes controlling, & if the date specified does not exist in the calendar (April 31), the date nearest to it applies (April 30). & in the case of the latter, the instrument is presumed to be made or drawn where it is dated, & is also presumed to be payable at the residence of the maker.

*what is an incomplete/delivered instrument?
An incomplete/delivered instrument is one w/c is wanting in any material particular, thereby granting the holder prima facie authority to fill up the blanks in accordance w/ the authority given. In the event it is not filled up in accordance w/ the authority given, all parties prior to its completion can set up their defense against any holder who is not a holder in due course. Since this is only a personal or equitable defense, it is not available against a holder in due course (Sec. 14, NIL)
Illustration: assume that M made a promissory note authorizing P to fill up the blank space for himself in the amount of P10, 000. Contrary to M’s instruction, P filled up the amount of P15, 000 & indorsed the note to A. A then indorsed it to B, who knew of M’s instruction to P to fill it up only for P10, 000. (ultra vires)
In the instant case, M can refuse to pay Bon the ground that the instrument was not filled up in accordance w/ the authority given. But, if B has no knowledge of P’s fraudulent act w/c would otherwise make him (B) a holder in due course. Between 2 persons where one must suffer by the bad faith of another, the loss must fall upon him who made it possible for the loss to occur.
What is an incomplete/ undelivered instrument?
An incomplete /undelivered instrument is one w/c is wanting in any material particular & w/c is not delivered w/ intent to transfer title thereto. A prima facie presumption arises that the instrument has been delivered, & so the maker should rebut it by evidence that there was no delivery. All parties prior to its delivery can set up real or absolute defense against any holder, including a holder in due course. But, all parties subsequent to the delivery are liable as indorsers (Sec.15, NIL)
Illustration: Assume that M signed a blank check w/c he placed inside the drawer of his office table. X, an officemate, stole the check & filled up the amount of P25, 000 & a fictitious name as payee. He then indorsed the check in the payee’s name & negotiated it to A. A indorsed it B, a holder in due course. (forged)
In the instant case, M, a party prior to the delivery, has a real or absolute defense & can refuse to pay B, a holder in due course. X (thief & forger) & A (party subsequent to the delivery) are liable to B because as indorsers they warrant that the instrument is genuine & in all respects what it purports to be. But there may be circumstance where M may be guilty of gross negligence that would make him liable on the note, like the act of leaving the note on the top of his office table open to view of many persons in the office.
What is a complete/undelivered instrument?
A complete/undelivered instrument is one that is not wanting of any material particular but not delivered w/ intent to transfer title thereto. There is conclusive presumption of delivery if the instrument is in the hands of a holder in due course. But, there is only a rebuttable presumption of delivery if the instrument is in the hands of one who is not a holder in due course (Sec. 16, NIL)
Illustration: Assume that M made promissory note complete of all material particulars & kept it in his drawer. X stole the note & indorsed it to A. A then indorsed it to B, then B to C, who knew that P stole the note from M.
In the instant case, M can refuse to pay C by proving that the note was not delivered because the presumption of delivery as to one who is not a holder in due course is merely rebuttable. But, if C knew nothing about the theft that would otherwise qualify him as a holder course, delivery as to him is conclusively presumed & M can be held liable to C. X (thief), A & B are liable to C on their warranty as indorsers.

*what is the distinction between “immediate parties” & “remote parties”?
The term “immediate parties” refers to those who have knowledge of any conditions or limitations placed upon the delivery of the instrument, whereas the term “remote parties” refers to those who have no contractual relation to each other. A party, although proximately remote, may become an immediate party if he has knowledge or notice of any infirmity in the instrument. For instance, M (maker) executes a note, w/c is stolen by X. X indorsed it to A, A to B, B to C, & C to D who knew of the theft. Here, X & D are immediate parties to M, & the latter can prove absence of delivery as against them.

*Rules on the construction of ambiguous instruments:
1. there is conflict as to the sum payable between the words & figures- the words prevail.
2. interest is specified but there is no date on w/c interest is to run- interest runs from the date of the instrument; if instrument is undated, interest runs from the date of issuance.
3. instrument is not dated- considered dated at the time of its issuance.
4. there is conflict between the written & printed provisions of the instrument- written provisions prevail
5. there is doubt whether the instrument is a bill or note- holder may treat it as either.
6.signature is not clear in what capacity- deemed an indorser only
7. “I promise to pay” is signed by 2 or more persons- they are jointly & severally liable (Sec. 17, NIL)

*what is forgery, & what are its consequences in relation to the parties of the forged instrument?
Forgery is the act of signing another person’s name or altering the name, capacity of the party, or amount in the instrument w/ intent to defraud. It is only the forged signature that becomes inoperative; the instrument itself & the genuine signatures thereon are not voided. A forged indorsement has the effect of cutting off the parties prior to the forgery from the parties subsequent thereto so that the latter have no rights against the former, unless:
a)	The party against whom the instrument is to be enforced is precluded from setting up forgery as a defense (estoppels) or
b)	The forged signature is not necessary to the holder’s title. (Sec. 23, NIL) ( ex: bearer instrument)

*M made a promissory note to P or order. P indorsed it to A. X stole the note & indorsed it to B by forging A’s signature as indorser. B indorsed it to C, then C to D, holder in due course. What are the liabilities of the parties to the instrument?
M & P are not liable to D because the rights of C against prior parties are cut off by the forgery of A’s signature. Likewise, A is not liable to D because his forged signature is wholly inoperative & no right to retain, discharge or enforce payment on the instrument is acquired by D under the forged signature. But, B & C are liable to D because as general indorsers, they warrant that the instrument is genuine & that is valid & subsisting at the time of their indorsements. Obviously, B & C have a right of recourse against the forger, X, if they are made to pay D. (special indorsements)
*Assume the same facts in the immediately preceding problem, except that when D asked A if it was his signature on the note, A acknowledged that it was his signature. What are the liabilities of the parties to the instrument?
M & P are still not liable to D for the same reason that as prior parties to the forgery, the rights of D against them are cut off. In case of A, his acknowledgement that it was his signature that precludes him from setting up forgery as a defense. Consequently, A along w/ B & C , are liable to D as general indorsers , w/ right of recourse against prior indorsers ( C from A; B from A) & also from the forger , X

*M made a promissory note payable to P or bearer & delivered the same to P, who in turn indorsed it specially to A. X fraudulently obtained possession of the note, forged A’s signature by specially indorsing the note to B. B delivered it w/o any indorsement to C. Who among the parties may be held liable to C?
(SPECIAL INDORSEMENTS) It must be noted that the instrument is originally payable to bearer & as such, indorsement is originally payable to bearer & as such, indorsement is not necessary as mere delivery thereof is sufficient for negotiation.
M may be held liable to C since the forged indorsement is simply disregarded. P is not liable to C because aside from the fact that A’s forged signature is wholly inoperative, C also did not obtain his title through A’s indorsement. It must be stressed that when an instrument payable to bearer is indorsed specially is liable as indorser only to such holders as make title through his indorsment. The special indorsements, however, were cut off when B negotiated the note by delivery to C. But B is liable to C, being an immediate prior transferor & on his warranty as a person negotiating by delivery. Of course, B has right of recourse against the forger, X.

*R drew an unsigned check for P30, 000 & placed it in his name as payee, then indorsed the check to A, holder in due course. S bank, the drawee-bank, encashed it when A presented it for payment.
1. Is the bank correct in debiting R’s account for the check?
No, S bank may not debit or charge R’s account w/ the amount of the forged check. The bank has the obligation to know the signature of R & is guilty of negligence in failing to detect the forgery of the drawer’s signature. Therefore, R has the right to have his account reimbursed by S bank in the amount of P30, 000.
2. Does S bank have a right of recourse against A?
No, S bank cannot recover what it has paid to A. As between equally innocent persons, the drawee bank that pays a check w/ the signature of the drawer forged cannot recover the amount from the one who received it. S bank, therefore, shall bear the loss & his only recourse is against the forger, P.

*R drew a check for P50, 000 & delivered the same to P, the payee. X fraudulently acquired the check from P, forged P’s signature as indorser, and then indorsed the check to A, holder in due course. A presented the check for payment to S banks, the drawee-bank, who paid the amount thereof.
1. Is S bank correct in debiting R’s account for the check?
As a GR, the drawee-bank that paid the check w/ the forged indorsement of the payee or indorser cannot debit or charge the drawer’s account for the amount of the check. The exception to this rule is when the drawer is guilty of negligence. Therefore, sans negligence on the part of R, his account must be reimbursed by S bank for P50, 000.
3. Does S bank have a right recourse against A?
While the drawee-bank has the duty to ascertain the genuineness  of the drawer’s signature, it has no similar duty to the signatures of the payee & indorsers to whom it is not familiar of. The fact that A was defrauded in the transaction does not give him the right to place the blame on the drawee-bank simply because it failed to detect the forgery. Therefore, S Bank has a right of recourse against A, who in turn can run after the forger, X.
CONSIDERATION
Absence of consideration- means lack of any valid consideration to support a contract 	Failure of consideration- means a valid consideration was agreed upon but the same failed to materialize
These are both personal defenses against a holder not in due course.

Illustration: M executed a promissory note for P100, 000 in favor of P for the purchase of P’s vehicle that he (P) never owned. P indorsed the note to A, a holder in due course. In this instant case, there is absence of consideration between M & P, & so M can refuse to pay P. But, since absence of consideration is merely a personal defense, M is liable for P100, 000 to A, a holder in due course.

Illustration: M executed a promissory note for P300, 000 in favor of P for the purchase of P’s lot. P indorsed the note to A, a holder in due course. But, it later turned out that P could no longer deliver the said lot because he had already sold it to another party who bought it in good faith & for value. In this instant case, there is failure of consideration between M & P, & so M is not liable to P. But, for the same reason, that failure of consideration is merely a personal defense, M is liable for P300, 000 to A, a holder in due course.

*P needed to raise P100, 000 & so he approached his friend M to help him out. M agreed to execute a promissory note for P100, 000 w/ P as the payee, provided that P would give to M his treasured fighting cock worth P20, 000. The parties agreed & P discounted the note a bank for P100, 000 less P10, 000 advance interest charges. Discuss the rights & obligations of the parties.
M is an accommodation party, having signed the note as maker w/o receiving value therefor. The phrase “w/o receiving value therefor” means that M did not receive any value for the instrument. It does not mean the he did not receive any payment for lending his name, like the fighting cock given to him. He is deemed a surety & therefore his liability is primary. & even if the accommodated party (P) is granted an extension to pay w/o his consent, M will still be liable as a solidary co-debtor for P100, 000
P is an accommodated party being the one in whose favor the instrument was executed in order to lend him credit. He is bound to pay P100, 000 on the instrument at maturity date, & to reimburse the accommodation party (M) for the same amount in case the latter will be made to pay. In the event  the accommodated party is liable to pay the instrument, he cannot enforce the instrument against M who merely accommodated him.

*R bought some merchandise from A for P5, 000. R offered to pay in check. A agreed , provided X would indorse the same. X indorsed the check. A knew that he (X) did not receive any value for his indorsement. When A presented the check for payment, it bounced due to insufficient funds. A give notice of dishonor to X but the latter refused to pay. Is X liable to A?
Yes, X is liable to A as an accommodation indorser even though the holder for value knows that he is a mere accommodation party to the instrument. As indorser, X bound himself to pay the check when it is dishonored upon due presentment, provided notice of dishonor is give to him.                                   NEGOTIATION
*What is negotiation & how is it effected?
Negotiation is the act of transferring an instrument from one person to another in such a manner as to constitute the transferee the holder thereof.
A bearer instrument is negotiated by mere delivery	While an order instrument is negotiated by indorsement of the holder completed b delivery (SEC. 30, NIL

*Is there negotiation in the following cases?
1. Delivery of the instrument to the payee; - the better view holds that there is no negotiation when an instrument is delivered to the payee because he acquires it by issuance & not by negotiation. Prior to the delivery to the payee, there is no negotiable instrument to speak of. Negotiation implies that a negotiable instrument already exists, & it cannot be said to exist as yet before it is delivered to the payee.
2. Payment of a check by drawee-bank; - the payment of a check by the drawee-bank is not a negotiation & the bank does not become the holder thereof in accordance w/ what is contemplated by law in the negotiation of an instrument. The bank is neither the payee not the indorsee. The act of the holder in writing his name at the back of the check when presenting it for payment is not deemed to be an indorsement but merely as a receipt for the money received  from the drwaee-bank.

*What is meant by indorsement?
Indorsement is the act the indorser’s name on the instrument, usually at the back thereof, w/ the intention of transferring the title to, or strengthening the security of the holder. The indorsement must be of the entire instrument. But, an instrument may be indorsed for the remaining balance if it has already been partially paid.
Thus, the indorsement of an instrument for P10, 000 in this manner: “Pay to A, P7, 500” or “ Pay to A P6, 000 & B P4, 000,” does not constitute a valid negotiation & will render the instrument non-negotiable because it purports to transfer to the indorsee a part only of the amount payable (P7, 500 out of P10, 000), or purports to transfer the instrument to 2 or more indorsees severally (P6, 000 to A & P4, 000 to B). But its indorsement as “Pay to A & B” is valid & the instrument may further be negotiated by the indorsements of both A & B.
*
Special indorsement- is signed by the indorser & specifies the person to whom, or to whose order, the instrument is to be payable. The indorsement of such indorsee is necessary for the further negotiation of the instrument. When an instrument that is payable to bearer is nevertheless indorsed specially, the person indorsing specially is liable as indorser only to such holders as make title through his indorsement. A special indorsemnt may be done in one of these ways : “Pay to A, (Sgd.) P”, or “Pay to the order of A, (Sgd) P,” or “Pay to A or order, (Sgd) P,”	A blank indorsement is simply signed by the indorser w/o specifying the name of the indorsee. The instrument so indorsed becomes payable to bearer & may be negotiated by mere delivery , regardless of whether the instrument is originally payable to bearer or to order. A blank indorsement may be done in this manner: (Sgd.) P”

*R draws a bill of exchange for P500, 000 payable to the order of P. The bill is endorsed successively as follows:
			Pay to A
				(Sgd) P
				(Sgd) A
B the present holder is well aware that by virtue of the blank indorsement of A the bill is now converted into a bearer instrument. He is concerned of the fact that someone may get hold of the bill & negotiate it by mere delivery w/o need of his own indorsement. He consults you on what to do in order to protect him from the disadvantages of a bearer instrument. What advice would you give to B?
I would advice B to simply write the words “Pay to B” over the signature of A, the indorser in blank. By doing this, the blank indorsement of A is now converted into a special indorsement . In effect, the instrument will become an order instrument once again & it cannot be further negotiated w/o the indorsement of B.

Restrictive indorsement is one that:
1.	Prohibits the further negotiation of the instrument (Pay to A only)
2.	Constitutes the indorsee as agent of the indorser (Pay to A for collection) or
3.	Vests the title in the indorsee in trust for or to the use of some other person ( Pay to A on trust for X)
Qualified indorsement constitutes the indorser as a mere assignor of the title to the instrument (Pay to A w/o recourse) &
Conditional indprsement contains some condition or conditions on the liability of the indorser ( Pay to A upon his passing the Bar Exams this year)

*M made a promissory note for P25, 000 to the order of P; P indorsed the note to A. A indorsed it to B as follows:”Pay to B for collection (Sgd.) A” B indorsed it further to c, present holder. When C demanded payment from M, the latter informed the former that he (M) had already paid A P25, 000. Can C still enforce the note?
No, C can no longer enforced the note because as subsequent indorsee to the restrictive indorsement he can require only the title of B, who in turn is merely an agent of A. M can put up the defense of payment on the instrument.

*M made a promissory note for P20, 000 payable to P or order. P indorsed it to A. A further indorsed it to B as follows: Pay to B sans recourse, (Sgd) A” M became insolvent. Against whom can B enforce the instrument?
 Since M, the maker who is primarily liable, is already insolvent, B can run after the indorsers who are secondarily liable. B can hold P liable because as a general indorser he warrants that the instrument will be honored. On the other hand,  B cannot hold A liable because as a qualified indorser, he does not warrant the solvency of M, unless he knew of M’s insolvency at the time of the negotiation  in w/c case his bad faith would make him liable despite the fact  that he is a qualified indorser.

*Assume the same facts in the immediately preceding problem, except that P’s indorsement to A was forged by X. Against whom can B enforce the instrument?
B cannot enforce payment against M because the forged indorsement of P has cut off the rights of all subsequent parties as against parties prior to the forgery such as M. Neither can be collect from P because the forged indorsement is wholly inoperative as to him. But, B can run after A because as a qualified indorser , A warrants that the instrument& in all respects what it purports to be.

*M made a promissory note for P40, 000 payable or order. P indorsed it to A as follows: Pay to A on his graduation from college this current school year, (Sgd) P.” At maturity date, A had not graduated from college. M sought your advice on what he should do under the circumstances. What advice would you give?
M has the option of whether or not he would pay the amount to A. he can refuse payment on the ground that the condition has not been fulfilled. Or he can pay A despite the non-fulfillment of the condition because he has the right to discharge his obligation on the note. After all, the condition attached to the indorsment is not part of his contract when he executed the note.  In case of payment by M, A, has the obligation to hold the P40, 000 in trust for P w/ the obligation to turn over the amount when the condition is not fulfilled.

*The following indorsements appear at the back of a promissory note executed by M:
				(Sgd) P
		Pay to B
				(Sgd) A
		Pay to C
				(Sgd) B
1.Assuming the note is payable to order , what indorsements may be stricken out by C & what are the effects thereof? C may strike out the indorsements of A & B & the note would now become a bearer note since the last remaining is that of P w/c is an indorsemnt in blank. These indorsements would no longer be necessary to C’s title if he intends to convert the instrument into a bearer instrument. Consequently, only M & P would be liable to C. But, since this is originally an order instrument, P’s indorsement cannot be stricken ourt because the indorsement of the payee is necessary to negotiate an order instrument.
2. Assuming the note is payable to bearer, what indorsements may be stricken out by C & what the effects thereof? C may strike out all the indorsements of P, A & B since these are not necessary to his title being originally a bearer instrument, the same can be negotiated by mere delivery. Consequently, only the maker would be liable to C. while an order instrument may become a bearer instrument if the only or last indorsement thereof is an indorsemnt in blank , a bearer instrument always remain a bearer instrument , although the persons indorsing it specially shall be liable to a holder who can trace his title by a series of an unbroken indorsements from such special indorsers.

*the following indorsemnts appear at the back of the bill of exchange drawn by R:
			Pay to A
				(Sgd) P
			Pay to B
				(Sgd) A
			Pay to C
				(Sgd)B
			Pay to D
				(Sgd) C
			Pay to E
				(Sgd) D
			Pay to C
				(Sgd) E
1.	Who are secondary parties liable to C, present holder? The secondary parties liable to C are: R (drawer), P (payee), and A & B (indorsers). C cannot run after D & E because if he sues them in his capacity as a subsequent indorser to both of them, D & E will also sue C in their capacity as a subsequent indorsers to him. This will, therefore, result into multiplicity of actions. Although D & E cannot be sued by C, both are not discharged on the instrument because they can still be held liable on the bill if it is further negotiated by C to another party.
2.	What indorsements may be stricken out by C? C may strike out the indorsemnts of D & E since these are not necessary to his title. Bothe D & E will then be discharged from the instrument. He may even strike out only the indorsements of D & in so doing E will also be discharged being a subsequent indorser of D
3.	Assuming that A & B had a prior agreement between themselves that B shall be liable first before A, can C run after A ahead of B? Yes, C can run after A ahead of B. Indorsers are generally liable prima facie in the order in w/c they indorse, but evidence is admissible to show that they agreed otherwise. This agreement, however, shall not be binding upon the holder of the instrument. As far as C is concerned, he has the right to choose who among R, P, A & B will he hold secondarily liable. And if A is made to pay C, A can seek reimbursement from B provided he can prove their agreement, or A can just run after R or P.
RIGHTS OF HOLDER
*What constitutes a holder in due course? Is a holder who has taken the instrument under the ff conditions? (CBTA)
1. That it is complete & regular upon its face;
2. That he became the holder of it before it was overdue & w/o notice that it had been previously dishonored, if such was the fact;
3. That he took in good faith & for value (there is consideration); &
4. 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. (Sec. 52, NIL)
Every holder is generally deemed a prima facie a holder in due course. The disadvantage of a holder not in due course is that the instrument is subject to defenses as if it were non-negotiable.

*R desirous to buy a car was told by his friend X that the latter was an agent of S hospital authorized to sell a car belonging to the hospital. R drew a crossed check for P5, 000 upon the request of X w/ S hospital as the payee. This check would only serve as evidence of R’s good faith & merely to be shown to S hospital. The check was supposed to be returned back to R when X would bring the car to him for inspection. It turned out that X used the said check to pay his bills at S hospital for P4, 500 & he was even given a change for P500 by S hospital. At the drawee-bank after X failed to show up. S hospital sued R to recover the value of the check. Will the suit prosper?
No, the suit will not prosper. S hospital is not a holder in due course; hence, it is not entitled to recover from the check. It is guilty of gross negligence by the surrounding circumstances of the case:
1. R, the drawer, is not a patient of the hospital;
2. The amount of the check (P5, 000) does not equal the hospital bill of X (P4, 500) &
3. A crossed check should have put the hospital I inquiry as to why X was using it to pay his hospital bills. (De Ocampo vs. Gatchalian)

Real/ absolute defenses are those that may be availed of against all parties, including holders in due course. (WFI2F)
Ex. Want of delivery of incomplete instrument, forgery, incapacity( minor is not liable but person transacting is liable), illegality of contract declared by law, & fraud in factum or fraud in esse contractus, want of authority of an agent, aletration	Personal or equitable defenses are those that may be availed of against an original or immediate party or one who is not a holder in due course. (WFAIS)
Ex. Want of delivery of  complete instrument, filling up blanks not in accordance w/ authority given, absence or failure of consideration, innocent alteration or spoliation ( made by a stranger to the instrument) & dimple fraud or fraud in inducement , acquisition through force, duress, or other unlawful means, mistake
As between immediate parties, there is really no need to distinguish between real defenses from personal defenses, since both defense can be availed against an immediate party. But as between remote parties, the distinction becomes relevant because only real defenses can be availed of against a remote party. It is noteworthy, that in determining whether or not a party is an immediate party, what is controlling is the element of privity & not proximity.

Fraud in factum/fraud in esse contractus is a fraud in the execution of the instrument. In other words, a person is deceived into signing an instrument believing it was something else rather than a negotiable instrument.
Ex. M placed his signature on a document after having been deceived that he was merely signing an employment certification when in fact what he signed was a promissory note. This sis a real defense available against a holder in due course.	Fraud in inducement or simple fraud is a fraud pertaining to the nature & character of the consideration of the instrument. IN other words, a person actually knows that what he signed is a negotiable instrument but was induced to do so because of fraudulent representation on its consideration.
Ex. M executed a promissory note for P50, 000 in consideration of what was represented to him as a diamond ring when in fact it was merely a valueless piece of glass. This is a personal defense not available against a holder in due course

*M made a promissory note for P100, 000 in favor of P or order, the latter deceiving the former that he (P) is selling his car in A-1 condition w/c was in fact a piece of junk. P indorsed the note to A who knew about the fraud. A in turn, indorsed the note to B, holder in due course. B further indorsed the note to C, a present holder.
1. Assuming that C has no knowledge of the fraud w/c would make him a holder in due course can C hold M liable on the note? M has only a personal defense w/c he can raise only against his immediate parties, in this case P (perpetuator of fraud) & A (has notice of the fraud). This defense is not available against a holder in due course such as C. Therefore, M is liable to C on the note.

2, .Assuming that C has notice of the fraud w/c would not make him a holder in due course, can C hold M liable on the note? Normally, C would be placed in equal footing w/ P & A as immediate parties to M, & the latter can interpose the personal defense of fraud in inducement (simple fraud) against them. But, since C derived his title from a holder in due course (B), he acquired all the rights of such former holder in respect of all parties prior to the latter. In other words, C stepped into the shoes of B who is a holder in due course. Therefore, M is liable to C just as he is liable to B.

3. Assuming that instead of indorsing the note to C, B indorsed it back to P, can P hold M liable on the note? Although P derived his title from B, a holder in due course, P will not acquire rights of such former holder in due course because he is a party to the fraud. P is placed back to his original position as payee of the note, & being an immediate party to M, the personal defense of simple fraud can be interposed by M against him. Therefore, M is not liable to P.

P induced M by fraud to make a promissory note w/o valuable consideration thereto for P10, 000 payable on demand to the order of P.
1.Can P file an action successfully against M for the amount of the note? No, the action to be filed by P against M will not prosper. M can always raise the defense of the absence of consideration against P, an immediate party & a holder not in due course. As to P who is not a holder in due course, M can interpose both real & personal defenses,

2. Assuming P indorses the note to A from value under circumstances that would make him (A) a holder in due course, can A file an action successfully against M from the amount of the note? Yes, the action filed by A against M will prosper. A is a holder in due course against whom only real defenses may be interposed. Absence of consideration w/c is a personal defense, cannot be raised by M against A.
			LIABILITIES OF PARTIES
*who among the parties to a negotiable instrument are primarily & secondarily liable thereto?
In a promissory note, the maker is primarily liable while the payee & indorsers are secondarily liable. In a bill of exchange, the acceptor is primarily liable while the drawer, payee & indorsers are secondarily liable.
The drawee of a bill of exchange is not obliged to accept it from the payee or any holder. But, his refusal to accept the bill w/o any justifiable reason can make him liable to the drawer. Once he accepts it, he becomes primarily liable as an acceptor.

*what are the warranties of a person negotiating an instrument by delivery or by qualified indorsement?
A person negotiating an instrument either by delivery or by qualified indorsement warrants that: (IGAN)
1.That the instrument is genuine & in all respects what it purports to be;
2.That he has good title to it;
3.That all prior parties had capacity to contract; &
4.That he has no knowledge of any fact w/c would impair the validity of the instrument or render it valueless(Sec.65, NIL)
Therefore, a person negotiating by delivery or by qualified indorsements is liable: (FAMK)
1.If the instrument is forged (first warranty)
2.if the instrument was acquired through fraud (second warranty)
3.If the maker or drawer is a minor (third warranty)
4.if such indorser has knowledge of wan of consideration but did not inform the transferee or indorsee of such fact (fourth warranty)
Such person is not liable in case the instrument is dishonored, due to insolvency of any prior party, unless he has knowledge of such insolvency in w/c case liability attaches. When the negotiation is by delivery, the warranty extends only to the immediate transferee.

A general or an unqualified indorser warrants:
1.That the instrument is genuine & in all respects what it purports to be; (ex forgery)
2.That he has a good title to it; (instrument was acquired through fraud)
3.That all prior parties had capacity to contract; (ex minority)
4.That the instrument is, at the time of his indorsement (what if maker is insolvent? Indorsements made are liable regardless whether you know or not), valid & subsisting; & (ex want of consideration)
5.That incase of dishonor, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it (Sec.66, NIL)
The first 3 warranties of a general indorser are the same as those of a person negotiating by delivery or by qualified indorsement. As to the 4th warranty, there is a difference: the general indorser gives an assurance that the instrument is valid & subsisting regardless of whether he knows of any invalidity or not; on the other hand, a person negotiating by delivery or by qualified indorsemnet merely warrants that has no knowledge of any invalidity to the instrument.
Therefore, in case of insolvency of a prior party, the general indorser is liable whether or not he knows of such insolvency, whereas the person negotiating by delivery or by qualified indorsement is not liable, unless he knows of such insolvency.

*M made a promissory note:
			Pay to A sans recourse.
					(Sgd) P
			Pay to B
					(Sgd)A
1.	Assuming M is a minor, who among the parties are liable to B, present holder in due course? M is not primarily liable to B because his (M’s) incapacity as a minor is a real defense available even against a holder in due course. P is secondarily liable to B because as a qualified indorser he warrants that all prior parties had capacity to contract. A is also secondarily liable to B because as a general indorser he, too, warrants that all prior parties had capacity to contract.
2.	Assuming M is insolvent, who among the parties are liable to B, present holder in due course? M can no longer pay B because his (M’s) insolvency. P is also not liable to B because as a qualified indorser he does not warrant the solvency of any prior party; unless he has knowledge of such fact in w/c case he will be liable. On the other hand, A is liable to B because as a general indorser he warrants that the instrument will be honored, whether or not he has knowledge of M’s insolvency.

*Are due presentment & due notice of dishonor necessary to hold an indorser liable on his implied warranty? While due presentment & due notice of dishonor are necessary before an indorser may be held liable as a secondary party to the instrument, such steps are not required if the basis of the indorser’s liability is breach of any of his implied warranties.
PRESENTMENT FOR PAYMENT (applies only to BOE)
*What is meant by presentment for payment?
It means the physical presentation of the instrument to the person primarily liable (maker of a note or acceptor of a bill) for the purpose of demanding & receiving payment. Although it is not necessary to charge the persons primarily liable, presentment for payment to them should still be made for the purpose of charging the parties secondarily liable (drawers & indorsers)
Failure to make presentment for payment will discharge the secondary parties, unless:
A) Presentment for payment is excused;
     1. as to the drawer, presentment for payment is not required to charge him where he has no right to expect or require that the drawee or acceptor will pay the instrument (drawer ordered drawee to stop payment of check, or drawer totally withdrew his deposit from drawee-bank) &
    2.as to the indorser, presentment for payment is not required to charge him where the instrument was made or accepted for his accommodation & he has no reason to expect that the instrument will be paid if presented (the accommodated-payee or accommodated-indorser is the real debtor)
B)Presentment for payment is dispensed w/:
    1. where after the exercise of reasonable diligence presentment cannot be made;
    2. where the drawee is a fictitious person
    3. by waiver of presentment, express or implied; &
    4. where bill is dishonored by non-acceptance.

*When must presentment for payment be made?It depends.
As to the instruments payable at a fixed or determinable future time, presentment for payment must be made at maturity date	As to the instruments payable on demand, a distinction must be made between a promissory note & a bill of exchange:
presentment for payment of a promissory note payable on demand must be made to the maker w/in a reasonable time after its issuance,	whereas presentment of a bill of exchange payable on demand must be made w/in a reasonable period of time after its last negotiation.

What constitutes a reasonable time depends upon the circumstances of each case & the burden lies on the holder to prove that presentment was timely made.
*when is an instrument dishonored by non-payment? When:
Presentment for payment is duly made & payment is refused or cannot be obtained; or	Presentment for payment is excused & the instrument is overdue & unpaid (Sec83,NIL)

*M made a promissory note on June 1 of the current calendar year for P50, 000 payable to the order of P on July 31 of the same year. P indorsed the note to A, present holder. July 31 of the said year fell on a Friday that happened to be a holiday .M, however, was already insolvent as of this date, w/c fact was known to A.
1. Should A make presentment for payment to M? Yes, A must present the note for payment to M. The provision dispensing presentment when there is no more right to expect payment applies only to the drawer in relation to the drawee or acceptor. Insolvency of the maker, even if known to the indorser, will not excuse presentment for payment. If A fails to comply w/ this requirement, P will be discharged from liability on the note, & his only recourse will be against M who is already insolvent.

2. Assuming presentment for payment is to be duly made, when should it be done? A must present the note for payment to M on Monday, August 3. When an instrument falls due on a holiday it is payable on the next succeeding business day. But when a time instrument falls due on a Saturday, it is to be presented for payment on the next succeeding business day. The next succeeding business day falling on a Sunday, maturity date would therefore be Monday, August 3. Had the note been payable on demand, the holder would have the option of presenting it for payment either on Saturday before 12’ o’clock noon (if not holiday) or on Monday.

3. Assuming presentment for payment is not done & presentment is not excused, is the note considered dishonored if it becomes overdue & unpaid? No, the note does not become dishonored by the mere fact that it is already overdue & unpaid. Presentment for payment must first be made; w/c is then refused or cannot be obtained, or presentment is excused. Furthermore, the indorser must be duly given a notice of dishonor to hold him secondarily liable.

4. Assuming the note is dishonored by the non-payment & due notice of dishonor is given, can A sue P on the note w/o including M as co defendant? Yes, A can sue P w/o including M as co-defendant in the suit. After due presentment for payment & due notice of dishonor, the parties secondarily liable becomes the principal debtors of the holder.  This right of recourse is immediate so that there is no need to first sue the maker or acceptor before suing the secondary parties.
NOTICE OF DISHONOR
*What is a notice of dishonor & what happens if it is not given?
It informs the secondary parties that since the instrument has not been accepted or paid, they are expected to pay it. It may be oral or in writing. The drawer or indorser not given due notice of dishonor shall be discharged, but he is still liable for his warranties in an indorser.

The ff parties need not be given notice of dishonor: (MAPQ)
1. maker    2.acceptor    3.person negotiating by delivery &    4.qialified indorser

*M executed a promissory note payable to the order of P. P indorsed it to A, A to B, & B to C, present holder. The note is dishonored.
1.Assuming C only gives notice of dishonor to P, & B paid C, does B have a right of recourse against P & A? The notice of dishonor given to P inures to the benefit of all parties subsequent to P, meaning to A & B. So even if B himself did not give any notice of dishonor to P & A, any one of them may be held liable to B.

2.Assuming C only gives a notice of dishonor to B, & B paid C, does B have a right of recourse against P & A? No, both P & A will be discharged from their liability for lack of notice of dishonor, although they may still be held liable on their warranty as indorsers. But, had B himself managed to give notice of dishonor to P & A. he would then have a right of recourse against them.

*When is notice of dishonor to be given?
An instrument is dishonored by non-payment after maturity. So notice of dishonor given before or at maturity date of the instrument is premature & ineffective. The law grants one whole day w/in w/c a party must give notice of dishonor.
Ex. An instrument that will mature on September 15 will be dishonored, if unpaid, on September 16. Therefore, a party must give notice of dishonor not later than September 17, either personally or by mail. And if the holder gives notice to his prior indorser on September 17, the latter has until September 18 w/in w/c to give notice to his prior indorser or indorsers (if notice is mailed by holder & received on September 20, the prior indorser has until September 21 to give notice to his prior indoreser or indorsers).

*May notice of dishonor be waived?
Yes, notice of dishonor may be waived either expressly (written on the instrument) or impliedly (ex. After maturity date, indorser promised to pay holder). If waiver is expressly written on the face of the instrument, such waiver binds all parties, but if written above the indorser’s signature, such waiver binds him only.

*Under what cases may notice of dishonor need not be given to the drawer?
Notice of dishonor is not required to be given to the drawer. When: (SFDNC)
1.Drawer & drawee are the same person (holder may treat the bill as a promissory note; hence, the drawer-drawee becomes a primary party)
2.Draweee is a fictitious person or a person not having  capacity to contract (holder may also treat the bill as a promissory note)
3.Drawer is the person to whom instrument is presented for payment (he himself dishonored it)
4.Drawer has no right to expect or require that drawee or acceptor will honor the instrument (drawer of check has no account or has no funds w/ drawee-bank)
5.drawer has countermanded payment (drawer of check gives “stop-payment order” to drawee-bank) (Sec 144, NIL)

*Under what cases may notice of dishonor need not be given to the indorser? (DTI)
Notice of dishonor is not required to be given to the indorser when:
1.Drawee is a fictitious  person or a person not having capacity to contract , & indorser was aware of this fact at the time he indorsed the instrument (since he knows, he does not anymore expect that the instrument  will be accepted or paid)
2.Indorser is the person to whom the instrument is presented  for payment (he himself dishonored it) &
3.Instrument was made or accepted for his accommodation (as an accommodated party he is primarily liable) (Sec. 115, NIL)
DISCHARGE OF NEGOTIABLE INSTRUEMENTS
How is  a negotiable instrument discharge ?by:
1.Payment in due course by or on behalf of the principal debtor- must be made at or after maturity date  to the holder on good faith & w/o notice that the holder’s title is defective; payment by accommodation party does not discharge instrument since he is not the principal debtor.
2.Payment in due course by the party accommodated where the instrument is made or accepted for accommodation- accommodated party is really the principal debtor.
3.Intentional cancellation thereof by the holder- may be done in writing the words “ cancelled” or “paid”, or destroying the instrument.
4.Any other act w/c will discharge a simple contract for payment of money- discharge is between immediate parties only, not in hands of a holder due course; refers to the causes of extinguishing obligations, such as:
  	1payment or performance
	2loss of the thing due
	3condonation or remission of the debts
	4confusion or merger of the rights of creditor & debtor
	5compensation
	6novation
	7other causes like annulment, rescission, fulfillment of resolutory condition & prescription (Art 1231 NCC)
	8the principal debtor becomes a holder of the instrument in his own right – the reason is obvious: it would be absurd for him to pay himself (Sec 119, NIL)
(a)if payment made by accommodated = discharge, b) if payment made by accommodation = not discharge * no consideration but value parted on lending of name in instrument, is there  consideration in accommodation? As far as the instrument, no as far as lending yes

*What constitutes material alteration?
1date
2sum payable, either for principal or interest
3time or place of payment
4number or relations of the parties
5medium or currency in w/c payment is to be made
6addition of a place for payment where none is specified;&
7any other change or addition w/c alters the effect of the instrument (Sec. 125, NIL)

*M made a promissory note for P30, 000 payable to P or order. P altered the amount by increasing it to P50, 000. P then indorsed it to A, & A to B, present holder. (As to holder in due course)
1. Assuming B is not holder in due course, briefly discuss the liabilities of the parties to B.
M is not liable to B who is not a holder in due course. As to M, the note is discharged because of the material alteration. P, who caused the alteration, is liable to B for P50, 000. A, an indorser subsequent to the alteration, is also liable to B for P50, 000.

2. Assuming B is a holder in due course. Discuss the liabilities of the parties to B.
M is liable to B for P30, 000 according to the original tenor of the instrument. B can recover the balance of P20, 000 from P or A, or if the note is dishonored by M. B can collect P50, 000 from P or A.
BILLS OF EXCHANGE-FORM & INTERPRETATION
*A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed determinable future time, a sum certain in money to order or bearer. (Sec. 126, NIL)

A bill of exchange may be distinguished from a promissory note as follows:
former is an order to pay,	latter is a promise to pay;
former has 3 parties: drawer, drawee & payee,	latter has 2 parties: maker & payee
former is drawn by a party who is secondarily liable (drawer),	latter is issued by a party who is primarily liable (maker)
former is accepted for acceptance (except a check),	latter is not presented for acceptance
former, if payable on demand, is presented for payment w/in a reasonable period of time from its last negotiation,	latter, if payable on demand, is presented for payment w/in a reasonable period of time from its issuance

*what circumstances may the holder of a bill treat it as a promissory note?
A  bill treat it as a promissory note by its holder if:
1.drawer & drawee are the same person
2.drawee is a fictitious person; &
3.drawee does not have capacity to contract (Sec.130, NIL)

*Face of a bill of exchange appears as follows:
Pay P or order P40, 000.  In case of need, apply to Z.
										(Sgd)R
To: S
The bill is indorsed by P to A, present holder. When A presented the bill to S, the latter dishonored the bill. Discuss the options of A.
A may resort to R, drawer, or P, payee for payment since they are both secondarily liable on the bill, provided that due notice of dishonor is given. Or if A desires, he can resort to Z for payment after the bill is protested. Z in this case, is what is known as a, “referee in case of need”. If Z pays the bill, he has a right of recourse against R, the drawer who named him in the bill as “referee in case of need”.                                 ACCEPTANCE & PRESENMENT FOR ACCEPTANCE
*Discuss the concept of acceptance of a BOE (promissory note does not apply)
Acceptance signifies the drawee’s assent to the order of the drawer. It is usually made by writing the word “accepted or honored,” followed by the drawee’s signature. This act makes the drawee an acceptor of the bill & may be:
1.unqualified- absolute acceptance of the tenor of the bill
2.qualified- dependent upon the fulfillment of a condition
3.partial- acceptance to pay part of the amount only
4.local- acceptance to pay at a particular place only
5.qualified as to time or
6.acceptance of one or more, but not all, of the drawees

*R drew a bill payable for P10, 000 to pay P or order, w/ S as a drawee. P presented it to S for acceptance but the latter refused to return & act on the bill. What is the effect of S’s refusal & inaction?
When the drawee refuses to return the bill as accepted or non-accepted w/in 24 hours or destroys the same, he is deemed to have accepted it. This is known as “constructive acceptance.”

*R drew a bill payable for P20, 000 to P or order, w/ S as drawee. P indorsed it to A, then A to B, present holder. Upon presentment for acceptance by B to S, the latter accepted the bill for only P10, 000. What are the rights of B in this case?
B may refuse the qualified acceptance & treat the bill as dishonored; in w/c case he must give the notice of dishonor, or protest the bill in some cases, in order to hold R, P & A secondarily liable thereon. On the contrary, If B assents to the qualified acceptance he must give notice of such qualified acceptance to the drawer & indorsers (R P & A) who in turn must express their dissent to the holder w/in a reasonable time in order to be discharged from liability; otherwise, they will be deemed to have assented thereto.

*Under what cases must presentment for acceptance be made?
1. where the bill payable after sight , or in any other cases where presentment is necessary to fix the maturity of the instrument;
2. where the bill expressly stipulates that it shall be presented for acceptance; or
3.where the bill is drawn payable elsewhere than the residence or place of business of the drawee (Sec143, NIL)
The ff therefore need not be presented for acceptance & presentment for payment is enough to charge the secondary parties:
1.bills payable on demand, like checks
2.bills payable on sight or on presentation
3.Bills payable at a fixed date; &
4.bill payable at a fixed period after date
It is noteworthy that the drawee becomes liable on the bill only upon his acceptance of the same. Therefore, it is to the best interest of the holder to have the bill accepted, whether or not the law requires presentment for acceptance.

*R drew a bill for P15, 000 payable 30 days after sight to the order of P, w/ S as the drawee. P indorsed it to A, A to B, & B to C, present holder. S refused acceptance upon presentment of the bill on July 1 of the current year. Does C have to wait July 31 (30 days thereafter) before he can dishonor the bill?
No, such delay would discharge persons secondarily liable on the bill. When the bill is dishonored by non-acceptance, an immediate right of recourse against the drawer & indorsers accrues to the holder & no presentment for payment is necessary. Therefore, C must give notice of dishonor to R , P, A & B not later than July 2, w/o waiting for the maturity date.
PROTEST
*What is the meaning of protest?
Protest is a formal certification by a notary public, or in his absence by a respectable resident of the place where the bill is dishonored in the presence of 2 credible witnesses, attesting that all the necessary steps for dishonor by non-acceptance or non-payment of the instrument have been taken. It is required only in the case of foreign bills & may be dispensed w/ in the same manner as a notice of dishonor may be dispensed w/.
inland BOE- drawn in the Phil payable in Phil,	foreign BOE- drawn in a foreign  payable in the Phil
ACCEPTANCE FOR HONOR & PAYMENR FOR HONOR
*Meaning for acceptance for honor?
By acceptance of honor, a person not a party to the bill engages to pay it provided it is not paid by the drawee & has been duly protested for non-payment w/ notice of dishonor given to him. It is also known as “acceptance supra protest” & is so called because it is done for the purpose of protecting the credit of some party or parties to the bill for whose honor  the acceptance is made.

*Meaning of payment for honor?
By payment for honor, a party or stranger to a bill that has been protested for non-payment pays it supra protest for the honor of any person liable thereon or for whose account it was drawn. It is laso known as “payment supra protest” & must be attested by a notarial act of honor.                                                 BILLS IN SET
*What is a bill in set?
A bill in set is one that consists of several parts, each part of the set being numbered & containing a reference to the other parts, the whole of the parts constituting one bill. Its purpose is merely to ensure that a bill sent from a distant place would have a greater chance of being received.

*R drew a n bill in set for P50, 000 to P or order, w/ S as the drawee. The first part of the bill in set was endorsed by P to A on November 10 of the current year, while the second part thereof was indorsed by P to B on November 5 of the same year. Both A & B are holders in due course.
1.As between A & B, who is the true owner of the bill ?
As between the 2 holders in due curse, B is the true owner of the bill because he is the holder in due course whose title first accrued, the bill having been negotiated to him earlier than to A.

2.Assuming A was able to present his bill for acceptance to S who, in good faith, accepted it, can B demand that S accept his bill?
No, B cannot demand acceptance of his bill by S. true, B is the true & rightful owner of the bill, but this does not affect the rights of a person such as S who in due course accepts or pays the part first presented to him, S, therefore, can rightfully refuse to accept the bill presented by its rightful owner B. B, however, still has a right of recourse against P who is not supposed to negotiate more than one part of the bill in set.

3.Assuming S paid the bill w/c bears his acceptance to A but the same was not surrendered to him & was negotiated to C, a holder in due course, can S be compelled to pay C?
Yes, C can compel S to pay him on the bill. When the acceptor pays a bill drawn in set w/o requiring the part bearing his acceptance to be delivered to him that part at maturity is outstanding in the hands of a holder in due course, the acceptor (S) is liable to the holder (C) thereon.                          PROMISSORY NOTES & CHECKS
*Define a negotiable promissory note?
It is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand at affixed or determinable future time, a sum certain in money to order or to bearer.

A note that is drawn to the maker’s own order is not complete until it is indorsed by him (Sec.184,NIL)

*define a check & describe the common types of checks now circulated in commercial usage.
A check is a special type of a BOE drawn on a bank payable on demand. A check does not have to state that it is payable on demand & presentment for its acceptance is not necessary.

The more common types of checks in circulation today include:
1.Manager’s check- it is drawn by the bank’s manager upon the bank signifying the bank’s primary obligation on the check. Therefore, it is not subject to countermand (stop payment order) & has the same effect as a certified check that operates as an assignment of funds to the credit of the payee or holder. If the check is drawn by the bank cashier, it is called “cashier’s check”.
2.Certified check- it is a commitment by the drawee bank to pay the check upon presentation by writing the word “certified” thereon. Certification is equivalent to acceptance & it operates as an assignment of funds of the drawer whose account is debited for the amount of the check even before the presentment for payment. The drawer, therefore, can no longer issue “stop payment order” on the check. Persons secondarily liable (drawer & indorsers) who are procured by the holder of such check are discharged from liability thereon.
3.Traveer’s check- it requires for safety purposes when traveling to be signed twice by the holder .
1st. at the time of its issuance &
2nd when it is to be paid in the presence of the payee, otherwise, this check is incomplete.
4.Crossed check- It bears 2 parallel lines written diagonally, usually at the upper left side on the face of the check. Its purpose is to insure that the check was to be paid to the rightful payee, especially when it is delivered by mail or through an agent. A crossed check cannot be encashed but must be deposited in the bank. Its negotiable character, however, is not destroyed but it can only be negotiated once. It has 2 types:
a.crossed specially-  the name of a particular bank or company is written between the parallel lines. The drawee-bank must pay the check only upon presentment by the said bank or company; otherwise, it may be made to pay again if the first payment is wrongful. In other words, the holder must deposit w the bank indicated between parallel lines, w/c in turn, takes care of collection from the drawee bank.	     b. crossed generally- the words “and Co.” or nothing at all is written between the parallel lines. I t also cannot be encashed but it must be deposited w/ the payee’s bank that intervenes in presenting the check for payment against the drawee-bank. In other words, the holder must deposit it w/ any bank in w/c he has account w/, & that the bank takes care of collection from the drawee-bank; otherwise, he is not a holder in due course because a crossed check serves a warning that it was issued for a definite purpose.

*what is a stale check?
A check is said to stale when it has not been presented w/in a reasonable time after its issuance. It has no value & is not to be paid. As to what constitutes an unreasonable length of time is dependent upon the existing circumstances. But, banking practice dictates a check is already a stale if it is not presented for payment w/in a period of 6 months from the date of its issuance. This does not mean. However, that the obligation of the debtor is extinguished simply because the check he issued to his creditor become stale.

*R issued a check for P30, 000 to the order of P, w/ S bank as the drawee-bank. P indorsed it to A, present holder. R had maintained sufficient deposit w/ S bank since the time he issued the check. A failed to present it for payment w/in a reasonable time , R’s deposit amounted to P750, 000 but he was able to recover only 250, 000 as a result of S bank’s insolvency.
1. How much, if any, can A recover from R on the check? A can recover only P10, 000 from R on the check. The law provides that in case a check is not presented for payment w/in a reasonable time after its issue, the drawer is discharged from liability thereon to the extent of the loss caused by the delay. R suffered loss equivalent to 2/3 of his deposit (P500, 000/P750, 000) so he is discharged from liability on the check in the amount of P20, 000 (2/3 x P30, 000). R is not totally discharged by the simple reason that presentment for payment is delayed because the drawer of a check is treated as a principal debtor.

2. How much, if any, can recover from P on the check?
A can recover nothing from P. An indorser, unlike a drawer, is totally discharged from a liability when the check is not presented for payment w/in a reasonable period of time after its issue, regardless, of whether or not he suffered any loss thereby.

*R drew a check for payment for P50, 000 payable to the order of P, w/ S bank as the drawee-bank. P indorsed it in a bank to A, who is lost it. At A’s request, R made a stop payment order on the check to S bank. But, S bank overlooked the order & the check was paid to B who had taken the check for value & w/o actual knowledge of the loss. A sued the S bank. Decide the case w/ reasons.
The case against S bank, the drawee-bank, will not prosper. A check in itself does not operate as an assignment any part of the funds to the credit of the drawer w/ the bank. The bank is not liable to the holder, unless & until it accepts or certifies the check. A is not even a holder of the check because he lost the same.
*R drew a check for P20, 000 payable to the order of P against R’s current account w/ S bank. X stole the check, erased P’s name, superimposed his own name as payee, & deposited it in his account w/ T bank after clearing, X w/drew his deposit at T bank & absconded. Who shall properly bear the loss of P10, 000 on the check?
S bank shall bear the loss. It should reimburse R for the amount debited against his account. The drawer’s order to the drawee was to pay “P or order “but P or his order was not paid in the case at hand.
T bank is not liable for any reimbursement to S bank. Although T bank may have stamped the words “all prior indorsements guaranteed” (a customary banking practice when it sent the check to S bank for clearing, it does not, however, include the guarantee that the check had not been materially altered.

*R drew a check for P50, 000 payable to the order of P, w/ S bank as the drawee-bank. The check was cleared & S bank paid T bank the amount. 3 weeks later, it was discovered that P’s signature as the payee-indorser was forged. T bank paid S bank & notified A that his account has been debited for P10, 000. Who between A & T bank should bear the loss?
A should bear the loss. 1stly, A indorsed the check when he deposited it in his account w/ T bank. As indorser, he warranted that the instrument is genuine, & that it was valid & subsisting at the time of his indorsement. He is therefore liable for breach of his warranties. 2ndly, by depositing the check w/ T bank, the latter became merely a collecting agent. Any liability on the check is therefore chargeable by T bank (agent) against A (principal).
INSURANCE CODE (PD NO. 1460, AS AMENDED) (JUNE 11, 1978) GENERAL PROVISIONS
*Define a contract of insurance. Is a contract of suretyship an insurance contract?
A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage, or liability arising from an unknown or contingent event. A contract of suretyship shall be deemed to be an insurance contract only if made by a surety who, as such is doing an insurance business. (Sec.2, IC)
(PAID UP CAPITAL + CERTIFICATE OF AUTHORITY)
(For purposes of recovery, the person insured must appear to have sustained a loss. This involves the necessity of insurable interest w/o w/c the insured cannot recover. It is an aleatory contract. Basically a contract of indemnity, the insurance contract is the law between parties.)

*A contract of insurance is a “risk-distributing device” as opposed to a “risk-shifting device.
When an insurer obliges himself to assume the risk of loss of w/c the insured having an insurable interest is subject to, this known as a “risk-distributing device”. The burden of having to suffer the loss is shifted from the insured to the insurer who agrees to assume risk	When the insurer assumes the risk because he aims to distribute the loss to a large number of insured who will all pay their contributions known as “premiums”, then it becomes a “risk distributing device”. This is the essence of a contract of insurance where the insurer devices a scheme to use the rather large amount of premiums from a good number of insured to pay for a smaller amount of loss expected to be suffered by a lesser number of insured.

*How are insurance contracts classified under the Insurance Code?
A)Life Insurance Contracts- insurance upon life made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuance or cessation of life.
	1.Ordinary Life Policy- premiums are paid regularly, usually on a per annum basis, throughout the life of the insured; beneficiary will be paid only upon death of the insured; may provide for a “cash surrender value” w/s is paid in case the policy is cancelled, or a “loan value” w/c the insured may borrow.
	2.Limited Payment Life Policy- premiums are paid only for an agreed period (10 yrs, 15 yrs, & etc) & beneficiary will also be paid only upon death of the insured; premium payment is relatively higher compared to ordinary life policy
	3.Term Insurance Policy- covers only a limited period agreed upon (5 yrs, 10 yrs) & insurer will pay the beneficiary only if the insured dies w/in the covered term; otherwise, the contract terminates if he survives beyond such term; premium payment is likewise relatively higher than the other types of policies
	4.endowment policy- insurer will pay a fixed amount if the insured survives for an agreed period or if he dies w/in the said period, insurer will pay the beneficiary; in other words, insured may collect proceeds if he survives the policy period: this is usually availed of for retirement purposes; premium payment is also relatively higher
B)Non-Life Insurance contracts- also known as “Property Insurance” may cover indemnification to the  insured for loss arising from damage to, or destruction of, his property, or for damages that the insured may be held legally liable as a result of injuries to other persons or damage to their property.
	1.Marine Insurance- also known as Transportation Insurance, covers perils that may be encountered while the property is in transit & may include ocean marine insurance involving sea transportation perils & inland marine insurance involving land or over-land transportation perils
	2.Fire Insurance- indemnifies the property owner for any loss, or damage caused to his property arising from fire, lightning, windstorm, tornado, earthquake, & other allied risks.
	3.Casualty Insurance- covers (unfortunate accident) loss or liability arising from accident (one that w/c may result damage or injury)or mishap, excluding those that are considered as falling under other types of insurance such as fire, marine, suretyship, & life
C)Contracts of Suretyship- the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third party called the oblige; it includes official recognizance’s, stipulations, bonds, or undertakings issued by any company

*How is an insurance contract interpreted?
An insurance contract is a contract of adhesion because its terms are usually contained in the printed forms prepared by the insurer to w/c the insured may just agree or reject. Therefore, an insurance contract must be construed liberally in favor of the insured & strictly against the insurer (Aleatory contracts)
CONTRACT OF INSURANCE, WHAT MAY BE INSURED
*What may be insured against?
Any contingent or unknown event, whether past or future, w/c may damnify a person having an insurable interest, or create a liability against him, may be insured against. (Sec.3 IC)

*M 17 yrs of age, took out a CMVI w/ a theft coverage clause on his expensive motorbike donated to him by his father. When the vehicle was stolen & cannot be recovered, M made a claim against his insurer but the latter refused on the ground that M, being a minor, is allowed by law to take up only a life, health or accident insurance for himself. Is the refusal of the insurer tenable?
No, the insurer cannot refuse payment to M. Although as a minor, M may take only life, health, or accident insurance on his life w/ only his father, mother, wife, child, brother or sister as the appointed beneficiary, nonetheless, the insurer cannot use the minority of the insured to escape his liability. The proper party to file a case for annulment of the insurance contract is the minor or his legal representatives & not the insurer.
Surety- assumes liability as a regular party to the undertaking;
Guarantor- depends upon an independent agreement to pay the obligation if the primary fails to do so,
Contingent- uncertainty as to the happening of the event upon w/c liability will arise, unknown- not known
PARTIES TO THE CONTRACT
*What is the extent of insurable interest of the mortgagor & the mortgagee on the property mortgaged & up to what amount may each of them recover on their insurance?
The mortgagor has an insurable interest in the mortgaged property to the extent of the value of the property, & he cannot recover on the insurance in excess of the amount of his loss. On the other hand, the mortgagee has an insurable interest in the mortgaged property to the extent of the debt secured by the mortgage, & he cannot recover in excess of the outstanding & unpaid credit at the time of loss nor the value of the property mortgaged.
Mortgage- contract by w/c the debtor secures ofr the creditor for the principal of the principal
Mortgagor- debtor or obligor under a mortgage obligation specially subjecting to such security real or personal rights over real property in case of non-fulfillment
Mortgagee- the holder or owner of a mortgage

*D took a fire insurance on his residential house for P1M. The house had a value of 1.5M & was mortgaged to C for P700 T. The policy contained an “open or loss payable mortgage clause” the house was completely destroyed by hostile fire?
1.Whos is entitled to collect the insurance proceeds & how much can be recovered from the insurer? C can collect the insurance proceeds of P1M since the policy taken by the mortgagor provides that the loss shall be payable to the mortgagee. But, C is entitled to only P700 T, to the extent of his insurable interest being the unpaid secured credit at the time of the loss. He shall hold the P300 T in trust for D who is entitled to the same.

2.Asssuming at the time of the loss D had already partially paid his debt to C in the amount of P100 T, how much can be recovered from the insurer? C can still collect the P1M insurance proceeds from the insurer. But since the unpaid secured credit at the time of loss is reduced to P600 T, this is the extent of his insurable interest that he can recover. C should than hold the P400 T in trust for D.

3.Assuming D stored inflammable materials in his house just prior to the loss, are the rights of C affected? Yes the right of C as a beneficiary under the insurance policy are affected D, the mortgagor who took the insurance, does not cease to be a party to the contract & any act on his part prior to the loss that would otherwise avoid the insurance would have the same effect. Under an “open or loss payable mortgage clause”’ the mortgagee is really not a party to the contract itself. Consequently, neither C nor D can recover on the policy. (VALUE/LOSS/INSURANCE)

	Open or loss payable mortgage clause	Standard or union mortgage clause	Independent policy (taken up by the mortgagee)
Who is the party to the insurance	Mortgagor (mortgagee – Beneficiary)	Mortgagor & mortgagee (separate interest)	Mortgagee
Who pays the premium	mortgagor	mortgagor	mortgagee
Who collects the proceeds	Mortgagee collects up to the amount of credit & gives any excess to mortgagor
(Mortgagor)	Mortgagees collects up to the amount of credit & gives any excess to mortgagor
(Mortgagor)	Insures his own interest as a secured creditor Mortgagee collects up to the extent & Mortgagor does not get it all
Who is entitled to the proceeds	Mortgagee- unpaid secured credit
Mortgagor- excess	Mortgagee- unpaid secured credit
Mortgagor- excess	Mortgagee
Will the acts of mortgagor affect the mortgagee	YES	NO	No
Is there subrogation	No, unless there is a stipulation in the policy 	No, unless there is a stipulation in this policy	Yes, & insures steps into the shoes of the mortgagor

*C took a fire insurance for P1.5M on the residential house mortgaged to him by D. The house had a value of P1.2M & was mortgaged by D to C for P1M. The policy contained a “standard or union mortgage clause”, w/ D to pay the premiums thereto. The house was partially destroyed by hostile fire w/ loss valued at P800 T.
1.Who is entitled to collect the insurance proceeds & how much may be recovered from the insurer? C is entitled to recover the insurance proceeds from the insurer in the amount of P800 T. Fire insurance, being property insurance, is a contract of indemnity. As such, the recoverable amount would never exceed the actual loss even if the insurance policy if for a bigger amount. (Had there been a total loss in the instant case, only the value of the property of w/c is P1Mwould have been recoverable. Or had the amount of the policy been P700 T, this would have been the only amount recoverable even if the value of the house at 1M& the amount of the loss as P800 T were bigger than the amount of insurance taken.)
Consequently, C would be entitled to the entire proceeds of P800 T, his insurable interest being the extent of the unpaid secured credit of P1M. D is still liable to C for the balance of P200 T & D would get nothing from the insurance proceeds. Had the insurance proceeds exceeded the unpaid mortgage of P1 M, D would have been entitled to the excess.

2.Assuming at the time of loss D had already partially paid his debt to C in the amount of P100 T, how much can be recovered from the insurer? C is still entitled to collect P800 T from the insurer. Although his insurable interest had been reduced from P1M to P900 T because of the partial payment of D, the amount of the loss at P800 T would nonetheless be the basis for recovery in fire insurance. Had the insurance proceeds exceeded the unpaid mortgage of P900 T, D would have been entitled to the excess.

3.Assuming D stored inflammable materials in his house just prior to the loss , are the rights of C affected?
No, the rights of c will not be affected by the act of D that would otherwise avoid the policy. C can recover P800 T from the insurer. Under a “standard or union clause”, the acts of the mortgagor do not affect the mortgagee since the purpose of such clause in the policy is to separate the interest of the mortgagee from the mortgagor.

4.Is the insurer subrogated to the rights of the mortgagee?
As a rule, the right of subrogation applies only when the mortgagee insures his own interest as such, independent of the mortgagor. In any other cases such as the instant case, the subrogation applies only when there is a stipulation to that effect. So unless stipulated in the policy, the insurer does not step into the shoes of the mortgagee upon payment of the insurance, whereby he (insurer) will acquire the right to collect form the mortgagor what he has paid to the mortgagee.

*D obtained a loan from C in the amount of 1M secured by a mortgage on D’s residential house valued at 700T. C then took fire insurance for P800 T, on the house by himself on his own interest as mortgagee. The house was completely destroyed by hostile fire.
1.How much, if any, can C recover from the insurer? C can recover P700 T from the insurer. The insurable interest of the mortgagee is to the extent of the credit secured by the mortgage, but in no case shall it exceed the amount of the credit at the time of loss nor the value of the property mortgaged. Therefore, the maximum amount he can recover from the insurer shall be the value of the mortgaged house.

2.How much, if any, can C recover from the insurer assuming that at the time of loss, D had already paid C:
	2a-P200 T? C can recover P700 T from the insurer. Although the debt was already reduced to P800 T (P1M-P200 T) by virtue of the partial payment, still his insurable interest cannot exceed the value of the mortgaged property w/c is P700 T.
	2b-P500 T? C can recover P500 T from the insurer. Since the debt is already reduced to P500 T (P1M-P500 T) by virtue of the partial payment, his insurable interest is only to the extent of the unpaid credit at the time of loss.

3.Assuming no partial or full payment was made by D to C at the time of loss & the insurer paid the insurance to C, is there subrogation in the instant case? Yes, the insurer will be subrogated to the rights of C, the mortgagee, to the amount of P700 T & the insurer acquires the right to collect the said amount from D. The payment by the insurer to the mortgagee does not extinguish the principal obligation of the mortgagor. As a rule, subrogation applies when the mortgagee insures his own interest independently as such. In any other cases, there is subrogation only when there is stipulation to that effect.

*A Cessna plane of ABC Co., collided w/ XYZ, Inc’s tramway steel cables in its logging area in Palawan resulting in the destruction of the plane & the death of its pilot. ABC Co., recovered insurances as follows: P5M for the plane & P1M for the pilot. Nevertheless, ABC Co., sustained additional damages of about P3M w/c were not covered by insurance. BC Co., then sued XYZ., Inc to recover not only additional damages of P3M but also the P6M already compensated b y the insurer. What are the rights of the parties in the instant case?
ABC Co., may sue XYZ for the P3M damages not compensated by insurance. But, as for the P6M, ABC Co., cannot bring an action for it because it was already indemnified by the insurer.
As for the insurer, it is subrogated to the rights of ABC Co., against XYZ Inc., to the extent of the property insurance of P5M for the plane. But the insurer does not acquire any right of subrogation as far as the P1M life insurance for the pilot concerned because subrogation applies only to property insurance & not to life insurance.
INSURABLE INTEREST
Insurable interest in one’s own life is absolute & unqualified &, therefore, every person has the right to insure his own life for an unlimited amount, as long as he is able to pay the premiums thereto	. But, not every person has insurable interest in the life of another, & the law requires that it must be pecuniary that is, the assured expects some benefit to be derived out of the insured’s continued life or expects some detriment out of the insured’s death. This pecuniary (continue to suffer benefit or detriment)benefit may arise because of blood relationship, marriage, or even a commercial transaction (e.g. the creditor’s interest in the debtor)
(Secured creditor insurable interest on the life of debtor? Yes, but only have the interest of land. Unsecured creditor? Yes, only to property of debtor when he is dead. Minor? Can’t insure before December 1989)

*Does blood relationship per se conform to the requirement of insurable interest insurance contracts?
Generally, only those relatives obliged to support each other under the FC have insurable interest in each other’s life. But, the requirement on insurable interest may far extend to relatives of a lesser degree of consanguinity (cousins, uncle, & nephew, & etc) or to relatives by affinity.(brother-in-law, stepchild) if support is in fact actually given to them, & even to business relationships (ex. Corporation insuring the life of its officers) (& to business relationships where the insured stands to gain from their continued existence/suffer loss from their demise.)

*What is a beneficiary? As ordinarily applied to life, health, or accident insurance, refers to the person named in the policy as the recipient of the benefits upon the death of the insured. A beneficiary need not have any insurable interest in the life of the insured. As a rule, the insured has the right to change the beneficiary designated in the policy. An exception to this rule is when he expressly waives such right in the policy, in w/c case, the beneficiary cannot be changed or a new one added w/o his consent. Furthermore, a person who is disqualified by law to receive any donation cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him. (RD: to prevent the contract from becoming a wagering contract)

*H took a life insurance policy & named W, his wife, as the beneficiary. The policy was silent w/ regard to any change of beneficiary. A month later, H changed his beneficiary from W to B, his brother; because he suspected that his wife was committing adultery. When H died afterwards, W claimed the insurance proceeds from the insurer, contending that she cannot be changed w/o her consent because she had a vested right to the proceeds of the policy, especially when she was just changed due to a mere suspicion of infidelity. Who is entitled to the insurance proceeds?
B the new beneficiary shall collect the life insurance proceeds. The designation of a beneficiary, unless expressly stipulated to be irrevocable, can be changed by the insured w/o the consent of the beneficiary.
 (GR: IRREVOCABLE
If the designation is irrevocable, the insured cannot assign the policy, take the cash surrender value of the policy add additional beneficiary/change the irrevocable to revocable w/ the consent & approval of the beneficiary (Philam vs Pineda)
E: Art 739 Civil Code consisting of persons who are disqualified to give donations to each other. A beneficiary in life like a donee the disqualification of a donee applies to beneficiary like a common law relationship. NB: COMMON-LAW)

*X took a life insurance on his life for P2M naming A as irrevocable beneficiary. A predeceased X. Who is entitled to the insurance proceeds upon the death of X? The estate of X is entitled to the insurance proceeds. Although A acquired a vested interest in the insurance when X expressly waived his right to change the beneficiary, the proceeds should not go to the heirs of A unless it is clearly a manifested in the policy that payment shall be made to A or his executors , administrators or assigns.

*what does insurable interest in property consist of?
An insurable interest in property may consist in:
1)An existing interest (ex. The owner’s interest in his house)
2)An inchoate interest founded on an existing interest (ex. The partner’s interest in the partnership property/stockholders)
3)An expectancy, coupled w/ an existing interest in that out of w/c the expectancy arises (ex. The fruit-grower’s interest in the future harvest of his mango plantaion)

*D owes c the sum of P500T. The loan is unsecured by any mortgage, But D owns a house valued at P700T.
1.Can C take property insurance on the house of D to the extent of the unpaid loan?
No, C as an unsecured creditor cannot insure the property of his debtor, D. A mere contingent or expectant interest in anything, not founded on an actual right to the ting nor upon  a valid contract for it, is not insurable. C has no actual right over the house or any contract for it because the hose was not mortgaged to him. But, if D is deceased, C can insure his property pending his claim against D’s estate.

2.Can c insure the life of D?
Yes, C can insure the life of D. Every creditor has an insurable interest in the life & health of any person under a legal obligation to him for the payment of money of w/c death or illness might delay or prevent the performance.

*When must insurable interest exist in the:
1.Property insured? It must exist when the insurance takes effect & when the loss occurs, nut need not exist in the meantime. A change of interest in the thing, unaccompanied by a corresponding change of interest in the insurance, suspends the insurance until the interest in the thing & the interest in the insurance are vested in the same person.

To illustrate, assume X took a 1 year fire insurance on his building on January 1. September 9,, X sold the property to Y w/o assigning the policy to the buyer. The building was gutted by fire on November 10 of the same year.
In the instant case, neither X nor Y can recover from the insurer. The insurance contract is suspended. X is no longer the owner at the time of loss & therefore has no more insurable interest in the property. Y on the other hand, is not a party to the insurance contract & therefore has no insurable interest in the insurance.

But, given another set of facts, the insurer will be liable to:
1)X, if he acquires ownership of the property again & is the owner thereof at the time of loss: or
2)Y, if the policy is assigned to him & he is a party thereto at the time of loss.

2.Life or health of a person insured? Interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist in thereafter or when the loss occurs (except that w/c is taken by a creditor on the life of his debtor)

To illustrate, assume X, Inc., can recover from the insurer. The only requirement of insurable interest in life insurance is that it must exist when the insurance takes effect. Recovery is not barred by the fact that X Inc., has no more insurable interest in Y at the time of loss (Sec.19, IC) (ex. The subsequent annulment of their marriage will not affect the right to recover the policy)
(Do you gain or loss if the debtor insured is alive or dead? Yes, insurable interest.) (Commonly in life insurance it is 1 year)

(GR: A change of interest in any part of the thing insured unaccompanied by a corresponding change of interest in the insurance suspends the insurance to an equivalent extent, until the interest in the thing & in the insurance vest in the same person.)

*Are there cases wherein insurance is not suspended despite a change in interest?
Yes, the insurance is not suspended under the ff cases:
1.Life, health or accident insurance
2.Change of interest ina thing insured after the occurrence of an injury w/c results in a loss
3.Cahnge of interest in one or more of several distinct things separately insured in one policy (The contract is divisible)
4.Change of interest by will or succession on the death of the insured: &
5.Transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others.
(ex. Partners of a taxi)
Insurable interest of a person on his life beyond the pecuniary estimation 	Property insurance, the insurable interest of the insured is only up to the value of the property insured
Beneficiary in life need not have insurable interest on the life of the insured	The beneficiary shall have an insurable interest on the property insured
The insurable interest should exist only at the time of the inception of the policy & need not exist at the time of loss	The insurable interest must exist both at the time when the policy is issued & at the time when the loss/damage occurs.
CONCEALMENT & MISREPRESENTAITON
*What is concealment? (PASSIVE)
It is the neglect to communicate that w/c a party knows & ought to communicate. (Sec 26, IC). But a party needs to communicate only those information that would tend to influence the party in entering into the contract. For ex. The failure to communicate one’s illness is concealment that will avoid the policy, even if the cause of death is entirely unrelated to such illness.
The omission entitles the injured party to rescind the contract of insurance whether or not it is done intentionally or unintentionally. Fraud is immaterial in concealment; unless the concealment refers to a warranty in w/c case the omission to communicate the information must be intentional & fraudulent in order for the insurer to rescind. Neither party is bound to communicate, even upon inquiry matters of his own judgment such as mere opinions & speculations.

*X took a life insurance policy where the insurer waived the requirement of a medical examination (non-medical insurance). A year later, X died of a brain tumor. Upon investigation, the insurer discovered that X had been treated a number of times for severe migraine even before the policy was issued. As a result, the insurer denied payment to the beneficiary under the policy. Is the insurer’s refusal to pay tenable?
Yes, the insurer may refuse to pay the insurance on the ground of concealment. In non-medical insurance wherein the insurer waives the medical examination before a policy is issued, information regarding the health of the insured becomes even more material because the health condition of the insured is important in considering the amount premiums to be paid.

*X took a life insurance on his life payable upon his demise. At the time of the application, X failed to disclose that he was confined in a hospital for renal failure. W/in 2 years from the issuance of the policy X died of an airplane crash.
1.Is the insurer liable? No, the insurer is not liable on the insurance on the ground of concealment. X’s failure to disclose his hospitalization for renal failure is material & the insurer can avoid the policy even if the death is due to other causes (Sun Life Insurance Company of Canada vs CA)

2.Assuming that the death occurred more than 2 years from the time of issuance of the policy, will your answer be the same?
No, my answer will not be the same. This time the insurer will be liable because of the incontestability clause in life insurance payable upon death of the insured. In other words, the insurer can no longer raise the issue of concealment to avoid the policy after the lapse of 2 years from the issuance of the policy.

*A fire insurance policy in favor of X contained a stipulation that the insured shall give notice to the insurer of any insurance/s already effected or w/c may subsequently be effected covering the property insured, & that violation thereof shall lead to forfeiture of all benefits. The face of the policy bore the annotation “Co-insurance declared”. The things insured were burned. It turned out that several insurances were taken on the same property for the same term. The insurer refused to pay X on the ground of concealment. Can X recover on the said fire insurance?
Yes, X can recover on the fire insurance since there is no concealment. The annotation “Co-insurance declared” on the face of the policy is already a notice to the insurer of the existence of other insurance contracts on the same subject  property.

*What is misrepresentation? (ACTIVE)
It is a statement by a party that something material is true when in fact it is not. It is an active form of concealment. For ex: lying about one’s age to make one younger is a misrepresentation.
Just liked concealment, misrepresentation entitles the injured party to rescind the contract of insurance, whether or not it is done intentionally or unintentionally. & it also does not cover mere expressions of opinion.

*What is the so called “incontestable clause” in life insurance?
It simply means that after the lapse of the period of 2 years (may be reduced but not extended) from date of issuance or reinstatement of the life insurance policy made payable on the death of the insured, the insurer can no longer prove that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or misrepresentation of the insured. Incontestability does not apply to life insurance that is not payable on the death of the insured & also to property insurance. Sec.48 IC)
The ff defenses are not barred by the “incontestability clause”:
1.The person taking the insurance has no insurable interest
2.The premiums have not been paid
3.The cause of death is an excepted risk; &
4.The action on the policy is not brought w/in the prescribed period (w/in 10 years from the time the cause of action accrues (Statue of Limitations); may be reduced by agreement but in case less than 1 year).

*The life insurance policy of X took effect on January 2, 2005 & made payable to his wife as beneficiary upon his death. In the application, X answered in the negative the question of whether or not he was a smoker. X died of lung cancer on April 15, 2007. Is the insurer liable on the insurance?
Yes, the insurer is liable on the insurance taken by X. It is undeniable that the act of X is not truly answering the question in the application constitutes material representation. But by virtue of the incontestability clause in life insurance payable upon death of the insured, fraudulently concealment or misrepresentation can no longer be used as a ground by the insurer to prove that the policy is void ab initio or is rescindable after a period of 2 years from the date of issue or last reinstatement of the policy. The death of X happened more than 2 years from the issuance of the policy.
POLICY
1.Policy of insurance- is the written instrument in w/c a contract of insurance is set forth. The policy must be in printed form, although blank spaces may be provided thereon, except group insurance & group annuity policies w/c may be typewritten. The policy must be signed by the insurer but it need not be signed by the insured, except warranties that are embodied in a separate document w/c must be signed by the insured (Sec49-50, IC)

2.Rider- is an attachment to the policy containing additional stipulations between the parties. In case of conflict, stipulations in the rider shall prevail over those in the policy. A rider needs the countersignature of the insured only if he did not apply for it & it is issued after delivery of the policy.

3.Cover note- may be issued by the insurer to temporarily bind the insurance pending issuance of the policy w/in 60 days after issuance of a cover note, a policy must be issued, unless such period is extended upon written approval of the Commissioner (Sec 52, IC)

*Kinds of policies: (kinds of non-life insurance)
1Open policy- is one wherein the value of the thing insured is not agreed upon, but is left to be determined in case of loss. (sec 60, IC)
To illustrate, assume that X insured his building against fire for P3M w/o agreement as to its value. The building is totally destroyed by fire. This is an open policy since the value of the building shall have to be determined at the time of loss. If its value is determined to be P2M, this is the amount recoverable by X. If the value turns out to be P3.5M, X can recover only P3M because the amount on the policy represents the maximum liability of the insurer.

2.A valued policy- is one that expresses on its face an agreement that the thing insured shall be valued at a specified sum. (Sec 61, IC)
To illustrate: assume that the face value of a fire insurance policy contains the amount of P2M. The value of the building of x is set at P2.5M. It is totally destroyed by fire. This is a valued policy since the value of the building is s et at P2.5M. But since the face value of the policy is only P2M, this is the amount recoverable by X. Had the face value been P2.5M or more, X would have recovered P2.5M, the amount of the loss suffered.

3.A running policy (fluctuating policy) is one that contemplates successive insurances & w/c provides that the object of the policy may be from time to time defined by additional statements & indorsements. (Sec 62, IC). This kind of policy finds application to goods or merchandise that constantly changes in a quantity so that there is a need to adjust their values from time to time.
To illustrate: assume that X is engaged in a merchandise business, whose inventory frequently fluctuates. A running policy would require that the value of the goods insured shall be determined at intervals of time agreed upon so that there will be a basis of determining the loss in the event the goods will be destroyed by fire.

*A policy taken by X provides, among others, that “any court action for the recovery of this insurance must be commenced by the insured or his representative w/in 1 year from the occurrence of the loss” The loss occurred on June 30, 20005. On July 5, 2005, X made a formal demand from the insurer for payment on the insurance. The insurer informed X that an investigation would have to be conducted first. After several attempt to follow-up his claim, X received a letter on April 16, 2006 signifying the insurer’s final rejection of his claim. X filed a suit in court on September 1, 2007. The insurer moved for the dismissal of the suit on the ground that the action has already prescribed for having been filed more than 1 year from June 30, 2005. If you were the judge would you dismiss the case?
No, I would not dismiss the case. The law provides that a stipulation in any policy of insurance limiting the time for commencing an action thereunder to a period of less than 1 year from the time the cause of action accrues is void. The cause of action in insurance begins to accrue not on the occurrence of the loss but upon final rejection of the claim by the insurer. Since the final rejection was received on April 15, 2006, X has until April 15, 2016 (10 year prescriptive period on written contracts) to file an action in court. The case is, therefore, filed on time.
The stipulation in the policy is declared void by law because it shortens the period to commence an action to less than 1 year from the time the cause of action accrues. It must be stressed that the law allows the 10 tear period to be reduced by a stipulation in the policy provided it is not less than 1 year from the time the cause of action accrues. Therefore, had the stipulation read “w/in 1 year from the time the cause of action accrues,” X’s action would have been barred since April 15, 2006 to September 1, 2007 is definitely more than 1 year.
WARRANTIES
*What is a warranty?
It is a statement relating to the past, present, or future written in the policy, the falsity or non-fulfillment of w/c entitles the insurer to rescind the policy.
It may be express or implied, but our law provides for implied warranties only in marine insurance.
Breach of warranties not coupled w/ fraud entitles the insured to a return of premiums paid,	Whereas if with fraud, no return of premiums will be made.
In case of doubt, a statement shall be construed as a representation rather than a warranty since the former requires only substantial truth, whereas the latter has to be strictly complied w/.

*The fire insurance policy provided that a fire extinguisher must be maintained at all times in the insured warehouse. The policy took effect on August 1 of the current year & a fire totally destroyed the warehouse 6 months thereafter w/o any fire extinguisher installed in he premises. Is the policy avoided?
Yes, the insurer may deny payment on the ground of breach of warranty. A warranty stipulated in the policy must be strictly complied w/ & the violation thereof avoids payment. But, the facts seem to show absence of fraud on the part of the insured. Consequently, he is entitled to a pro-rata return of premiums paid or ½ thereof.
PREMIUMS
*Give the rule on payment of premium & the exception if any:
Premium represents the consideration of the contract of insurance & the insurer is entitled to its payment as soon as the thing insured is exposed to the peril insured against. The general rule, therefore, is that no contract of insurance issued by the insurer shall be valid & binding unless & until the premium thereof has been paid. (Cash-&-carry rule), except in the ff cases:
1.Life or industrial life policy whenever the grace period provision applies:
2.Waiver on the part of the insurer (ex. Insurer accepted partial payment then sued for the balance, or insurer agreed to an installment term)
3.When against public interest or innocent 3rd parties (ex. CMVL insurance where the victim becomes a 3rd party claimant)
4.Any acknowledgement in the policy/contract of insurance of the receipt of premium
5.If the parties agreed to installment payment of the premium & partial payment has been made at the time of the loss.
6.If the insurer granted the insured a credit term for the payment of the premium & loss occurs before the expiration of the term, recovery should be allowed even the premium is paid after the loss but w/in the credit term
7.Estopple bars the insurer from taking refuge under Sec 77 if it has granted the insured a credit term to pay the premiums
LOSS (life vs non-life)
*Under what instances is an insurer liable for loss?
An insurer is liable for loss:
1.Where the proximate cause is the peril insured against (in fire insurance, where a fire that originated from adjacent building caused the “LPG” in insured house to explode- insurer is liable since fire is the (proximate cause) is the peril insured against, even if the explosion (immediate cause) may not be insured against); & (fire too explosion)
2.where the immediate cause is the peril insured against , even if the proximate cause is not the peril insured against a(in fire insurance, where a truck rammed an electric post that fell to the insured house causing fire thereto- insurer is liable since the immediate cause (fire) is the peril insured against even if the proximate cause (truck ramming electric post) is not insured against) & (explosion to fire)
3.Where it arises as a result of rescuing the thing insured from the peril insured against (in fire insurance, loss or damage to things due to water or theft when they are removed from the fire scene in order to save the same) (another insurance for wet electric fan)

*The ff are common stipulations found in insurance policies relative to loss:
1.Deductible clause- in motor vehicle insurance sets a fixed amount that the insured will shoulder in case of damage to the vehicle. It represents the insured’s contribution to the loss making him liable for a portion thereof.

2.Franchise clause- in marine cargo insurance sets a minimum amount of loss to be sustained before the insurer will pay. Any loss of a lower amount will not be indemnified by the insurer; otherwise he will pay for the entire loss.

3.Co-insurance clause- in marine insurance means that in case a thing is insured for less than its value & a loss occurs, the insured becomes a “co-insurer” for the uninsured portion. This clause is implied in marine insurance, but is not applicable to fire insurance, unless expressly stipulated therein.

A hostile fire is one that burns in a place where it ought not to burn (fire caused by a lighted cigarette that fell on a mattress). A friendly fire may become a hostile fire when it starts in a place where it ought to be but later spreads to a place where it ought not to be (small fire set on garbage was blown by a sudden gush of strong wind setting fire on a nearby house). The insurer is liable for hostile fire	A friendly fire is one that burns in a place where it ought to be (fire burning on a stove or lamp) the insurer is not liable of a friendly fire caused by a negligence, provided it does not escape to a place where it ought not to be.
(ART 2207.if the plaintiffs property has been insured, & he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract, the insurance company shall be subrogated to the right of the insured against the wrongdoers or the person who violated the contract).
DOUBLE INSURANCE & REINSURANCE
Double insurance exists where the same person is insured by several insurers separately in respect to the same subject matter & interest (Sec. 93 IC)	Over-insurance exists where the amount of insurance exceeds the value of the insurable interest of the insured. (NB: when there is over insurance by reason of double insurance the insurer shall contribute ratably to the loss & the insured shall never recover more than the amount of his insurable interest.
(Co-insurance- privity of contract indemnity except loan. Mutual insurance- generally a cooperative enterprise both the insurer & insured are members …profits are divided among themselves)
There may or may not be over-insurance in double insurance, & vice versa. & incase of over-insurance by double insurance, (Both insurer will share risks & interest) each of the insurers shall contribute ratably to the loss, bearing in mind that the insured shall in no way recover more than his insurable interest.
Fire insurance policies normally contain “other insurance clause” w/c contains a provision that the policy shall be avoided in case additional insurance is taken on the property w/o the insurer’s consent.
(RD: In order to prevent an increase in the moral hazard & to serve as a warranty that no other insurance exists. Its incorporation in fire policies prevents over-insurance & averts the perpetration of fraud.)

*What is meant by reinsurance contract?
It is one where an insurer procures a 3rd person to insure him against loss or liability by reason of such original insurance. (Sec.95, IC). The original insured is not a party to reinsurance; hence, he has no cause of action against the reinsurer, unless:
1)the reinsurance contract has a stipulation in favor of the original insured; or
2)the reinsurance contract amounts to a novation (A contract, the object of w/c is either to extinguish an existing obligation & to substitute a new one in its place.) of the original insurance contract
Non-life insurance companies are required by law to take reinsurance when they assume a risk on any one subject in an amount exceeding 20% of their net (capital= asset-liability) worth.
(Over-insurance- amount of insurance exceeds the value of insurable interest.
NB: Where there is over-insurance by reason of double insurance the insurers shall contribute ratably to the loss & the insured shall never recover more than the amount of his insurable interest)

*X company, a non-life insurance company, has total assets of P600M & total liabilities of P100M. It insures a shopping complex for P150M. is X company allowed by law to insure the property at P150M?
Since Company X’s net worth is P500M (P600M-P100M), its “retention limit” amounts to only P100M (P500Mx20%). This is the maximum amount it can insure the shopping complex by itself. If X company desires to push through w/ the P150M insurance, it is required by law to take up a reinsurance fro the excess of P50M w/ another insurance company.
CLASSES OF INSURANCE MARINE INSURANCE
*What are the various kinds of transportation insurance?
Transportation insurance, popularly known as marine insurance, includes the ff:
1.Ocean marine insurance- provides insurance against risk related to navigation to w/c a ship, cargo, profits, or other insurable interest in movable property may be exposed.
2.Inland marine insurance- provides insurance against risk related to land & over-the-land transportation such as property in transit (railroads, airplanes, etc,), bailees in custody of property of another (carriers, warehousemen, etc.,) fixed instrumentalities of transportation (bridges, tunnels, etc), including “floater” (moved from one place to another) policies on jewelry, works of art & other movables.

*1.Insurance against all risks- marine insurance policy covers all losses during the voyage, whether arisisng from a maritime peril or not, including pilferage (steal) losses during war.
  2.Inchamaree clause- in the marine insurance policy covers loss or damage to the hull (lower most portion of the vessel) or machinery through:
		a.negligence of the captain or crew
		b.explosion or breakage of shafts; or
		c.latent defect of the hull or machinery

Perils of the sea relates to losses that arise from the unusual & extraordinary movement of wind & wave. They include losses due to shipwreck, collision, stranding, jettisoning of cargo to save the vessel, barratry (willful misconduct of the master & crew for unlawful purpose/o the ship-owners’ consent) & other extraordinary causes related to navigation. An insurer is liable for perils of the sea.	Perils of the ship relate to losses occasioned by the natural & inevitable action of the sea, wear & tear of the ship or negligence in failing to provide the ship w/ the proper crew, equipment & supplies. An insurer is not liable for perils of the ship.
*X, owner of a ship valued at P5M, secured a “loan on bottomry” (A contract in the nature of a mortgage by w/c the owner of a ship borrows money for the use, equipment, or repair of the vessel for a definite term & pledges the ship as a security for its repayment) from Y for P3M. The contemplated voyage involved a trip from Cagayan de Oro City to Manila wherein the ship was chartered by Z under a charter contract that stipulated Z’s liability to X for the value of the ship in case of loss. The ship sank somewhere in the Visayas region due to perils of the sea.
1.How much, if any, is the insurable interest of X, Y & Z on the ship?
As to X (shipowner), the law provides that he has insurable interest up to the value of the ship; even if it is chartered by one ho covenants to pay him its value in case of loss. But, because of the bottomry loan, his insurable interest shall only be the excess of its value over the amount secured by bottomry w/c is P2M (P5M-P3M).

As to Y (creditor), his insurable interest in the ship consists of the amount of the bottomry loan w/c is P3M. This is because he stands to forfeit collection of his credit should the ship not arrive safely at its destination under a bottomry loan agreement.

As to Z (charterer), his insurable interest is the extent that he is liable to be damnified by the loss. He can be held liable under the charter agreement to X for only P2M because this is only the extent of X’s insurable interest in the profits he expects to derive in carrying the cargo in excess of the charter fee he had paid to X.

2.Assuming X, Y & Z all took a marine insurances  for themselves, how much can each of them recover from the insurer?
X cannot recover anything from the insurer if Z paid him P2M per their charter agreement. In case X is able to collect a lesser amount from the charterer, he may recover the deficiency from the insurer. X does not have to pay his bottomry loan to Y since it is extinguished by the loss of the ship.

Y can recover P3M from the insurer representing his loss of not being able to collect anymore the amount he loaned to X.

Z can recover P2M from the insurer because this is the extent of his loss assuming he paid the said amount X. If he also insured his expected profits on the cargo, he can also collect the same from the insurer.
NB: the same principle applies to a loan that is secured on the cargo known as RESPONDENTIA loan.

*What is a charter party?
It is the charter agreement wherein a ship is let by its owner to the charterer. It may be one of the ff:
1.Bareboat or demise charter- the charterer provides the vessel w/ his own master & crew of the shipowner, but then they are directly responsible to the charterer as the latter’s agents & employees. (Ordinary diligence) (Private carrier)
2.Voyage or trip charter- contemplates the carriage of goods on one particular voyage or on a series of agreed voyages. The master & crew of the vessel remain under the employ of the shipowner. (Extraordinary diligence)
3.Time charter- contemplates the use of the vessel for a specified period of time or for the duration of one or more specified voyages. Like the voyage charter, the master & crew of the vessel remain under the employ of the shipowner. (Public carrier)

*Concealment & misrepresentation in marine insurance are stricter when compared to fire insurance. In marine insurance, mere failure to communicate information that the insured possesses even though he is not personally actually aware of it (ex. Information known by agent but not known by principal-insured), will avoid insurance. Likewise, the insured is bound to communicate to the insurer beliefs, opinions, or expectations of 3rd persons in reference to a material fact.

*X took a marine insurance upon his goods on board a ship w/c departed from Greece to Manila, w/o any disclosure to the insurer of the fact that the ship had been reported at Australia as seen at sea, deep in water & leaky. This report turned out later to be wrong because the ship was at no time during the voyage leaky or in trouble, but was lost thru another insured risk. The insurer refused to pay on the ground of concealment. X countered that the undisclosed fact was erroneous & did not increase the risk & was therefore immaterial. Decide the dispute w/ reasons.
X will not recover on the marine insurance. The information that the ship was seen at sea, deep in water & leaky although wrong, was material. Its concealment entitled the insurer to rescind the contract of insurance

*what are the implied warranties in a marine insurance?
1.Vessel must be seaworthy- means that the vessel is reasonably fit to undergo the voyage. The implied warranty is complied w/ if the vessel is seaworthy at the time of the commencement of the risk. In other words, there is no implied warranty that is seaworthy at all times throughout the life of the policy. Exceptions:
1.Time policy- vessel must be seaworthy at the start of each trip;
2.Voyage policy- vessel must be seaworthy at the start of each stage of the trip; &
3.cargo policy- each vessel on w/c cargo is shipped or transshipped must be seaworthy at the start of each trip.
It is may happen that a ship is seaworthy for the purpose of insuring the ship, but seaworthy for the purpose of insuring the cargo.

2.Vessel must not deviate from agreed voyage- deviation means departure from the course of voyage insured, unreasonable delay in pursuing voyage, or commencement of an entirely different voyage.
Deviation is proper:
	1.when caused by circumstances beyond the control of the master & shipowner;
	2.when necessary to comply w/ a warranty or to avoid a peril
	3.when made in good faith & upon reasonable ground of belief in the necessity to avoid peril; or
4.when made in good faith for the purpose of saving human life or relieving another vessel in distress (but not to save       property) (Sec 124, IC)
Any other deviation not specified above is improper (Sec 125, IC) VS SEC 123

3.Vessel must not engage in illegal venture; &

4.Vessel must carry the requisite papers of nationality or neutrality where such nationality or neutrality is expressly warranted.

*What is meant by constructive total loss & abandonment? Loss may be total or partial, & total loss may be actual or constructive.
In constructive loss, the loss is not actually total but the law considers it as such provided there is proper abandonment of the thing insured.	Abandonment is the relinquishment of the insured’s interest in the thing to the insurer if the loss or damage is more than ¾ of the value of the thing insured. Acceptance on the aprt of the insurer is not necessary because the right to abandon, if proper, is absolute

*The logs to be shipped from Butuan City to Cebu City were insured in one policy & were placed in 2 barges. Due to unexpected sudden & violent action of the sea more than ¾ of the logs placed in one barge were lost. May the insured declare a constructive total loss on logs loaded in the said barge?
No, insurer cannot declare a constructive total loss on the logs shipped in one barge because only a single policy was taken & the logs were not insured separately, The insurance is, therefore, indivisible. Constructive total loss, therefore, may only be declared if the loss of n=more than ¾ occurred on the entire shipment in the 2 barges (Oriental Assurance Corporation vs CA)
(Co-insurance applies if:
1)	vessel is under insured
2)	& there is partial loss- implied in marine insurance but must be expressly stipulated in fire insurance)
General averages include damages deliberately caused by the master of the vessel in order to save the vessel, cargo or both. An ex. Is the jettison of cargo in order to save the vessel. Since damages have benefited all persons having interests in the vessel & cargo, the loss must be borne by all of them. The insurer is liable for his proportion of all general averages loss	Particular averages include damages that have bot effected all persons having interest in the vessel & cargo. So the loss is borne by the owner of the vessel or the cargo. The insurer is liable for particular average loss, unless there is a stipulation to the contrary.

*X owns a ship w/c he insures under a marine insurance policy of P8M. Determine the liability on the insurance assuming:
1.The ship’s value is set at P8M & loss amounts to P5M:
Since the vessel was insured for its full value, the insurer shall be liable in the amount of P5M to X representing the partial loss on the vessel. The insured does not become a co-insurer in case of partial loss if the property is insured for its value.

2.The ship’s value is set at P8M & loss amounts to P7M:
Since the loss is more than ¾ of the ship’s value, constructive loss may be declared thereon. And where the requirements of abandonment are properly observed, X shall recover the full amount of P8M from the insurer.

3.Sthe ship’s value is set at P10M & loss amounts to P5M:
Since the vessel was insured for less than its full value & there was a partial loss, the insured automatically became a co-insurer is determined by the ff formula:
INSURER’S LIABILITY-PARTIAL LOSS/SHIP’S VALUE X INSURANCE
Applying the above formula, the insurer shall pay X PP4M (P5M/10M X P8M). The balance of P1M on the loss shall be borne by X as co-insurer thereof.

*”One –third new for old” rule in marine insurance is applicable when there is a partial loss of a ship or its equipment. When repairs thereto are made, the old materials are deducted from the cost of the new repairs needed. After such deduction, the remaining cost of repairs is apportioned as follows: thereof to be borne by the insurer, & 1/3 thereof to be borne by the insured. The principle behind this apportionment is that after such repairs the vessel is made more valuable than before. In other words, the loss is estimated at 2/3 of the cost of repairs, thereby resulting into “One-third new for old” (Sec 166, IC)
FIRE INSURANCE
GR: No co-insurance E: unless expressly stipulated (No abandonment in fire insurance)

*A fire insurance policy ordinarily covers loss or damage to property by hostile fire. But the current trend is to include, subject to additional premiums, the so-called “extended coverage” w/c may include some or all of the allied risks such as lightning, explosion, earthquake, typhoon, flood, & etc. (LEWTOA) It may even include the special coverage known as “loss of profits or business interruption insurance” wherein unrealized profits resulting from fire will be indemnified.

1.The rules on concealment & misrepresentation are stricter in marine insurance than fire insurance
2.The rules on constructive total loss & abandonment apply to marine insurance but not to fire insurance &
3.When the insured insures his property for less than its actual value & partial loss occurs, he becomes a co-insurer of the uninsured portion under a marine insurance, but he does not become a co-insurer of the uninsured portion under a fire insurance, unless expressly stipulated in the policy.
4.No implied warranties in fire insurance only in marine insurance

*X took a fire insurance policy for P1M on his commercial building worth P3M. The property was later partially destroyed by hostile fire. How much can X recover from the insurer under each of the ff independent cases?
1.Partial loss was equivalent to ½ of the value of the building;
The amount of insurance taken (P1m) was less than the actual value of the building (3M). But, the insured fire insurance does not become a co-insurer for the uninsured portion in case of partial loss. Furthermore, although the partial loss amounts to P1.5M (1/2 of P3M), X can recover only the amount of P1M from the insurer because this is the extent he insured for would violate the fundamental principle that property insurance is a contract of indemnity.

2.Partial loss was equivalent to 1/3 of the value of the building;
As previously explained, X does not become a co-insurer for the uninsured portion in fire insurance. Since he insured his building for P1M & the partial loss amounted to also P1M (1/3 of P3M) X can recover the said amount from the insurer.

3.Partial loss was equivalent to ¼ of the value of the building;
Since X insured his building for P1M & the partial loss is only P750T (1/4 of P3M), he can recover P750T from the insurer representing the actual loss on the property. Fire insurance is a contract of indemnity. The insured can never realize any gain on the insurance by being allowed to recover more than the loss sustained.

*10 years ago, X constructed a house worth P1M w/c he insured against fire for the same amount. The insurance for the same amount was renewed every year. At present, when the house was already worth P2M on account of inflationary prices (in case of a rebuilding), ¼ of the house was destroyed by fire. X was completely blameless & there was nothing illegal about the contract. How much can X recover from the insurer of the policy is:
1.Valued policy- the valuation is conclusive between the parties, unless there is fraud. Therefore X can recover only P250T representing the loss of ¼ of the value of P1M.
2.Open policy- the loss is appraised at the time of the loss. Since the house was worth P2M then the loss of ¼ would amount to P500T Therefore, X can recover P500T from the insurer.

*X took a fire insurance policy w/ an “option to rebuild clause”. The valued policy for P3M covered a residential bungalow of w/c X spent P2M to construct 5 years ago. The house was completely destroyed by hostile fire. Instead of paying X the value of P3M, the insurer availed of the “option to rebuild clause” in the policy. But, when the construction cost reached P3M the insurer stopped the construction, leaving the house only 70% complete. X sued the insurer to compel him to finish the construction. Will the suit prosper?
Yes, the suit will prosper & the insurer can be compelled to finish the construction of the insured property. The insurer was at liberty to choose whether to pay X P3M, or to rebuild the house. Since he chose the latter option, he cannot later on back out from it even if the cost of rebuilding the property will exceed the original amount of the insurance.
CASUALTY INSURANCE
*Casualty insurance is an insurance covering loss or liability arising from accident or mishap, excluding those that exclusively fall w/in the scope of other types of insurance. Casualty insurance includes:
1.Employer’s liability insurance
2.Workmen’s compensation insurance
3.Burglary & theft insurance
4.Personal accident & health insurance as written by non-life insurance  companies; &
5.Other substantially similar kinds of insurance (Sec 174, IC)

*When can 3rd persons directly sue the insurer in liability insurance?
When the policy provides for indemnity against liability to 3rd persons, such 3rd persons can directly sue the insurer since they have a beneficial interest in the proceeds of the policy. But, when the policy provides indemnity against actual loss or payment, 3rd persons cannot directly sue the insurer since the only duty of the insurer in this case is to reimburse the insured for liability paid by him to 3rd persons.

*X took a personal accident insurance. While cleaning his firearm, he removed the magazine of his pistol &, thinking erroneously that it was not loaded, he pointed it at his temple & pulled the trigger. X died instantly as a result thereof. Is the insurer liable? Yes, the insurer is liable. In accident insurance, negligence is almost a factor. What is controlling in this type of insurance is that death or injury is not the natural & probable result of the insured’s voluntary act. The insured neither committed suicide nor willfully exposed himself to needless peril since he thought the gun was not loaded w/ any bullet (Sun Insurance Office Ltd vs CA)                                                                                           SURETYSHIP
*A contract of Suretyship is an agreement whereby the surety guarantees the performance by the principal or obligor of an obligation or undertaking in favor of a 3rd party or obligee.It is a collateral contract in relation to the principal contract between the obligor & the oblige. It includes official recognizances, bonds, & other undertakings. (Sec 175, IC)
A surety bond evidences in writing the contract of a surety whose liability under the bond is solidary. The obligor, for his part, executes an “indemnity agreement” to indemnify the surety against the loss.

*KLM Assurance issued a surety bond although it has not been authorized by the Insurance Commissioner to issue surety bonds. Can KLM Assurance Corporation later on claim that it has no authority to issue the surety bond?
No, KLM Assurance Corporation is stopped from claiming that it had no authority to issue the surety bond. (Philippine Pryce Assurance Corporation vs CA)                                             LIFE INSURANCE
*Is life insurance a contract of indemnity?
Life insurance is generally not a contract of indemnity. In ordinary life insurance the amount to be paid is already ascertained beforehand, unlike in property insurance where the amount payable is contingent on the extent of the loss. Likewise, there is no limit as to the amount of insurance that may be taken on one’s life, such being dependent only on the insured’s willingness & capacity to pay the corresponding premiums. Rather than being described as a contract of indemnity, a life insurance contract is more of an investment.
But, health, accident, & disability insurance, insofar as it provides benefits for hospital or medical expenses, may be regarded as a contract of indemnity. A health insurance can also be viewed as a casualty insurance; hence, it is issued by both life & non-life insurance companies.
(Rules on suicide in life insurance:
1.Insured was sane, committed suicide w/in 2 yrs incontestable clause- insurer is not liable
2.Insured was sane, committed suicide after 2 yrs incontestable clause- insurer liable
3.Insured was insane, (suicide is not an excepted risk)- insurer is liable, incontestable clause in immaterial
4.Insured was insane committed suicide (suicide is an excepted risk)- insurer is liable)

*May a life insurance policy be assigned to someone w/o insurable interest?
Yes, the law provides that a policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest or not,& such person may recover upon it whatever the insured might have recovered.
Such transfer or bequest does not require notice to the insurer, unless expressly required in the policy. But even if notice is required but is, in fact, not made, the assignee will still be entitled to the proceeds from the named beneficiary who should collect the same in trust for him. The insurer, on the other hand, is relieved from his obligation once he pays the said beneficiary w/o the required notice.

*Cite instances that will make the insurer liable on a life insurance where the insured has committed suicide.
The insurer shall be liable if the insured committed suicide in the ff cases:
1.Suicide is committed after the incontestable period of 2 yrs from the date of issue or last reinstatement of the policy; the period may be shortened by stipulation but it cannot be extended);
2.Suicide is committed in the state of insanity, regard less when it is committed, & suicide is not an excepted risk in the policy (sec 180-A)

*X took an ordinary life insurance on his life on September 1, 2005. X committed suicide. Is the insurer liable on each of the ff independent cases?
1.X was sane when he committed suicide on February 14, 2007
The insurer is not liable because the suicide was committed w/in the 2-year period of the incontestable clause of the life insurance policy & X was not insane at the time of its commission.
2.X was sane when he committed suicide on December 25, 2007;
The insurer is liable because the suicide was committedbeyond the 2-year period of the incontestable clause of the life insurance policy even if X was not insane at the time of its commission.
3.X was insane when he committed suicide
	a. February 14, 2007: or b. December 25, 2007
It is immaterial whether X committed suicide on Fenruary 14, 2007 or on Decemebr 25, 2007. The insurer is liable regardless when the suicide is committed (whether during or beyond the incontestability period of 2 years) because X was insane at the time of its commission.                     COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
*1.Passenger-(if strict occupant) any fare-paying person being transported & conveyed in & by a motor vehicle for transportation of passengers fro compensation, including persons expressly authorized by law or by the vehicle’s operator or his agents to ride w/o fare.
2.Third-party- any person other than a passenger, excluding a member of the household, or a member of the family w/in the 2nd degree of consanguinity or affinity, of a motor vehicle or land transportation operator or his employee in respect of death or bodily injury arising out of & in the course of employment.
3.Motor vehicle owner- the actual or legal owner of a motor vehicle in whose name such vehicle is duly registered w/ the LTO.
4.Land transportation operator- the owner or owners of motor vehicles for transportation of passengers for compensation, including school buses.
5.Occupant- may include a “passenger” or a “3rd party” for as long as they are riding in or mounting or dismounting from a motor vehicle (sec 373, IC)
(Authorized driver rule- for purposes of recovery, the driver of the vehicle must be in possession of a valid, subsisting & professional driver’s license. But this rule will not apply if the one driving the vehicle at the time of the accident was the owner of the vehicle.) (Even premiums is not paid in the interest of public policy)
*CMVLI is an insurance passenger & 3rd party liability for death or bodily injures arising from motor vehicle accidents. It is made compulsory, to a certain extent by the law & makes the insurer’s liability primary & not dependent on any judgment that the injured party may obtain against the insured, thereby providing immediate financial assistance to victims of vehicular accidents.
For owners of private motor vehicles, the insurance covers 3rd-party-liability for death or bodily injuries. And for operators of land transportation (including private motor vehicles used to transport passengers for compensation), it covers both 3rd-party & passengers liabilities for death or bodily injuries. Instead of the CMVLI policy, a surety bond or cash deposit may be given as a substitute.
(In order to give immediate assistance to the victim of motor vehicle accidents &/or the dependents specially if they are poor regardless of the financial capability of the owner of the motor vehicle/ operator responsible for the accident.
1.claim is collected from the insurer of the vehicle where the claimant is riding, mounting, or dismounting. In all other cases, the claim is against the insurer of the offending vehicle.
2.Insurer who pays the claim can ask reimbursement from the offending vehicle
3.recovery by the insured from the insurer is direct & not dependent on the recovery against the insurer by the insured party.)

*No fault indemnity claim- any claim for death or bodily injuries (excluding property damage) in an amount exceeding P5, 000 per person under the CMVLI shall be paid w/o necessity of proving fault or negligence of any kind, upon submission of the ff under oath:
1)police report; &
2)death certificate or medical report, as the case may be
The claim may be made against one motor vehicle only. In the case of an occupant, his claim must be against the insurer of the vehicle where he is riding, mounting or dismounting. In any other case, the claim shall be made against the insurer of the directly offending vehicle.

*In order to avoid a direct collision w/ an over speeding car that was travelling on the wrong lane, the bus driver swerved his vehicle to the side resulting in the bus hitting an electric post. X a passenger of the bus, suffered serious physical injuries, & Y. A sidewalk vendor selling fruits beside the electric post, died as a result of the mishap. The over-speeding car is insured w/ ABC Insurance Co. & the bus is insured w/ ABC Insurance Co. & the bus is insured w/ RST Insurance Co.
1.Against whom shall X exercise the “no fault indemnity claim”? X can claim up to P5, 000 under the “no fault indemnity claim” against RST Insurance Co. because as an occupant of the bus, his claim shall lie only against the insurer of the bus in w/c he is riding. He must file a written a notice of his claim w/in 6 months from the date of the accident, accompanied by the corresponding police & medical reports.

2.Against whom shall the heirs of Y exercise the “no fault indemnity claim”? The heirs of T can claim up to P5, 000 under the “no fault indemnity claim” against RST Insurance Co. because any claimant other than an occupant can only claim against the insurer of the directly offending vehicle. The phrase “directly offending vehicle” should refer to the bus that hit Y causing his death.

*X is the registered owner of a private pick-up truck. Y a close friend of X, drove the vehicle for a joy-ride w/o a driver’s license but w/ express permission of X. Y negligently hit Z, the latter suffering physical injuries as a result thereof. The vehicle is insured/ LMN Insurance Co. can Z run against LMN Insurance Co. under the “no fault indemnity claim”?
Ordinarily, the insurer is not liable under the insurance because of violation of the “standard authorized driver clause” w/c prohibits the driving of the insured vehicle by a person authorized by the owner w/o the proper driver’s license. However, the primary purpose of compulsory 3rd-party liability insurance is to protect 3rd persons who are not parties to the contract & who might suffer loss or injury on account of an accident. The insurer, therefore, should not be allowed to escape liability simply because the vehicle owner happens to violate the contract.
Therefore, Z can claim up to P5, 000 from LMN Insurance co. under the “no fault indemnity claim” w/o prejudice to the rights of the insurer under the insurance contract.
(Group insurance vs Insurance commissioner: adjudicatory & regulatory)
TRANSPORTATION LAWS (COMMON CARRIERS ART.1732-1766 CIVIL CODE & CODE OF COMMERCE)
(Is the carriage of passengers/goods/both by of land, water, & air. The carrier may be a 1) common carrier or 2) private carrier)

*A common carrier is one that is engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public. (A contract of transportation is one where by a person natural or judicial, obligates himself to transport persons/goods or both, from one place to another, by land, water, or air for a price or consideration.)

*Distinguish CC from PC:
CC- is obliged to carry or transport all those who want to employ its services. It is also obliged to exercise extraordinary diligence.	PC- can select the persons it may wish to contract. It is also obliged to exercise ordinary diligence only.

*X is the operator of a bus service for school children. The bus was hired for a special student trip to the province. Is X engaged in the business of a CC?
Yes, X is a CC. art 1732 of the CC does not distinguish between a carrier offering a transportation services on a regular basis & on unscheduled basis, & between a carrier offering the said services to the general public & to a narrow segment of it. (Fabre vs. CA)

*A group of college students chartered a passenger bus of Mintrans Company for an excursion trip to Bukidnon Province. The company charged the students a very minimal fee for the trip but a written agreement was made that the company would not be liable on account of any accident occasioned by its employee’s negligence. The bus fell into a deep ravine due to the reckless driving of the bus driver & 7 youngsters died as a result of the accident. The heirs of the victims sued Mintrans Company for damages arising from breach of their contract of carriage. Will the action prosper?
No, the action will not prosper. Mintrans Company acted as a private carrier when its bus was used in the excursion trip. As a private carrier, any stipulation exempting it from liability for the negligence of its employees is valid & is not against public policy.

*What law governs liability of common carriers in case of loss, destruction or deterioration of the goods?
The liability of common carriers as to the loss destruction or deterioration of goods shall be governed by the law of the country to w/c said goods are to be transported. As to the goods transported to the Philippines, the liability of the carrier is primarily governed by the Civil Code, & in all matters not regulated by the said code, The Code of Commerce & special laws (ex. COGSA) will apply.

*Common carrier is not liable:
1. Stow away being a trespasser
2. Holds-ups robbers acting w/ irresistible threat, force/violence beyond the control of the common carrier
3. Passenger’s negligence when he placed elbow outside the window railing of the bus
4. Injury to passenger caused by an unidentified man who threw stone at the passenger bus

*Under what circumstances will a common carrier not liable for the loss destruction or deterioration of the goods?
Common carriers, for reasons of public policy, are bound to observe extra-ordinary diligence in the vigilance over the goods. But they are not responsible if the loss, destruction, or deterioration of the goods is caused by any of the following:
1.Natural disaster or calamity
2.Act of the public enemy in war, whether international or civil
3.Act or omission of the shipper or owner of the goods
4.Character of the goods or defects in packing or in containers &
5.Order or act of competent public authority (Sec.1734,CC)
(6.When the CC had observed diligence in the vigilance over the goods & utmost diligence fro the safety of passenger
7. Hijackers acted w/ grave/irresistible threat/force /intimidation)

*Common carriers are liable:
1) Death/injury to a passenger raises the presumption that the common carrier was at fault or negligent
2)Loss/destruction/deterioration of goods being transported
3)Mechanical defect & blowing out of new-installed tire do not constitute fortuitous event
4)CC is hijacked, it is still liable to passengers unless it porves that the hijackers acted w/ grave/irresistible threats, intimidation, or force
5)negligence of its employees even if such acts are beyond the scope of authority. Ex. Taxi driver killed the passenger where he held on the passenger
6)Act of passenger stabbing another passenger in the bus

*Far east shipping lines., inc. is the owner of the vessel M/S Godspeed wherein a cargo of office equipment consigned to Computek Phils., inc. was loaded & to be transported from Malaysia to the Philippines. A fire broke out while the ship was in transit casing damage to the said cargo.
1. What law will govern the loss of the cargo: The Civil Code or the COGSA? The law of the country to w/c the goods are to be transported will govern the liability of the common carrier. Therefore, since the goods are to be carried to the Philippines, the Civil Code primarily applies. The COGSA will only be suppletory, unless the parties have expressly provided for its application.

2. Is Far eastern shipping lines., inc. negligent under the circumstances? Fire is not among the enumerated causes in the Civil Code providing exemption from liability to common carriers. The court does not consider fire as a natural disaster or calamity unless it is caused by lightning or other natural disaster or calamity. Therefore, Far eastern shipping lines., inc. is presumed to be at fault or has acted negligently, and the burden is on the said common carrier to prove that it has exercised extraordinary diligence in the vigilance over the goods.

*Can the shipper or owner of the goods and the common carrier enter into an agreement limiting the carrier’s liability on the goods:
1.w/ respect to the diligence required? Yes, the parties may agree to limit the liability of the common carrier for the loss, destruction, deterioration of the goods to a degree less than extraordinary diligence, provided it is:
 a)In writing, signed by the shipper or owner
 b)supported by a valuable consideration other than the service rendered by the common carrier, and
 c)reasonable, just and not contrary to public policy (Sec.1744,CC) (relate to Civil Code arms/irresistible force or  grave threats)


(The liability of CC on cargoes shipped amounts declared in the bill of lading/ticket unless the shipper declared a higher value & pays a higher value rate of freight. The amount must be fair & reasonable)

2.Yes, the parties may agree to limit the liability of the common carrier to the value of the goods appearing in the bill of lading, unless the shipper or owner declare a greater value. But a stipulation is not valid if:
 a)the common carrier is exempted from any and all liability for loss or damage arising out of its own negligence; or
 b)there is an unqualified limitation of such liability to an agreed valuation. (Art. 1749, CC) (Heacock Co. vs. Macondray & Co., Phil.)

(GR:The common carrier is still liable even if the ticket issued to passenger provides exemption of common carrier from death or injury of passenger and notices were posted dispensing extraordinary diligence of the common carrier or even if the passenger was given a discount of his fares.
E: Passenger is carried gratuitously, stipulation limiting the common carrier for negligence is valid but not for willful act or gross negligence.

A bill of lading serves as a receipt for the goods shipped and a contract.)

(The liability of common carrier on cargoes shipped amounts declared in the bill of lading/ticket unless the shipper declared a higher value & pays a higher rate of freight. The amount must be fair & reasonable.

*What degree of diligence is required of a common carrier when transporting its passengers? A common carrier is bound to carry its passenger as far as human care & foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances. (Art. 1755, CC) (In case of death or injury the common carriers are presumed to have been at fault)

*A passenger bus running at a moderate speed was suddenly hit w/ strong force from behind by a 10 wheeler truck, prompting the driver to swerve the bus to the left side to avoid falling into a deep canal, but hitting instead a nearby tree. X a bus passenger died as a result of the incident. Is the bus operator liable for X’s death?
No, common carrier is not liable for X’s death. Although extraordinary diligence is required, the accident was totally beyond the control of the common carrier’s driver. Clearly, the carrier should be excused from liability due to fortuitous event (Ampang vs. Guinoo, Trans., Co)

*Assume the same facts in the immediately preceding problem, except that the passenger bus was temporarily parked right on the cemented highway and X was about to disembark when the incident happened, causing X’s death. In his defense, the bus operator invoked the “last clear chance” principle to avoid liability. Is the bus operator liable for X’s death?
Yes, the common carrier is liable for X’s death. It is guilty of negligence when it parked the vehicle right on the cemented highway w/o first securing it at the side of the road before X could dismount therefrom. The “last clear chance” principle cannot be invoked in the instant case because it applies only in a suit between the owners and drivers of 2 colliding vehicles. (Anuran vs. Buno)

*Is the common carrier liable for death or injuries to passengers through the negligence or willful acts of:
1.its employees? Yes, even if the latter acted beyond the scope of their authority or in violation of the orders of the common carrier. This liability does not cease upon proof that they exercised all the diligence of a good father of a ffanily in the selction and supervision of their employees. Furthermore, such liability cannot be eliminated or limited by stipulation or otherwise. (Sec.1759-1760, CC)
(DO NOT APPLY  TORTS)
2.Other passengers or strangers? Yes, the common carrier is responsible for death or Injuries of passengers on account of the negligence or willful acts of other passengers or of strangers, if its employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission (Sec.1763,CC)

(CC’s duty to observe the required diligence in the shipment of goods lasts from the time the articles are surrendered to/unconditionally placed in the possession of, and received by the carrier for transportation until they are delivered or until the lapse of a reasonable time for their acceptance by the reason entitled to receive them.)
(GR: gratuitous passenger, liable E: simple negligence EE: gross negligence)

*X rode on a passenger jeepney. He placed his right arm outside the window of the vehicle & as a result, his arm was hit & severely injured by a passing car. Is the jeepney operator liable for X’s injury?
No, jeepney operator is not liable. True, X may only be guilty of contributory negligence which does not relieve the carrier but only reduce his liability. However, analogy may cited to a decided case where the court held it negligence per se for a passenger on a railroad train to protrude any part of his body & thus preventing him from recovery for his injury. (Issac vs. A.L. Ammen Trans. Co.)

*A passenger bus was already starting to resume its journey after a 30- minute stop for lunch. While it was still at a very slow speed, X attempted to board the vehicle board. X’s feet were barely on the platform when suddenly the bus picked up on ies, the common carrier is liable for X’s injuries. For all intents & purposes, X was already a passenger when it stepped on the platform of the bus. The driver or the conductor should have taken the necessary precautions to prevent what happened to X. It is not negligence per se to attempt to board a passenger bus w/c has just started & still moving slowly. This is a matter of common experience among Filipinos (Dangwa Transportation Co., Inc vs. CA)

*A security guard of Z transport company saw X seated at the window side of a bus that was  about to depart. For some personal reasons, the security guard shot X w/ the gun furnished by the bus company to its guards on duty. X died as a result. Is Z Transport Company liable to the heirs of X for damages?
Yes, the C is liable. The extraordinary diligence required of CC extends to acts of its employees performed while discharging their duties. Z Transport Company bears the risk of the wrongful acts of its employees against the passenger because it has the power to select & improve them. (Marana vs. Perez)

*Assume the same facts in the immediately preceding problem, except that it was Y, a cigarette vendor, who committed the crime. Is Z Transport Company liable to the heirs of X for damages?
No, the CC is not liable. There was no way for ZZ Transport Company to possibly anticipate & prevent the sudden act of Y, a stranger, in shooting X. If the employees of the CC, by the exercise of diligence of a good father of a family, could have presented or stopped his act, but failed to do so, the CC would have been liable.

*What damages may be awarded in cases of breach of contract of carriage by a common carrier?
The ff may be awarded to the passenger if duly proven:
Actual & compensatory damages, w/c may consist of:
1)medical, burial, & other expenses
2)unrealized profit that may have been earned by the passenger had he safely reached his destination
3)unrealized net earnings during period of temporary or permanent disability due to injuries suffered
4)unrealized net earnings based on life expectancy due to death
5)P30, 000 as damages for death &
6)attorney’s fees when proper & applicable
Moral damages, provided:
1)passenger died as a result of the breach or
2)passenger suffered physical injuries & CC acted fraudulently or in bad faith
Exemplary damages, provided:
1)CC acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, or
2)CC authorized or ratified thereafter the wrongful act of his agent
Nominal damages-in order to vindicate a right of the passenger but not for the purpose of indemnifying him (cannot co-exist w/ actual & compensatory damages)
Temperate damages- passenger has suffered some pecuniary loss whose  amount cannot be proved w/ certainty due to the nature of the case; &
Liquidated damages- agreed upon by the parties, provided the amount is not unconscionable (unreasonable or inequitable)(Sec. 1764 & 2197 CC)

*A passenger bus hit the rear end of a carabao cart & sharp tip of a bamboo pole tied to it penetrated through the windshield of the bus, hitting X’s face that resulted into his death a day later in the attending hospital. In the ensuing action for breach of contract of carriage against the common carrier, it was found out that at the time of his death; X was 35 years old & a competent junior executive of a prestigious firm w/ an annual salary of P350, 000 & annual expenses of P200, 000. Receipts submitted to the court also revealed medical & burial expenses of P120, 000 & an attorney’s fee of P30, 000. If you were the judge how much would you award an actual & compensatory damages to the heirs of X?
I would award the ff same as actual & compensatory damages:
1.unrealized earnings based on life expectancy. P4,500,000, computed as follows:
P350, 000-P200, 000 x 2/3) x (80-35) or
P150, 000 x (2/3 x 45) or
P150, 000 x 30 or
P4, 500, 000
2.Medical & burial expenses, P120, 000 &
3.Attorney’s fee, P30, 000 (Villa Rey TransIt, Inc vs CA)

*Assume the same facts in the immediately preceding problem. If you were the judge, would you award the ff to the heirs of X:
 1.moral damages? I would award moral damages in the instant case. As a general rule, moral damages are not recoverable in breach of contract of carriage. There are, however, 2 exceptions:
	1.death of a passenger, and
2.fraud or negligence on the part of the CC, even if the passenger suffered only physical injuries.
The instant case squarely falls w/in the 1st exception.

2.Exemplary damages? I would not award the same, In breach of contract of carriage, it is difficult to conceive how defendant could have acted in a wanton, fraudulent, reckless, oppressive or malevolent manner when it was only the driver who was reckless. However there are 2 instances that may hold the common carrier liable for exemplary damages:
	1.if he authorized the wrongful acts of his agent or
	2.if he ratified the same thereafter
MARITIME & ADMIRALTY LAW (Code of commerce)
*What is meant by the limited liability rule under the maritime law?
Dictates that the ship owner’s or agent’s liability is merely co-extensive (simultaneous existence) with his interest in the vessel such that a total loss thereof results in its extinction; in other words, “no vessel, no liability”. This rule under the code of commerce covers only:
1.	Liability for injuries to 3rd parties
2.	Acts of the captain and
3.	collision
The ff, exceptions, however, will make the ship-owner or agent liable despite the loss of the vessel:
1.	where the injury or death to the passenger is either due to the fault of the shipowner, or concurring negligence of the shipowner & the captain(only to passengers & not cargo)
2.	where the vessel is insured
3.	in workmen’s compensation claim

*Mindanao shipping lines is the owner of the vessel M/V Decidido w/ X as its ship captain. The vessel sailed the inter-island waters of the country & sank due to a typhoon. 10 passengers died & all the goods were were lost as a result. The facts would reveal that the coast guard initially prevented the vessel to pursue its voyage but later issued a clearance due to the insistence of the captain X. The weather reports in various television & radio station had already announced the impending arrival of the typhoon several days earlier. The heirs of the victims & the cargo owners sued Mindanaon Shipping Lines for damages. Decide the case w/ reasons.
GR MSL would not be liable under the limited liability rule under maritime law because his liability is merely co-extensive w/ his interest in the vessel. The total loss of the vessel, therefore, would extinguish its liability. However, an exception to the rule is where the death or injury is due to the fault or concurring negligence of the shipowner.MSL is guilty of negligence in allowing the vessel to depart despite numerous bulletins announcing the typhoon & displayed lack of foresight & minimum concern for the safety of its passengers.
Therefore, the claim for damages filed by the heirs of the victims will prosper. However, the clam of the cargo owners will fall under the Limited Liability Rule.

Simple or particular averages shall be, as a GR, all the expenses w/c have not inured to the benefit & common profit of all the persons interested in the vessel & her cargo. The owner of the goods w/c gave rise to the expenses or suffered the damage shall bear the S/PA  	General or gross averages shall be, as GR, all the expenses & damages w/c are deliberately caused in order to save the vessel, her cargo, or both at the same time, from a real & known risk. All the persons having an interest in the vessel & cargo shall contribute to satisfy the amount of the general or gross averages. It’s essential requisites are:
1)common danger
2)deliberate sacrifice
3)Successful saving and
4)proper legal steps & authority (A. Magsaysay Inc., vs Agan)

*Determine whether the ff constitutes particular averages or general averages:
1.Expenses incurred in refloating a vessel after it was intentionally stranded to save it & the cargo- The expenses constitute GA because of the common benefit derived by all the parties thereto. The intentional stranding of the vessel to save it & the cargo presupposes a common danger.

2.”””” After it accidentally ran aground in order to proceed to its destination- “”” Particular averages because there is no showing of an imminent danger to the ship & its cargo. The refloating was done merely to enable the vessel to continue its voyage. It is the safety of the property, not of the voyage, that constitutes GA because it was done to save the vessel & the rest of the cargo from an impending shipwreck. Under the so called “Jason Clause”, the rights to contribution in GA shall not be affected although the event w/c gave rise to the sacrifice or expenditure may have been due to the fault of one of the parties to the adventure, w/o prejudice to any remedies against a party at fault.

*What is a towage contract?
Is one whereby one vessel pulls another from one place to another for compensation. It is a contract for services (lease contract) & is not a contract of carriage.

Collision is the impact between 2 vessels in motion.	Allision is the impact between one moving vessel & a stationary one.
Error in extremis refers to the sudden movement of a vessel that is not at fault during the third zone of collision (point where impact is very certain to happen) w/ another vessel that is at fault. The vessel making any wrong sudden movement shall not be responsible for it.

*what are the rules as to liability in case of collision?
1.One of the vessels is at fault- the owner of the vessel at fault is liable for the losses & damages suffered by the owner of the innocent vessel & the cargo owners:
2.Both vessels are at fault- each owner of the vessel shall bear his own losses & damages, & they are both solidarily liable to the owners of the cargo of either vessel:
3.fault cannot be determined (principle of inscrutable fault)- same rule in letter B
4.Collision due to fortuitous event- each owner of the vessel & each owner of the cargo shall bear his own losses & damages
(Apply the LLR when the vessel is totally lost)

*What is the doctrine of inscrutable fault?
The court has determined the commission of a fault but is unable to locate it due to conflicting testimonies, such as impossibility, at times, of determining the specific acts surrounding a collision

*What are the different types of charter parties?
1.Bareboat or demise charter- the whole of the vessel is leased by the shipowner to the charterer, including the control  of the vessel. The charterer may provide his own master & crew or retain those of the shipowner; in either case, they become the agents & employees of the charterer
The shipowner ceases to be a common carrier & becomes a private insofar as the particular charter is concerned. In effect, any stipulation absolving the carrier form liability for the negligence of its agent is valid & is not against public policy

2.Affeightment contract- the whole or part of the space of the vessel is leased by the shipowner to the charterer for the purpose of carrying the goods for other. The control of the vessel remains w/ the shipowner, including employment of the master & crew. The shipowner remains to be a common carrier. It may either be a:
	1.time charter- lease of a vessel is for a definite period of time or
	2.voyage charter- lease of vessel is for a particular voyage

*X ordered P50, 000 cases of imported wine from Y, the distributor operating in France. Y shipped the goods in correct quantity & in good order to the cargo ship owned by Z by virtue of a voyage charter executed by the parties. When the goods arrived at the Customs house in Manila, the inspection revealed a shortage of P10, 000 cases. X sued Z for the loss on the cargo. Is Z liable to X? Yes, the charter being one of affreightment, Z did not cease to be a common carrier & he is liable for the negligence of his agent resulting into the loss or damage of the goods. Y is not liable in the instant case as he has no control in the means of handling & caring for the goods. As far as the law is concerned, Y is a stranger to the master & crew of the ship.

On board bill of lading- is one that states that the goods have been received on board the vessel that will transport such goods
It is issued when the goods are actually placed aboard the vessel w/ certainty that the same will be shipped	Received shipment bill of lading- is one that states that the goods have been received w/ or w/o specifying the vessel that will transport such goods.
Issued whenever there is insufficiency of shipping space for the goods.

*What is transshipment?
It is the taking out of a cargo from one vessel & loading the same in another vessel. Transhipment, w/o legal excuse, is a violation of the contract of affreightment & will subject the carrier to liability if the freight is lost or damaged even by a cause otherwise excepted.

A loan on bottomry is a type of loan in maritime commerce whereby the vessel is given as a security for the loan & whose payment thereof is made dependent upon the safe arrival of the said vessel at the port of destination.	A loan on respondentia is one where the cargo is given as a security for the loan & whose payment thereof is made dependent upon the safe arrival of the goods at the port of destination
Under both types of loan, the creditor charges a rather high rate of interest because of the risk in not being able to collect if the vessel or the goods, as the case may be, fails to arrive safely at the port of destination
CARRIAGE OF GOODS BY SEA ACT (PUBLIC ACT NO. 521)
*Give some important features of the COGSA?
1.The COGSA applies to all contracts for the carriage of goods by sea to & from the Philippines ports in foreign trade w/ suppletory force to the Civil Code.
2.Notice as to damage on the goods should be given upon receipt of the goods, unless such damage is not apparent or externally visible in w/c case notice should be given w/in 3 days from receipt of the goods
3.Failure to give notice does bar the filing of the suit for loss or damage to the goods
4.The carrier & the ship shall be discharged from liability in respect to loss or damage unless suit is brought w/in 1 year after delivery of the goods or date when the goods should have been delivered; provided:
	a)The 1 year prescriptive period is counted from the date of delivery of the carrier to the arrastre operator, not from the date of delivery by the arrastre operator to the consignee
	b)It does not apply to cases of misdelivery of the goods (delivery to wrong person)
	c)It is not interrupted by a written extrajudicial demand or claim by the consignee to the carrier
	d)It is not interrupted in the ff cases:
			1.Action has been filed in court or
			2.Express agreement that extrajudicial claim or demand for damages will suspend the running of the prescriptive period
(EE: when there is an express stipulation)
5.The maximum liability of the carrier is 500$ per package or per customary freight unit, or its equivalent in other currency, unless the shipper or owner declares a greater value. The parties, however, may stipulate a lesser amount in the bill of lading.

*certain imported items were sold to Y from abroad on the agreement that Y would first pay the price under a bank draft before the bill of lading would be given to him by the bank for presentation to Z, common carrier. X failed to pay & so the seller from abroad indorsed the bill of lading to X. However, Y was able to secure a bank guaranty in favor of Z, & on the strength of this document the Bureau of customs delivered the goods to Y on August 10, 2006. X filed an action against Z for the wrongful delivery on October 1, 2007. Z filed a motion to dismiss n the ground that the action was filed beyond the 1 year prescriptive period. Has the action prescribed?
No, the action has not prescribed. The 1 year prescriptive period for loss or damage to goods contemplates actions due to the loss or damage of goods while the same are in transit w/ the carrier. Misdelivery of the goods is not covered by the said prescriptive period because there was in fact no loss or damage to the goods when they were transported. X has 10 years w/in w/c to file an action for breach of written contract, or 4 years for quasi-delict (Ang vs American Steamship Agencies, Inc.)

*goods were shipped from Japan to the Philippines on June 1, 2006 on board a vessel owned by Y shipping, Inc. Goods were received by X, consignee, on June 15, 2006. Due to shortage in the delivery of the goods, X gave a written notice of such shortage to Y shipping, Inc. on une 17, 2006. Negotiations for an amicable settlement were pursued until the parties finally stopped on August 1, 2007, unable to settle the claim. X filed an action for damages in court against Y shipping, Inc. on August 10, 2007. Has the action prescribed or not?
Yes, the action has prescribed & should be dismissed. Extrajudicial claims & negotiations for amicable settlement do not interrupt the running of the 1 year prescriptive period, unless there is an agreement to that effect, Since the goods were delivered to X on June 15, 2006, he has only until June 15, 2007 to file an action for damages on the goods against Y shipping Inc. When the case was filed on August 10, 2007, the action has already prescribed.
SALVAGE LAW (ACT NO.2616)
*What is meant by salvage & what are the elements of a valid salvage claim?
Salvage refers to the service rendered in recovering the ship or goods that have been abandoned at sea due to maritime peril by the owner. The elements of a valid salvage claim are:
1.maritime peril
2.voluntary service rendered
3.success

*What is “derelict” as used in maritime commerce?
Refers to a ship or her cargo that has been abandoned at sea by those in charge w/o any hope or intention of recovery.

*How shall the owner claim the vessel or things saved & what happens if nobody files a claim over the salvaged vessel or things? The owner is entitled to the delivery of the salvaged vessel or things once he pays or gives a bond to secure the expenses incurred in relation to the salvage & the reward. In case no claim is made w/in 3 months from the publication of the salvage mad, the things saved shall be sold at a public auction, & its proceeds to be applied in the ff order of priority:
1.expenses of custody conservation advertisements auction taxes & duties
2.expenses of salvage
3.salvage of reward (not exceeding 50% of net amount) &
4.remaining balance to the owner
In case no owner claims the deposited balance, half thereof shall go to the salvor, & the other half to the National Government

*How is the salvage reward going to be divided among the shipowner, captain & crew who effected the salvage?
The owner shall be entitled to 50% of the salvage reward, while the captain & the crew shall get 25% each, respectively. The 25% reward of the crew shall be apportioned among them on the basis of their salaries in the absence of an agreement (Sec.13, SL)

*MV Cindy was floating helplessly in the open sea due to engine trouble. The weather was fair & the sea was calm. Captain X of the MV/P Pauleen answered the distress signal of M/V Cindy & towed the latter to the nearest port w/ the consent of its captain & crew. Y the owner of M/V Pauleen, waived any compensation for the service rendered. X demanded payment, contending that the law entitles him to 25% reward from the successful salvage. Is X entitled to compensation?
No, captain X is not entitled to any compensation. The instant case involves an implied contract of towage, not salvage, because M/V Cindy was not really exposed to a maritime peril & was not abandoned by its captain & crew. In a contract of towage, only the owner of the towing vessel is entitled to remuneration. Since Y, the owner of M/V Pauleen, waived the right, captain X is not entitled to any compensation form the towage.

*MV Julia, an inter-island cargo ship, suddenly had an explosion in thee ngine room that caused an irreparable leakage at the bottom portion of the ship. The ship was gradually & hopelessly sinking so captain X declared abandonment of the vessel & all its cargo. Captain Y MV Gladys, w/c was just a few kilometers away, rushed to the scene to rescue captain X & his crew who were boarded on their lifeboats. captain Y then told captain X that his crew would be willing to save whatever goods on deck they could manage to rescue, provided they would be paid 2/3 of their value. Left w// no other alternative, captain X agreed to the proposal. Using its sophisticated equipment, captain Y & his crew were able to save 3 BMW cars owned by Z on the deck of MV Julia before it finally went down to the bottom of the sea.
1.As legal counsel of Z, what advice will you give to your client in  relation to the salvage or assistance reward? I will strongly advice Z not to pay 2/3 of the value of the cars saved. Any agreement on the reward for salvage or assistance may be impugned where the amount demanded was clearly exorbitant & was agreed under compulsion because of the danger existing at the time, such reward may be equitably reduced. (Sec. 9 SL)

2.Assuming that Z assails the validity of the agreement, how will the reward for salvage or assistance be determined? The amount of the salvage reward will have to be fixed by the RTC of the province where the things salvaged are found, taking into account the ff factors:
1.salvage expenses incurred
2.zeal demonstrated
3.time employed
4.services rendered
5.Excessive expenses  occasioned
6.number of persons who aided
7.exposure to danger
8.that w/c menaced the things salvaged &
9.value of the salvage things after deducting expenses (Sec. 10 SL)

3.Assuming that captain X & his crew also assisted in salvaging the cargo, are they entitled to share in the salvage or assistance reward? No, captain X & his crew are not entitled to any reward for salvage or assistance rendered by them. They are the agent & servants of the shipowner & as such, it is their duty & obligation to assist in saving the vessel & its cargo. (Sec.8 SL)

4.Assuming that the RTC finally awarded P10, 000 as reward for salvage or assistance who will share in the amount, & how much will each receive? The salvage or assistance reward of 1, 000, 000 shall be apportioned as follows: P500, 000(50%) to the shipowner, P250, 000 (25%) to captain Y, & P250, 000(25%) to the crew who will divide it in proportion to their salaries in the absence of any agreement (Sec.13 SL)

(Primage- award for the salvage, Demurrage penalty for the delay in the shipping)
INTERNATIONAL AIR CARRIAGE (WARSAW CONVENTION) (MULTI-LATERAL TREATY & NOT A LAW)
*What is the so called Warsaw Convention?
Refers to the convention for the unification of certain rules relating to international carriage by air w/c was signed in Warsaw, Poland on October 12, 1929 & amended by the Hague Convention signed on September 28, 1955. The Philippines is a party to the convention & it became applicable in our country on February 9, 1951.

*What is the airway bill?
It as a document serving as the prima facie evidence for the goods carried by air carriers. It has 3 parts intended for the carrier, the consignor & the consignee of goods.

*Is an international air carrier liable for damages under Warsaw Convention?
The carrier shall be liable for damages sustained in the event of death or bodily injury suffered by a passenger on board the aircraft or in the course of embarkation or disembarkation thereof, & of damage or loss of any checked baggage or any goods during the transportation by air.

*What is the limited liability of the international air carrier under the Warsaw convention?
1.for each passenger- 125, 000 euro dollars
2.For checked baggage & of goods- 250 euro dollars per kilogram
3.For objects that the passenger takes charge himself- 5, 000 euro dollars per passenger
The above limitations may be exercised by agreement, but any provision tending to relieve the carrier of its liability or to fix a lower limit shall be null & void; provided, that the limitations shall not apply if the damage is caused by
1.the willful conduct of the carrier or his agents
2.not an international
3.contrary to public policy

*X checked in 2 luggage’s containing advertising materials at the Americans Air’s tickets counter before boarding the aircraft w/ destination to Guam. Upon arrival, the 2 luggages did not arrive w/ his flight. X’s business presentation to his prospective clients was cancelled as a result. American Airways insisted that its liability to the lost luggages is limited only to $600 ($20 x 20 kilos) as printed at the back of the airline ticket. X contended that American Airways is guilty of willful misconduct in losing his lugages & so the limitation on the airline’s liability does not apply. Decide the controversy w/ reasons.
The contention of American Airways limiting its liability in case of lost luggage’s $20 per kilo is in harmony w/ the Warsaw Convention. The failure of the airline to deliver the luggage at the designated time & place does not amount ipso facto to willful misconduct. There must be a showing that the acts complained of were impelled by an intention to violate the law or in persistent disregard of one’s rights. It mus be evidenced by a flagrantly or shamefully wrong or improper conduct. Therefore, X is only entitled to $600 ($20 x 30 kilos) (Pan Am World Airways, Inc vs. IAC)

*Give some examples of willful misconduct that would hold an airline liable for damages:
1.Flight attendant rudely placed a passenger w/ 1st class ticket in the economy section of the airplane- compensatory, moral, & exemplary damages & attorney’s fees awarded. (Northwest Airlines, Inc vs Cuenca)
2.Flight attendant ousted as Asiatic passenger from the plane & substituted a white passenger on his seat- compensatory, moral, & exemplary damages & attorney’s fees awarded (Air France vs Carrascoso)
3.Airline personnel subjected a passenger to rude & barbaric treatment, calling him a monkey- compensatory, moral, & exemplary damages & attorney’s fees awarded (Zulueta vs Pan Am)
4.Spouses & child, all w/ confirmed & reconfirmed reservations, were placed on wait list, w/ only one making it in the scheduled flight & the 2 others were compelled to buy again tickets from a different airline- compensatory, moral, & exemplary damages & attorney’s fees awarded (Zalamea vs CA)
5.Loss of baggage due to carrier’s negligence & tainted w/ bad faith by faking a retrieval receipt to bail itself out of having to pay the passenger- actual & exemplary damages & attorney’s fees awarded (Pal vs CA)

*X is a resident of the Philippines, USA Airways is a foreign corporation w/ principal office in Seattle, USA & licensed to engage in business in the Philippines w/ branch office in Manila. While X was vacationing in the USA, he bought a roundtrip ticket in the NY based ticket outlet of USA Airways (NY via okyo) Manila –NY). His airline ticket showed that his return flight (Manila-NY) was left “open”. Upon his arrival in Tokyo, X was told that there was no reservation for his Tokyo-Manila flight. X pleaded that his flight had been confirmed & reconfirmed by the NY office. X was “waitlisted” & was only able to take the flight the ff day. X then sued USA Airways in the Manila RTC. Will the action for damages prosper?
No, the action will not prosper for lack of jurisdiction of Manila RTC. Being an international flight involving 2 high contracting parties (USA & Philippines) of the Warsaw convention, its provision on jurisdiction of actions foe damages shall apply. Such being the case, the damage suit can only be filed in the proper court of any of the ff:
1.domicile of the carrier
2.principal office of the carrier
3.place of business through w/c the contract has been made or
4.place of destination
It is clear that the domicile & principal office of USA Airways are in Seattle, USA, while the place of business where the contract was made & the place of destination (roundtrip) are in NY, USA. Therefore, the damage suit filed in the Manila RTC should be dismissed for lack of jurisdiction (Santos III vs Northwest Airlines)
PUBLIC SERVICE ACT (COM. ACT NO.146, AS AMENDED)
*What is the general function of the Public Service Commission?
The PSC shall have jurisdiction, supervision, & control over all public services & their franchises, equipment, & other properties, & in the exercise of its authority, shall have the necessary powers & the aid of the public force.
The PSC has been replaced by the ff agencies in the field of transportation:
1.LTFRB (Land transportation)
2.MARINA (Water transportation)
3.CAB (Air transportation)
Other agencies regulating public services include the: National Telecommunications Commission (radio, television, telephone, & other telecommunications entities), Philippines Postal corporation (mail services), National Electrification Administration (electric companies & cooperatives & local water utilities administration (local water utilities)

*Are warehouses, public markets & ice-plants covered by the provisions of the Public Service Act?
No, warehouses, public markets & ice-plants are among those expressly exempted from the provisions of the Public Service Act.

Certificate of Public Convenience is issued for the operation of public service that will promote public interests for w/c a legislative or municipal franchise is not necessary	Certificate of Public convenience & Necessity is issued upon the approval of a franchise granted by any political subdivision of the Philippines

*1.Prior applicant rule- all things being equal, the application for public utility that is filed earlier than the others shall be given preference. But, this rule finds no merit whenever the public interest & convenience are better served by a certain applicant rather than by others, even if the latter filed their applications ahead of the former.

2.Prior operator rule- an existing operator w/ a certificate of convenience shall be protected from ruinous competition that will be brought about by the grant of a certificate of convenience to a new & incoming operator. In other words, the entry of a new operator may be refused on the ground that the existing operators at the time are more than enough to serve the public w/ their needs.

3.Kabit system- an arrangement between 2 parties whereby one who has certificate of public convenience permits another to operate his motor vehicle under the franchise of the former. This arrangement has been condemned & declared void by the court. (Lisa Enterprises, Inc vs IAC)

4.Boundary system- an arrangement between the operator & his driver whereby the former leases his motor vehicle for a fixed fee on an hourly or daily basis to the latter who actually uses, & supplies the gasoline of , the motor vehicle. The court has declared the relationship between the owner & the driver as one of employer-employee relationship. (National Labor Union vs Dinglasan)

*X is the registered owner & operator of several taxicabs in the city. X sold one taxicab to Y, the latter operating it under the franchise of the former. Z, the taxicab driver of Y, figured in a vehicular accident that inflicted serious physical injuries to A, a passenger, & also to B, a pedestrian. A & B instituted separate actions for damages against X, Y & Z. Opposed the suits against him, contending that he was no longer the owner of the taxicab when the accident happened. Is X’s contention meritorious?
No, the defense of X has no merit. The law requires that X should seek the prior approval of the LTFRB before effecting any transfer of the public utility. As far as the passenger (A) & the third person (B) are concerned, X can be jointly & severally liable for damages as the registered owner of the taxicab. But, X has the right to be indemnified by Y, the true owner, in case he is made to pay the damages.
CORPORATION CODE (BP 68) GENERAL PROVISIONS
*A corporation is an artificial being created by operation of law, having the right of succession & the powers, attributes & properties expressly authorized by law or incident to its existence. (Sec2, Corp code)
A corporation has the ff attributes:
1.It is an artificial being
2.It created by operation of law
3.It has the right of succession
4.It has powers, attributes & properties expressly authorized by law or incident to its existence

*Under the doctrine of “Corporate entity” a corporation has a personality of its own that is separate & distinct from its officers & stockholders. From this doctrine flows the right of a corporation to purchase & own properties, to enter into contracts, to incur liabilities & obligations, & to sue or be sued.
But where the legal fiction of corporate entity is being used as a cloak or cover fraud or illegality or to defeat public convenience justify wrong protect fraud or defend a crime. The courts will disregard this legal fiction & treat the individuals composing the corporation as identical (Yutivo Sons Hardware Co vs CTA)
Consequently, the corporation is now treated merely as an association of persons & liability attaches to the stockholders & members comprising it. This is what is known as the doctrine of “piercing the Veil of Corporate Entity”
The elements for the doctrine of “piercing the veil of corporate entity” to apply are the ff:
1.Complete control over the business
2.Such control is used to commit fraud or wrong &
3.The said control & breach of duty must be the proximate cause of the injury or loss. (Concept Builders, Inc vs NLRC)

*X owned 90% of the outstanding capital stock of CDE, Inc & also 95% of the outstanding capital stock of LMN, Inc. CDE, Inc. had financial obligations to its employees. It stopped its operations & turned over all its assets to LMN, Inc. May LMN, Inc be held liable for the financial obligations of CDE, Inc. to its employees?
Yes, LMN, Inc may be held liable for the financial obligations of CDE, Inc. to its employees under the doctrine of “piercing the veil of corporate fiction.” It is quite clear that LMN, Inc is being used as a cloak or cover to evade payment of obligations. Therefore, the veil should be pierced to prevent injustice to the employees.

*ABC Corporation filed an action for damages against RST, Inc. In the complaint, the President of plaintiff ABC corporation alleged that he suffered mental anguish, social humiliation & serious anxiety as a result of the tortuous acts of defendant RST, Inc. In the counterclaim, RST, Inc alleged that it suffered moral damages due to besmirched reputation & goodwill.
1.May ABC Corporation recover moral damages based on the allegations in the complaint?
No, ABC Corporation may not recover moral damages based on the allegations in the complaint. In its complaint, it was the president & not the corporation who suffered moral damages. ABC Corporation is a juridical person separate & distinct from its officers.
2.May RST, Inc. recover moral damages?
Yes, RST, Inc may recover moral damages. A corporation may have acquired a good reputation & goodwill w/c if besmirched, will justify an award of moral damages. (Jardine Davies Inc vs CA)

*May a corporation be a partner to another corporation or other individuals?
As a GR, a corporation cannot be a partner to another corporation or to other individuals. This limitation is based on public policy because to allow such partnership to exist would make the corporation liable for acts committed by persons who are not authorized officers & agents. Exceptions:
1.Where all partners are managing partners & the articles of incorporation expressly allow it being in line w/ its business
2.Where a foreign corporation (not allowed to participate but may invest) is merely a limited partner in a  domestic limited partnership
3.Where only a joint venture(particular undertaking) is entered into in line w/ the business of the corporation.

Corporations that have capital stock divided into shares & are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations.	All other corporations are non-stock corporations, the latter being primarily for not for profit. (Sec.3, Corp Code)

*Are GOCC private or public corporations?
Public corporations are those created for political or public purpose, such as the provinces, cities, municipalities & barangays.
On the other hand, GOCC are necessarily Private Corporation because they are not created for political or public purpose (ex.GSIS). There are also quasi-public corporations w/c are granted franchises by the state to perform public duties for profit (ex. Public utilities like electric, water, telephone & transportation companies)

Corporators are those who compose the corporation, either as stockholders (shareholders) of a stock corporation or as members of a non-stock corporation	Incorporators are those who are mentioned in the articles of incorporation as originally forming & composing the corporation & who are the signatories thereof.
All incorporators are corporators, whereas not all corporators are incorporators (Sec 5, Corp code)

*Are all incorporators of a (stock) corporation also subscribers?
Subscribers are those who agreed to buy the original & unissued shares of a corporation about to be formed or already formed. Therefore, it follows that all incorporations are subscribers, but not all subscribers are incorporators.

*1.Capital stock- the amount fixed in the articles of incorporation to be subscribed & paid in or secured to be paid In by the stockholders of the corporation, either in money or property or services, at the organization of the corporation or thereafter.
(issue=selling)

2.Authorized capital stock- (applies only in par value shares) the amount of capital stock fixed in the articles of incorporation; synonymous w/ capital stock in case of par value shares but there is no authorized capital stock in case of no par-value shares; amendment of articles of incorporation is necessary in order to issue additional shares in excess of the authorized capital stock

3.Subscribed capital stock- the portion of authorized capital stock that has been subscribed but not yet paid & therefore still unissued

4.Outstanding capital stock- the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid, except treasury shares

5.Paid-up capital stock- the portion of outstanding  capital stock that has been actually paid

6.Unissued capital stock- the portion of the capital stock that has not yet been issued or subscribed

7.Legal capital- the portion of paid-in capital arising from the issuance of capital stock w/c cannot be returned to the stockholders in any form during the lifetime of the corporation; as to par value stock, it is the aggregate par value of the shares issued & subscribed; as to no par value stock, it is the total consideration received from the stockholders including the excess over the stated value

*Under the trust fund doctrine, the assets of the corporation constitute a fund that the creditors have a right to look for the satisfaction of their claims. The capital stock of the corporation as well as its assets, in case of insolvency, are generally regarded in equity as a trust fund for the payment over the stockholders of the corporation.

A share of stock represents the interest of the stockholder in the corporation; the former may be issued even if the subscription is not yet fully paid save in the case of no par stock	A certificate of stock is the evidence of that interest; The latter is issued only upon full payment of the subscription price, unless the by-laws expressly allow otherwise

A par value stock is one w/ specific value fixed in the articles of incorporation & appearing on the certificate of stock. Its purpose is to fix the minimum issue price of the shares.
A no-par value stock is one w/o any value appearing on the certificate of stock. Although it has no par value, it always has an issued value based on the consideration given for its issuance. The ff corporations, however, are prohibited to issue no-par value shares of stock:
1)banks	3)Insurance companies	5)Building & loan associations (Sec.6 Corp Code)
2)Trust companies	4)Public utilities


*1.Common stock- they are also called because the common stockholders enjoy the same rights & privileges w/ no preference over each other; common stockholders have no fixed or definite return on their investment; if there is only one class of stock, it is necessarily common stock. (if not classified presumed )

2.Preferred stock- they are so called because the preferred stockholders enjoy preferences, usually on dividends or on et assets in case of liquidation; preferred stockholders have a fixed or limited return on their investment. (Always w/ percentage)

3.Redeemable shares- also called “CALLABLE SHARES”; usually preferred shares that are redeemable by the issuing corporation at a fixed date at a certain redemption price, regardless of the existence of unrestricted retained earnings; provided however, that the corporation will not become insolvent by virtue of such redemption; a sinking fund is required to be maintained & deposited at a trustee bank for the purpose of redeeming such shares.

4.Treasury shares- these are shares that have been issued & fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation, or other legal means, provided there is sufficient amount of unrestricted retained earnings to support the cost thereof; these shares are not retired & so they may be sold again at a reasonable price w/c may even be less than par value; they cannot be distributed either as cash or stock dividends, but may be distributed as property dividend.

5.Convertible shares- these are shares that may be converted by the stockholder from one class to another (ex. From preferred to common, or from no-par to par) at a certain price & w/in a certain period.

6.Shares in escrow- these are shares that are in the meantime deposited in the custody of a 3rd party until the subscription shall be fully paid; the grantee is not yet the owner of the shares; hence, he is not yet entitled to the rights of a stockholder. (Not yet a stockholder)

7. Founders’ shares- these are shares issued to the organizers & promoters of a corporation that may be given certain rights & privileges not enjoyed by owners of other stocks; where the exclusive right to vote & be voted for in the election of directors is granted, it must not exceed 5 years from the date of approval by the SEC.

*Some significant features of preferred shares of stock:
1.Preference may be on dividends or on net assets in case of liquidation (in the absence of stipulation, preference is on dividends only).

2.Kinds of preferred shares as to dividends:
	1) Cumulative- the holder is only entitled to receive not only the current dividend but also dividends in arrears. (EXPRESSLY)
	2)Non-cumulative- the holder is only entitled to the current dividend & forfeits those not previously declared; in the absence of stipulation, preferred shares are presumed to be non-cumulative.
	3)Participating- the holder is entitled to receive not only the dividend at the preferred rate but also participates w/ the common stockholders in the excess profits pro rata after first satisfying the common shares at the same preferred rate. (EXPRESSLY)
	4)Non-participating- the holder is entitled to receive only the dividend at the preferred rate & the balance , if any, goes entirely to the common stockholders, in the absence of stipulation, preferred shares are presumed to be non-participating.
3.Preferred stock is always a par value stock.

4.There is never any guarantee that dividends will be received because distribution of dividends is dependent upon the declaration thereof by the board of directors.

5.Preferred shares have voting rights, unless expressly deprived in the articles of incorporation. And when the right to vote is deprived, it can nevertheless vote on matters mentioned in Section 6 (Memorize) of the Corporation Code.
Although preferred shares cannot vote in the election of directors if such right is deprived from them, they are still counted in determining whether or not the majority of the outstanding capital stock is present to constitute a quorum for such an election.
*XYZ corporation is a very profitable & stable corporation for many decades. It recently offered preferred shares & common shares to the public. Your friend X, consulted you on what type of shares to buy, preferred or common?
I will advise X to purchase common shares instead of preferred shares. When the company is remarkably profitable, it normally follows that big dividends are declared & distributed to its stockholders. Although the preferred stockholders will certainly be given their dividends ahead of the common stockholders. It follows, therefore, that common stockholders tend to get bigger dividends when the corporation reaps a huge profits & declare then as dividends. Furthermore, there is really no necessity in acquiring preferred shares that are preferred as to its assets in the event of liquidation since the corporation has proven to very stable for many decades. (Preferred is advantageous only during liquidation)

*Retained earnings are accumulated earnings or profits of the corporation from prior periods. It is 2 kinds:
1.Unappropraited retained earnings- also known as unrestricted or free retained earnings; it is the portion of retained earnings that is available for dividend distribution.

2.Appropriated retained earnings- also known as RESTRICTED RETAINED EARNINGS; it is not available for dividend distribution because  it is restricted for some legal, contractual, or voluntary appropriations (ex. Appropriated for redemption of redeemable shares, appropriated for bond sinking fund, appropriated for plant expansion, appropriated for pending lawsuit, etc.,) (Justifiable reasons)

*What shares of stock may be deprived of voting rights?
As a rule, all shares irrespective of their class (ex. Par, no par, preferred, & common) possess the rights of a stockholder, including the right of each share to be entitled to one vote. But the ff shares may be denied the right to vote in the articles of incorporation:
1)Preferred shares
2)redeemable shares &
3)where  founder’s shares are granted the exclusive right to vote & be voted for during a limited period of 5 years, the common shares will be denied the right to vote in the election of the board of directors fro such limited period (Sec. 6 & 7, Corp, Code)

*What are the instances wherein the holders of non-voting shares are nevertheless entitled to vote?
The holders of nonvoting shares are still entitled to vote on the ff matters;
1)Amendment of the articles of incorporation
2)Adoption & amendment of bu-laws
3)Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property
4)Incurring, creating or increasing bonded indebtedness
5)Increase or decrease of capital stock
6)Merger or consolidation of the corporation w/ another corporation or corporations &
7)Dissolution of the corporation (Sec 6, Corp Code)
INCORPORATION
*The articles of incorporation of 2 corporations to be organized were submitted to the SEC showing, among others, the ff list of incorporators:
1)Corporation No.1:
	1.X, Filipino citizen residing in Canada
	2.Y,Filipino citizen residing in the Philippines
	3.A, British citizen residing in the Philippines
	4.B, American citizen residing in the Philippines &
	5.C, Canadian citizen residing in the Philippines
2)Corporation No.2
	1.A, Filipino citizen residing in the Philippines
	2.B, Filipino citizen residing in the Philippines
	3.C, Filipino citizen residing in USA
	4.D, Filipino citizen residing in France &
	5.X, Inc., domestic corporation
Will the SEC approve the articles of incorporation of the 2 corporations?
A. The articles of incorporation of Corporation No.1 shall be approved. The corporation code requires that the incorporators should be:
1.natural persons numbering not less than 5 nor more then 15
2.all of legal age
3.majority of whom are residents of the Philippines &
4.each must own or subscribe to at least 1 share of the capital stock of the corporation (Sec.10, Corp code)
It follows that if the majority or even all of the incorporators are aliens, but the majority reside in the Philippines, the qualification of incorporators as to residency is complied w/. Since A, B, & C are residents of the Philippines, the articles of incorporation shall be approved.

B. The articles of incorporation of corporation No.2 shall be disapproved. The law allows only natural persons to become incorporators, although it is permissible for X, Inc to subscribe fro the shares of stick of Corporation No.2. X, Inc., therefore, cannot be an incorporator of Corporation No.2

*How long is the term of corporate existence?
The term of corporate existence is that contained in the articles of incorporation, w/c may be less but not more than 50 years, renewable for a term not exceeding 50 years at any one instance (Sec 11, Corp Code)

*What is the pre-incorporation subscription requirement on stock corporations under the Corporation Code?
At least 25% of the authorized capital stock appearing on the articles of incorporation must be subscribed at the time of incorporation, & at least 25% of the total subscription must be paid  upon subscription; provided, that in case shall the paid up capital be less than P5, 000 (sec 13, Corp code) (25% ACS + 25% TS + ≥ P5, 000

*A proposed corporation has an authorized capital stock of P8M divided into 80T shares @P100 par value. A, incorporator, subscribed for 40T shares at P4M & partially paid P500T on his subscription. B, C, D, & E, the other incorporators, each subscribed for 1 share w/ no payment thereon.
1.Considering only the issue on the number of incorporators, did the corporation pass this test?
Yes, the corporation passed the test as far as the number of incorporators needed is concerned. The law merely requires a minimum of 5 & a maximum of 15 incorporators in a stock corporation, & each of them must be an owner or subscriber of at least 1 share thereof. The validity of the corporation is not affected by the fact that the other 4 incorporators are merely qualifying incorporators or “dummies” as they are popularly called, as long as the doctrine of “piercing the veil of corporate entity” cannot be applied under circumstances of fraud.

2.Considering only the issue on the pre-incorporation subscription requirement, did the corporation pass this test?
No, the corporation did not pass the test as far as the pre-incorporation subscription requirement is concerned. Although A subscribed for more than the minimum required, having subscribed for more than the minimum required, having subscribed half of the authorized capital stock as a matter of fact, still the minimum 25% of the total subscription was not paid. A should have paid at least P1M on his subscription (P4M X 25% = P1M) to meet the legal requirements on subscription.

3.what legal advice would you give to A who is bent on acquiring controlling interest in the corporation?
I would advise A to subscribe in the meantime for P1,999,600 + 400 = P2M w/c is 25% of P8M), then pay also the minimum of P500T). After the certificate of incorporation shall have been granted by the SEC, A could then subscribe for additional shares to acquire controlling interest in the corporation. He will not be burdened anymore in this case because the 25%-25% pre-incorporation subscription requirement no longer applies to the remaining unsubscribed shares after the corporation shall have already been incorporated.

*A proposed corporation has both par value & no par value shares of stock: 1) Authorized capital stock of P16M consisting of 100 shares @ P160 par value; & 2) 100T authorized no-par value shares. The incorporators subscribed for P25, 000 par value shares at P4M subscription price & partially paid P1M, thereof. Did the incorporators comply w/ the pre-incorporation subscription requirement?
The pre-incorporation subscription requirement is not complied w/. As far as the par value shares are concerned, the requirement was met because at least 25% of the ACS was subscribed (P4M of P16M = 25%) & at least 25% of the subscription was paid (P1M of P4M = 25%). However, no subscription & payment were made on the authorized no-par value shares. The law requires that inn case of no-par value shares; at least 25% of the authorized number of shares must be subscribed & fully paid. In other words, 25, 000 (100, 000 X 25%) no par-value shares must be issued & fully paid for. It is important to stress that the subscriber of no-par value shares is required to pay in fully paid & non-assessable once it is subscribed. (P5. 00 below not allowed)

*May an existing corporation subscribe to the capital stock of another corporation that is yet to be incorporated?
Yes, an existing corporation may subscribe to the capital stock of another corporation yet to be incorporated. But the SEC requires all corporate subscribers to pay their subscriptions in full, & also prohibits them from becoming incorporators. Furthermore, it must be stressed that juridical entities are prohibited from becoming incorporators w/ the exception of the incorporators of rural banks under the Rural Banks Act.

*1.What is meant by Articles of Incorporation?
AOI refers to the document containing all the legal requirements in forming a corporation that is submitted to the SEC from approval. The SEC at present provides an express lane service where pro-forma AOI & by-laws may be purchased at a minimal fee.

2.Can the purpose clause of the AOI contain the phrase “& for such other lawful purposes that may be proposed by the board of directors& duly approved by the stockholders”?
No, the said purpose clause will be rejected by the SEC on the ground that the purpose to w/c the corporation is to be formed is not definitely stated. A purpose couched in broad & general terms are, however, permissible.
(Corporate name needs approval of SEC + reserved it for 30 days + accomplish a “name verification slip”)

*How shall an amendment to the AOI be effected?
Any provision or matter in the AOI may be amended for legitimate purposes by the:
A)Majority vote  of the board of directors (stock) or trustees (non-stock) &
B)Vote or written assent of at least 2/3 of the OCA or members (Sec 16, Corp Code)
A 2/3 vote, not just written assent, is necessary in the ff:
	1)amendment increasing or decreasing the capital stock
	2)amending extending or shortening the corporate term &
	3)amendment in a close corporation regarding:
			a)removal of any provision in the AOI &
			b)reduction of quorum or voting requirement
The amendment shall take effect upon its approval by the SEC or from the date of filing if not acted upon w/in the 6 months therefrom for a cause not attributable to the corporation.

*What are the limitations on the adoption of a corporate name?
No corporate name may be allowed by the SEC if the proposed name is:
a)identical or deceptively or confusingly similar to that of any existing corporation or to any other name protected by law or
b)patently deceptive, confusing or contrary to existing laws (Sec.18, Corp Code)

*Court decisions/administrative rulings on corporate names.
1.”House of Investments” engaged in investments vs “House of Insurance, Inc” engaged in insurance- no similarity, “House is generic & cannot, therefore, be exclusively appropriated (SEC opinion)
2.”Lycuem of the Philippines”- “Lyceum” is a generic name that means school & can, therefore be used by other educational institutions (Lyceum of the Philippines, Inc. vs CA)
3.”Philips Export B.V” vs. Philips Industrial Development, Inc.”- Philips is the dominant word & so they are confusingly similar (Philips Export B.V vs CA)
4.Universal Textile Mills, Inc.” vs “Universal Mills Corporation”- confusingly similar since the latter also dealt w/ the manufacture, dyeing & selling of fabrics in w/c the former has been engaged fro more than a decade (Universal Mills Corporation vs textile Mills, Inc)
5.”Armco Steel Corporation” of Ohio, USA vs. “Armco Steel Corporation” w/c is a Philippine corporation- the former can have the name of the latter changed even if the latter’s name has been approved by the SEC (Armco Steel Corporation vs SEC)

*When does the life of a corporation commence?
The life of a corporation commences on the date of issuance of the certificate of incorporation by the SEC (Sec19, Corp Code)

A de jure corporation is one that was able to comply substantially w/ all the requirements of the law for its incorporation; the former’s existence cannot be successfully attacked even in a direct proceeding	A de facto corporation is one that was able to make colorable (complied but defective) compliance of the legal requirements for its incorporation; hence, it exists for all practical purposes as a corporation; the latter’s existence can be directly attacked in a quo warranto proceeding
(Corporation- do not use the word who) (A de facto government in good faith must correct the defect w/in a reasonable time)

*A corporation by estoppels (Ostensible corporation) is one that is  not a de jure, or even a de facto, corporation but is merly regarded as such between the persons misrepresenting themselves as a corporation & the persons misrepresenting themselves as a corporation & the persons who relied on the their misrepresentation.
(No compliance- not a corporation but deemed a corporation)

*Give the consequences of the ff:
1)Non-use of corporate charter- Failure of a corporation to formally organize & commence business transactions or construction of its works w/in 2 years from the date of its incorporation shall result into the cessation of its corporate powers & it shall be deemed dissolved.
2)A subsequent continuous inoperation for at least 5 years shall be a ground for suspension or revocation of its corporate franchise or certificate of incorporation (Sec 22, Corp Code)
Note: The SEC is of the opinion that the above provisions still require due notice & hearing (Not automatic but w/ due process)
BOARD OF DIRECTORS & OFFICERS
Important features of the BOD of a stock corporation:
1.The number of directors must not be less than 5 nor more than 15
2.The majority of the directors must be residents of the Philippines (but not necessarily citizen)
3.Each director must own at least one share not delinquent even if he is not actually the beneficial owner, such as a voting trustee)
4.Addtional qualifications may be provided in the by-laws (ex.a director is disqualified for nomination or election if he owns at least 10% of the stocks of other competing corporation)
5.the term of office of directors is 1 year, unless a valid holdover takes place (ex. Failure of quorum to hold the election)
6.A director must not have been convicted by final judgment of an offense punishable by more than 6 years imprisonment, or committed a violation of the Corporation Code w/in 5 years prior to the date of election or appointment
7.No director shall receive any compensation (other than per diems) as such, unless the same is granted in the by-laws or by a vote of at least 2/3 of the OCS; provided; that the total yearly compensation (excluding per diems & compensation as officers) shall not exceed 10% of the net income before income tax of the corporation during the preceding year
8. A majority of the quorum of the board is sufficient to adopt a proposal, unless a majority of te entire board is required in certain cases (election of officers)
9.Directors cannot validly act by proxy; &
10.A director may be removed from office by a vote of 2/3 of the OCS w/ or w/o cause, provided, that removal w/o cause may not be used to deprive minority stockholders, who used cumulative voting to elect such director, of the right of representation.

*What are the methods of voting available to a stockholder in the election of directors?
A stockholder, by statutory right (not being prohibited by the by-laws), may vote in the election of directors using any of the ff methods:
1.Straight voting- the stockholder votes such number of shares for as many persons as there are directors.
Ex.X owns 10 voting shares in a corporation where 5 directors are to hold office. X, therefore, is entitled to a total of 50 votes. He may then, using straight voting, choose his 5 candidates & give them 10 votes each.
2.Cumulative voting (stock only)-  stockholders gives his candidate or candidates as many votes as he wants , provided he does not exceed the total number of votes he is entitled to.
(Proxy, voting is by roll call unless voting by ballot is requested if one requests for ballot voting, delinquent shares cannot vote, methods of voting is a straight voting)
Ex.In the preceding illustration, X may give candidate No.1 all of his 50 votes, or he may give candidate No.2 1 his 3o votes & candidate No.2 his 20 votes
(GR: Non-stock is straight voting E: when expressly cumulative)

Officers are those elected by the board or stockholders. The by-laws may provide that their terms of office exceed 1 year, but the term of the President is necessarily coterminous w/ his one year term as director. Their positions & number vary in businesses but the most corporate officers include the ff:
1.President- must be a director, cannot be the President-secretary-treasurer at the same time (President has 1 year term dependent to 1 year term of BOD)
2.Vice-President- next in rank to the President; if he is to take over the position of President when the needs arises, he must also be a director or trustee
3.Secretary- must be resident & a citizen of the Philippines; need not be a director or trustee
4.Trustee- must be a resident of the Philippines as required by the SEC although the law does not give such a requirement
Employees- are those that are appointed usually by the corporate officers. There may be instances where an officer may at the same time function as an employee as when he is hired to perform some services appurtenant to employees

*A vacancy in the BOD may be filled up  by the vote of the stockholders in a regular or special meeting called for that purpose, provided such vacancy resulted from any of the ff causes:
1.removal;
2.expiration of term;
3.increase in the number of directors:
4.any other causes where the remaining directors no longer constitute a quorum.
In all other cases except those mentioned above (ex. Death, resignation, etc.,), the vacancy may be filled up by the vote of at least the majority of the remaining directors, provided the remaining directors still constitute a quorum (Sec 29, Corp Code)
Note: the newly elected director shall only served the unexpired term of his predecessor.

*X corporation has 9 members of the BOD. A recent plane crash resulted into the death of some of the directors. How will the vacancies be filled up, assuming:
1.3 directors died in the accident? The vacancies did not result from removal, expiration of term, or increase in the number of directors. Therefore, the vacancies may be filled up by the vote of the majority (4 out of 6) of the remaining directors because the 6 remaining directors still constitute a quorum (6 out of 9)
2.5 directors died in the accident? Although the vacancies did not result from removal expiration of a term or increase in the number of directors, the remaining directors cannot by themselves fill up such vacancies because they no longer constitute a quorum (4 out of 9). Therefore, the vacancies can only be filled up by the stockholders in a regular or special meeting called for that purpose.

*The doctrine of corporate opportunity provides that the members of the BOD occupy a position of trust & confidence. Consequently, a director should not make use of his position to gain personal advantage & to the disadvantage of the corporation he is serving Sec 31, Corp Code)

*Is a contract between the corporation & one or more of its directors or trustees or officer valid?
A contract entered into by self-dealing directors, trustees or officers w/ the corporation so voidable, at the option of the corporation.
However, such contract is valid if all the ff conditions concur:
1.the presence of the director, trustee, or officer in the board meeting in w/c the contract was approved was not necessary to constitute a quorum for such meeting
2.the vote of such director, trustee, or officer was not necessary for the approval of the contract
3.the contract if fair & reasonable under the circumstances &
4.in the case of an officer, the contract has been previously authorized by the board of directors
Where any of the first two conditions aforementioned is absent, the contract may be ratified by the 2/3 vote of the OCS or members, as the case may be: provided that:
	1.full disclosure is made at such meeting &
	2.the contract is fair & reasonable under the circumstances (Sec32 Corp Code)

*Is a contract between 2 or more corporations having interlocking directors valid?
A contract between 2 or more corporations w/ interlocking directors is valid & cannot be invalidated on that ground alone, provided the ff conditions are present:
1.Absence of fraud
2.contract is fair & reasonable under the circumstances &
3.if the interest of the interlocking director in one corporation/s is merely nominal (not more than 20% of the OCS), he shall be subject to the rules on self dealing directors insofar as the latter corporation/s are concerned (Sec 33 Corp Code).

*X is a director of ABC, Inc w/ 20% interest, & also a director of RST, Inc w/ 25% interest in the OCS of both corporations. ABC, Inc entered into a contract w/ RST, Inc whereby the former was going to sell some of its commercial lots to the latter at an agreed discounted price. The minutes of the board of meeting of ABC, Inc revealed that the contract was approved by a 3-2 vote of its 5 directors, w/ X voting in the affirmative. On the other hand, the minutes of the board meeting of RST, Inc revealed that the contract was unanimously approved by all its 7 directors, including X. Assuming that there is no fraud & the contract is fair & reasonable, is the said contract valid?
The contract between ABC, Inc & RST, Inc remains valid since there is no fraud & it is fair & reasonable under the circumstances. It cannot, therefore, be invalidated merely on the ground that X is an interlocking director of both corporations.
But, since X has a nominal interest (20% or less) in ABC, Inc the conditions on self dealing directors are applicable to X as far as ABC, Inc is concerned. One of these conditions is not met because the vote of X was necessary In approving the contract (3-2). Consequently, any opposing director or stockholder may fiel a derivative suit in behalf of the corporation against X & the other consenting director’s for damages that may be suffered by ABC, Inc as a result of the contract. Of course, this can be overcome if the stockholders representing at least 2/3 of the OCS of ABC, Inc decide to ratify it instead.

*An executive committee is governing body w/c functions as the board itself & governed by the same law & rules applicable to the BOD subject to the ff conditions:
1.It must be provided for in the by-laws of the corporation
2.Its membership must be composed at least 3 members of the board
3.It may act on matters w/in the competence of the board, as may be delegated to it in the by-laws or on majority vote of the board, except the ff:
	1)any action that also requires the stockholders’ approval (ex. Merger or consolidation)
	2)filling of vacancies in the board
	3)amendment or repeal of by-laws or adoption of new by-laws
	4)amendment or repeal of any board resolution w/c by its express terms is not so amenable; &
	5)distribution of cash dividends to stockholders (Sec 35, Corp Code)
CORPORATE POWERS
The right of pre-emotion, or pre-emotive right, is the right of the stockholder to acquire any new shares to be issued by the corporation in proportion to his existing stockholding before such shares may be offered to others. It extends to both new issue of shares as well as original shares not yet offered for subscription. This right is not absolute, & may be denied under any of the ff cases:
1.When expressly denied in the AOI or an amendment thereto
2.When new shares are to be issued in compliance w/ laws requiring stock offerings or minimum stock ownership by the public
Or (RD: to avoid excess of ownership)
3.when the new shares are to be issued in good faith w/ the approval of 2/3 of the OCS in exchange for property needed for corporate purposes or in payment of previously contracted debt

*X  Inc. has an ACS of P10M consisting of 100T common shares @ P100 par value. So far only 80T common shares have been offered for subscription; all of w/c are now subscribed & fully paid for, in effect giving the corporation an OCS of P8M (80T shares X P100)
1.Is X, Inc allowed to increase its capital stock by creating additional new 40T common shares @ P100 par value? Yes, X Inc. may increase its capital stock even if the original shares are not yet fully paid subscribed, provided the increase (or decrease) is approved by a majority vote of the BOD & by 2/3 vote of the OCS, & finally approved by the SEC.

2.Considerign your answer in No.(1), how much must be subscribed & paid in order to meet the 25%-25% subscription requirement? The SEC has ruled that the 25% subscription & 25% payment requirement shall be applied to the additional increase in capital stock, & not the total capital stock consisting of the original & the new. Therefore, of the P4M increase in the ACS, at least P1M (25% of P4M) must be subscribed, & at least P250T thereof must be paid (25% of P1M).

3.Assuming that A is a stockholder of X, Inc. owning 4T shares, up to what extent is his right of pre-emption? The right of pre-emption extends not only to new issues resulting from an increase in capital stock but also original shares not yet offered to subscribers. The pre-emptive right of A, therefore, shall extend to the ff:
	1.1T original shares (4T/80T or 5% of 20T) &
	2.2T new shares (5% of 40T)
The above number of shares must first be offered to A before the same shall be available for sale to the public or other stockholders.

*What is a bond & what are its various types?
A bond is a formal unconditional promise made under seal to pay a specified sum of money at a determinable future date, & to make periodic interest payments at a s a stated rate until the principal sum is paid. In other words, the corporation issues bonds to borrow money from the bondholders. The contract between the issuing corporation & the bondholders is called “bond indenture”. The issuing corporation may sell the bonds at a premium (sales price is more than the face value), or at a discount (sales price is less than face value).
The different types of bonds are:
1)Callable bonds- may be called in for redemption by the issuing corporation prior to maturity date;
2)convertible bonds- may be exchanged for capital stock of the issuing corporation;
3)Guaranteed bonds- payment is guaranteed by another party should the issuing corporation fail to pay; &
4)Junk bonds- High yield but high risk bonds issued by heavily indebted or financially weak corporations that are desperately in need of additional capital. (Advantageous due to returned interest)

*Dividends represent the income realized by the stockholders from their shares of stock in a corporation. Dividends may be:
1.Cash dividend- payable in the form of cash;
2.Propoerty dividend- payable in the form of property other than cash (ex. Shares of stock from another corporation); also treated as a cash dividend by some authorities;
3.Stock dividend- payable in the form of the corporation’s own unissued stock;
4.Scrip dividend- payable at some future time due to unavailability of cash at the time of declaration;
5.Liquidating dividend- payable upon dissolution & winding up of the corporation after payment of all corporate liabilities.

The 3 dates relevant to dividend distribution are:
1)date of declaration-the right of the stockholder to the dividend accrues on this date; in other words, the corporation incurs a liability to pay its stockholders upon declaration of dividends.
2)date of record- those who are registered in the stock & transfer  book as stockholders on the date of record shall receive the dividends.
3)date of payment- the date when the dividend is actually distributed to the stockholders.

*A cash dividend may be distinguished from stock dividends as ff:
declaration	The declaration of the former requires only a majority of the quorum of the BOD	The latter, in addition, requires the approval of at least 2/3 of the OCS
Once declared	Once declared, belongs to the stockholder & cannot be transferred to any surplus account of the corporation	May be rescinded before its actual issuance
effect	Has the effect of distributing the accumulated profits to the stockholders 	Has the effect of capitalizing such accumulated profits thereby increasing the corporation’s capital
source	Capital in excess (not to be given as stock dividend but as dividend) of par (premium (not part of legal capital) on sale of stock) cannot be the source of the former, 	the same may be the source of the latter
Delinquent stockholders	A delinquent stockholder is still entitled to receive the former but it must be first be applied to his unpaid subscription balance	Shall be w/held until the delinquent stockholder pays his subscription in full

*What is the limitation against retaining surplus profits & what are its exceptions?
The term “surplus profits” is already obsolete in accounting terminology. The current terminology for surplus profits is “retained earnings” the Corporation Code prohibits stock corporations from holding unrestricted (free) retained earnings in excess of 100% of their paid-in capital stock. The SEC is empowered to order such excess as “improperly accumulated profits” that are subject to the surtax of 10% in addition to the normal income taxes imposed.
(SURPLUS PROFITS = RETAINED EARNINGS)
Exceptions:
1)justifiable expansion projects approved by the BOD;
2)bound by a loan agreement to first secure the consent of the creditor before any dividend may be declared, & such consent is not yet secured; &
3)retention is necessary under special circumstances (ex. Appropriating a portion of the retained earnings for possible liability in a pending lawsuit) (Sec 43, Corp Code)

*Stock split is way of restructuring the corporate capital by changing the number of shares w/o capitalizing retained earnings or changing the amount of its legal capital. It may be in the form of:
1.Stock split up- the outstanding shares are called in & replaced by a larger number, accompanied by a corresponding reduction in the par or stated value of each share; this may be resorted to when the corporation feels that the existing par value of its stock is too high attract prospective stockholders.
Ex. If a stockholder owns, 1T shares @ P100 par & the stock is split 5 for 1, his old shares will be replaced by 5T new shares @ P20 par. His stockholdings will still remain at P100T

2.Stock split down- the reverse of stock split up; the outstanding shares are called in & replaced by a smaller number, accompanied by a corresponding increase in the par or stated value of each share; this may be resorted to when the corporation feels that a higher par value is more advantageous that the existing par value of its shares.
Ex. If a stockholder owns 1T shares @ P100 par & the stock is split down 5 for 1, his old shares will be replaced by 200 new shares @ P500 par. His stockholdings will still remain at P100T

What is a management contract & what are its limitations?
  A management contract, also known as service contracts, is an agreement between 2 corporations whereby 1 undertakies to manage or operate all or substantially all of the business of the other.
It is subject to the ff limitations:
1.The entire supervision & control over the officers & business of the managed corporation cannot be turned over to the managing corporation;
2.The contract must not be longer than 5 years at any 1 term;
3.The contract must be approved by the BOD or trustees, & by the majority of the OCS or members, as the case may be, of both the managing & managed corporations; provided, that the 2/3 vote of the OCS entitled to vote or members, as the case maybe, of the managed corporation shall be necessary whenever:
		1The stockholder/s having the same interest in both corporations own or control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation; or
		2.The majority of the BOD of the managing corporation also constitute the majority of the BOD of the managed corporation (Sec44, Corp Code)

*An ultra vires act is one that is not necessarily illegal but is not w/in the express, implied & incidental powers of the corporation. For instance, if a corporation were organized for the purpose of trading rice & corn, the act of trading clothing materials would be ultra vires, although it is not unlawful. As a rule, strangers & creditors whose rights are not infringed may not attack a contract as ultra vires. A stockholder, however, may avail of an injunction to prevent its commission.
BY LAWS & MEETINGS
By-laws are rules of action that govern the internal affairs of a corporation. It is to be submitted for approval to the SEC not later than 1 month from receipt of official notice of the issuance of the certificate of incorporation although in most cases it is submitted together w/ the AOI. Any amendment or repeal thereto requires a majority vote of the BOD or trustees & the majority vote of the OCS or members, as the case maybe. If desired, 2/3 of the OCS or members, as the case maybe, may delegate the power to amend or repeal the by0laws to the BOD or trustees, w/c power delegated to them may be revoked thereafter by the majority vote of the OCS or members, as he case maybe.

*Are by-laws binding on 3rd persons?
No, by-laws are not binding on 3rd persons, unless they have actual knowledge thereof.

*When & where shall corporate meetings be held?
A)Board meetings:
	1.regular- monthly; at a place determined in the by-laws or in the absence thereof, anywhere in or outside the Philippines.
	2.Special- anytime when necessary; same venue as provided for regular meetings.
B)Stockholders’ or members meetings:
	1.Regularly- annually on date fixed in by-laws or in the absence thereof, on any date of April; in the city or municipality where principal office is located, & if practicable in the principal office of the corporation.
	2.Special- anytime when necessary; same venue as provided for regular meetings (Sec 49-51 & 53, Corp Code)

*what is a quorum in stockholders’ meeting:
Quorum in meetings shall consist of the majority of the OCS or members, as the case maybe, unless the Code or by-laws provide otherwise (Sec 52, Corp Code)

A) A proxy is a formal authorization given by the stockholder or member possessing the right to vote to another person so that the latter may exercise the voting right of the former.
 B) A proxy has the ff characteristics:
1.It must be in writing signed by the stockholder & filed before the scheduled meeting (oral proxy is not valid)
2.A person may act as proxy even if he himself is disqualified to vote (ex. A delinquent stockholder may act as proxy of another non-delinquent stockholder)
3.It is not allowed in board meetings
4.It does not have to be notarized or attested by witnesses
5.It is incident to the ownership of a stock so that it cannot be denied in stock corporations; however, the AOI or by-laws of non-stock corporation may deny such right for as long as it is not discriminatory; &
     6.A continuing proxy w/ no fixed period or w/ a period exceeding 5 years shall be valid for only 5 years, renewable for not       more than 5 years for every renewal.
what is a voting trust agreement? (legal owner & beneficial owner)
1. A voting trust agreement is an arrangement whereby 1 or more stockholders transfer their shares to a trustee in whose hands the control of all or part of the stock is placed. The certificate of stock covered by the agreement are surrendered & exchanged w/ new ones w/ the trustee as registered owner thereof. But the beneficial ownership of the stocks still remains w/ the transferring stockholder. It must be notarized & cannot exceed 5 years until the full payment of the loan. (Sec 59, Corp code)
2.What is the distinction between a voting trust agreement & a pooling agreement? (as to owner or title)
A pooling agreement is a n arrangement between 2 or more stockholders whereby all or some of their shares shall be voted as a unit in order to gain control in the management of the corporation. The stockholders remain as the legal owners of the shares. Under a voting trust agreement, however, the legal title on the shares is transferred to the trustee w/ only the beneficial ownership retained by the transferring stockholder.

*A entered into a voting trust agreement w/ X, the former transferring the legal title to all his shares to the latter in order to gain control in the corporation.
1.May A run for a seat in the BOD? A is disqualified to be elected as director because he no longer owns at least 1 share in the corporation. Legal title to all his shares has already passed to X.

2.May X run for a seat in the BOD? X is qualified to be elected as director because he has legal title to the shares under the voting trust agreement

3.Who between A & X shall have the rights appurtenant to a stockholder? The right to vote & be voted for in the election of the BOD shall belong to X. The right to inspect the corporate books shall belong to both A & X w/ the obligation to turn it over to A. All the other rights of a stockholder shall be retained by A as beneficial owner of the shares of stock.
STOCK & STOCKHOLDERS
*A subscription contract is a contract for the acquisition of unissued stock, whether to an original issue or to an increase of capital stock, notwithstanding the fact that the parties refer to it as a purchase or some other contract. When privilege is given to subscribe for shares of stock w/in a certain period (must not exceeds 3 years), it is called a “stock option.” (Refers usually to the promoters/ original organizers)

*X subscribed 1T shares of P100 par value common stock of ABC Corporation for P100T. X was able to pay only P30T when ABC Corporation became insolvent. The creditors of the corporation filed s suit against X to collect the balance of P70T. Will the suit prosper? Although no creditor-debtor relationship exist between the corporation & its stockholders w/ regards the shares of stock of the latter, subscribers who have not paid in full are the debtors of the corporation, & failure of the latter to enforce collection gives its creditors a cause of action against a stockholder for his unpaid subscription. Since ABC corporation became is insolvent, the creditors need not exhaust their legal remedies against it & can run after X for the unpaid subscription balance P70T.

*A subscription contract provides that the subscriber shall pay the shares subscribed out of dividends that may be declared until the subscription shall have been fully paid. Is the subscription contract valid? No, the subscription contract is not valid for being discriminatory in favor of the subscriber. Furthermore, the payment relies on a contingency because dividends may or may not be declared by the corporation. In the event no dividends will be declared, the subscriber incurs no liability for his subscription & this is prejudicial to the interest of the creditors who rely on the corporation’s capital stock.

*Give some rules to be observed in the issuance or transfer of shares of stock.
1.consideration may be in cash, property, services already rendered or previously incurred indebtedness but shares of stock cannot be issued in exchange for promissory notes or future services;
2.while original issue of shares of stock cannot be made for less than par value or issued price (watered stock) treasury shares may be sold for a reasonable price even if less than the par or issued value thereof;
3.shares of stock may be issued even if the subscription is not yet fully paid &
4.Over-issued stocks- (in excess of ACS) are null & void, regardless of good faith of the transferee

*A certificate of stock is a document that serves as evidence of ownership of the shares of stock. It is not a negotiable instrument as contemplated by the NIL despite the fact that it is indorsed & delivered. In case of a subsequent transfer of stock from a stockholder to a 3rd party, the transfer must be recorded in the stock & transfer book of the corporation w/ he certificate of stock surrendered to the corporation so that the new one will be issued in favor of the transferee, otherwise, the said transfer is binding only between the parties & will not bind the corporation & the creditors.

*X subscribed for 2T shares, P100 par, and common stock in the amount of P200T from RST Corporation. To date, X had paid P50T on his subscription.
1)Can X sell or transfer 1,500 shares to A? X (GR) cannot sell or transfer part of his subscription if the entire subscription is not yet fully paid, (E:))unless the corporation consents to such transfer. (RD:)The reason behind the prohibition is the indivisible nature of the subscription.

2)Can X sell or transfer all the 2T shares to A & B?X cannot sell or transfer the entire unpaid subscription to several transferees (A & B). However, the SEC allows the transfer only, such as A (or B) in the instant case, w/ the consent of the corporation. This is based on the fact that the intended transfer will constitute a novation to the contract of subscription (change in the person of the debtor)

3)Is X entitled to a certificate of stock in proportion to his partial payment?
No, X is not entitled to a certificate of stock on the shares partially paid. The code provides that no certificate of stock shall be issued to a subscriber until the full amount of his subscription together w/ interest & expenses (in case of delinquent shares) if any due, has been paid. The SEC follows the doctrine that a subscription is one, entire, & indivisible contract. However, some authorities find nothing wrong in issuing certificates corresponding to the paid portion of the subscription when the by-laws expressly allow such practice.
NOTE: In Baltazar vs Lingayen Gulf Electric Co., the court gave the corporation the option either to grant certificates of stock only when the subscription is fully paid or to that portion already paid, in the absence of any provision in the by-laws to the contrary. This ruling was made during the effectivity of the old corporation Law. The SEC believes that the new corporation Code intended to abandon this ruling.

4)Assuming that  the shares of stock have no par value, is X entitled to a certificate of stock on the shares partially paid? No, X is not entitled to a certificate on the partially paid no-par shares of stock. No-par value shares must be paid in full when issued.

5) Does X have the rights of a stockholder even if the subscription is not yet fully paid? Yes, X has all the rights of a stockholder such as, but not limited to, the right to receive dividends & the right to vote. This right does not extend only to the partially paid shares but to the entire subscription. In other words, X has rights equivalent to the entire 2T shares subscribed.

*What is a watered stock? (There is no watered stocked in a non-stock)
Watered stock is one issued for a consideration less than its par value or issued value. Watered stock is not void per se, but the director or officer having knowledge thereof & w/o raising any objection thereto is solidarily liable w/the stockholder to the corporation & its creditors for the difference between the par or issued value & the consideration (Sec 65, Corp code)

*When does a stock become delinquent?
A stock becomes delinquent:
1)when the subscription is not paid in full w/in the 30-day grace period from the due date specified in the subscription contract; or
2)when the subscription is not paid in full on the date of the call (board resolution declaring the subscription payable & fixing the date of payment thereof), after due notice to the stockholders.
Call is not necessary when the subscription contract has provided for a definite date of payment. A delinquent stock retains its right to receive dividends up to the time of delinquency sale, but loses all the other rights of a stockholder (ex. Voting right). As for dividends due on a delinquent stock, the same may be applied to the unpaid balance (if cash dividend) or w/held until full payment (if stock dividend).

*What is the procedure of the delinquency sale of delinquent stocks?
Delinquency sale of delinquent stocks involves the ff steps:
1)the BOD, thru a board resolution, shall order the sale of delinquent stocks, such sale to be made not less than 30 (because of grace period) days nor more than 60 days from the date the stocks became delinquent
2)notice of the sale shall be given to every delinquent stockholder personally or by registered mail, the same shall be published for 2 consecutive weeks in a newspaper of general circulation. (phone call is not advisable)
3)The delinquent stock shall be sold to the highest bidder (one who offers to pay the full amount of the subscription balance, w/ accrue interest & expenses on the sale, for the least number of shares)
4)In case there is no bidder or the highest bidder is rejected by the corporation, the latter may either:
			a)bid for the delinquent stocks, in w/c case title to all the stocks covered by the subscription shall belong to the corporation as treasury shares; or
			b)File an action for collection of the unpaid balance.

*What is meant by highest bidder in a delinquency sale?
Bidders in the public sale of delinquent stocks shall offer to pay the entire amount of the subscription balance plus accrued interest & expenses of the sale in exchange for the number of shares they wish to bid. The bidder offering to pay the said amount for the least number of shares is the highest bidder.
To illustrate, assume that X subscribed for 1T shares of P100 par value common stock of w/c he was only able to pay P60T, thereby leaving a balance of P40T. Accrued interest amounted to P800 while advertising & other selling expenses amounted to P4,200. The ff bids were offered.
A-P45T for 600 shares
B-P45T for 500 shares
C-P45T for 400 shares
D-P40T for 350 shares
C is the highest bidder since he offered to buy the least number of shares for the required P45T bid. Consequently, C shall become the owner of the 400 shares while X, the delinquent stockholder, will become the owner of the remaining 600 shares.

A derivative suit- is an action brought by 1 or more stockholders or members in the name & on behalf of the corporation for the protection or vindication of the rights of the latter incase the management refuses to act or is the one being sued.
A representative suit- is an action brought by a stockholder in behalf of himself & other stockholders who have the same cause of action. It is in the nature of a class suit.
An individual suit- is an action brought by a stockholder against the corporation flowing from his right as a stockholder.

*The conditions for filing a derivative suit are as follows:
1)there is a valid cause of action for this kind of relief;
2)the stockholder bringing the suit has exhausted all remedies w/in the corporation, unless such remedies would be useless;
3)the stockholder was such when the acts complained of occurred, unless they continue & are injurious to the stockholder;&
4)the action must be brought in the name of, & for the benefit of, the corporation.

*The members of the BOD of ABC Corporation have been misappropriating & misapplying corporate funds. X, a stockholder owning only 1 non-voting share of the corporation, discovered the irregularity. Can X file derivative suit against the BOD?
Yes, X can file a derivative suit in the name & on behalf of ABC Corporation against the erring BOD. It does not matter if X is just an owner of 1 non-voting share. What is important is that he is a stockholder. After all, the suit is not the personal action of X but of ABC Corporation, w/c stands to be damaged by the misappropriation & misapplication of corporate funds.

*X is a stockholder of LMN Corporation. The corporation increased its ACS but X was not afforded the opportunity to purchase the number of shares proportionate to his stockholding in the corporation. X later discovered that many stockholding in the corporation. X later discovered that many stockholders were also denied of their pre-emptive right.
Can X file a representative suit in behalf of himself & the other stockholders against LMN Corporation?
No, X cannot file a representative suit in behalf of himself & the other stockholders. However, X can bring an individual action to enforce his pre-emptive right. It has been held that pre-emptive right is personal to every stockholder so much so that he may not institute a representative suit in behalf of the other stockholders (Mathay vs Consolidated Bank & Trust Co)

*Assume the same facts in the immediately preceding problem, except that X & the other stockholders were denied of their right to vote in the election of the BOD. Will your answer be the same?
No, my answer will not be the same. This time X may file a representative action in behalf of himself & the other stockholders against the corporation because all of them have a common cause of action making it impractical to bring them all to court. The right to vote affects many interests unlike the pre-emptive right, w/c is essentially personal to the stockholder.
CORPORATE BOOKS & RECORDS
*What are the books & records that a corporation must keep?
The corporation is required to keep the ff books & records:
1)Minutes book- contains the minutes of the meetings of the BOD & the stockholders;
2)Books of Accounts- contain the record of all business transactions; basically includes the journal & the ledger
3)Stock subscription book- book of printed blank subscription
4)Stock certificate book- book of printed blank certificates of stock; &
5)Stock & transfer book- contains the names of stockholders, date on payments & balance of their subscriptions, & data on any transfers of stocks.
MERGER & CONSOLIDATION
Merger is a form of corporate combination whereby one corporation (absorbing corporation) absorbs another (absorb corporation), the former acquiring all the assets & assuming all the liabilities of the latter. The absorbing corporation issues a block of shares equal to the net assets (total assets minus total liabilities) acquired, w/c stocks shall then be distributed to the stockholders of the absorbed corporation, w/c is dissolved. The stockholders of the absorbed corporation consequently become the stockholders of the absorbing corporation. Merger may be expressed mathematically as :X + Y = X or Y	Consolidation is a form of corporate combination whereby 2 or more corporations are dissolved in order to create a new corporation (consolidated corporation), the latter acquiring all the assets & assuming all the liabilities of the constituent corporations. Consolidation may be expressed mathematically as: X + Y = Z

*What steps are involved in effecting a merger or consolidation?
The ff steps are taken in order to effect a merger or consolidation:
1)The plan for merger or consolidation shall be approved by a majority vote of the BOD or trustees;
2)The plan shall be submitted for approval by at least 2/3 of the OCS (including non-voting stock) or members, as the case may be, of each corporation; provided, that a dissenting stockholder may exercise his appraisal right;
3)The articles of merger or consolidation shall be executed by each corporation & submitted to the SEC for approval thereof;
4)The conduct of a hearing by the SEC whenever necessary & (optional, it depends)
5)The issuance of the certificate of merger or consolidation by the SEC, at w/c time the merger or consolidation becomes effective (Sec 77-79, Corp Code)

*Is the consent of the creditors of the corporations a merger or consolidation necessary?
No, the consent of creditors is not necessary in mergers & consolidation because these are combinations expressly authorized by law & the rights of creditors are not impaired by any merger or consolidation.
                                                                             APPRAISAL RIGHT
*Appraisal right is a statutory right granted to a dissenting (negative vote not agreeing) stockholder whereby he may demand payment of the fair value of his shares after dissenting from a proposed corporate action in any of the ff cases as provided by law:
1)Any amendment to the AOI that changes or restricts the rights of any stockholder or class of shares of authorized preferences in any respect superior to those of outstanding shares of any class or of extending or shortening the corporate term
2)the sale lease exchange transfer mortgage pledge or other disposition of all or substantially all of the corporate property & assets
3)merger or consolidation &
4)the investment of funds in another corporation or business for a purpose other than its primary purpose (Sec42 & 81 Corp Code)

*What must a stockholder do in exercising his appraisal right?
1.The stockholder must make a written demand on the corporation for the payment of the fair value of his shares w/in 30 days from the date he voted against the proposal concerned;
2)He must surrender his certificates (annotated for dissenting) of stock to the corporation w/in 10 days after the demand for payment
3)He shall transfer the shares to the corporation upon payment of the fair value of the shares of stock (Sec 82 Corp Code)

*May a stockholder transfer his shares of stock that have already been marked as dissenting shares?
Yes, the stockholder may still transfer the shares already bearing the notation as dissenting shares. However, he shall no longer be paid the fair value of his shares.

*FGH Corporation is a domestic corporation engaged in the manufacture of building construction materials. Due to unprofitable operations, its BOD wanted to engage in developing subdivision lots. The majority vote of the BOD was already secured & the proposal was ratified by at least 2/3 of the OCS in a meeting for that purpose. X, a stockholder, strongly objected to the new endeavor & sought your advice on what he could possibly do under the circumstances. What legal advice would you give to X?
I would advice X that if he really strongly against the new endeavor, he might as well exercise his appraisal right as a dissenting stockholder & get away from the corporation. He should make a written demand to FGH Corporation for the payment of his shares w/in 30 days from the date of the meeting when he voted against the proposal, & surrender his certificates of stock w/in 10 days from his demand for payment of his shares. The fair value of his shares will then be determined & paid to him.
(3 independent appraisers:
1 from corporation, 1 from the stockholder, & 1 from both of them; award- 30 days for the corporation to pay; GR: appraise pays the expenses but fair E: 1) deadlock 2) Courts finds that it is unreasonable
CLOSE CORPORATIONS
*A close Corporation has the ff features:
1)the number of stockholders of record of all stocks except treasury shares, does not exceed 20 (not a public corporation)
2)The transfer of stocks may be restricted so as to grant existing stockholders or the corporation the option to buy the shares of a transferring stockholder w/in 1 month & under reasonable terms; before the same is offered to strangers (right of first refusal) provided, that such restriction appears in the AOI, by laws & certificates of stock & provided further, that an absolute restrain on transfer of stock unlimited in time is not valid;
3)The pre-emptive right of stockholders extends to all stocks to be issued, including treasury shares, unless limited in the AOI
4)The management of the corporation may be entrusted to the stockholders themselves rather than to a BOD as may be provided in the AOI
5)The officers or employees may be elected or appointed by the stockholders themselves rather than by the BOD as may be provided in the AOI
6)The stocks are not listed in any stock exchange or offered to the public
7)The holders of each class of stock may elect the allocated number of directors coming from their own class as provided in the AOI
8)Any amendment to the AOI must be approved by at least 2/3 of the OCS, w/ or w/o voting rights (mere assent is not sufficient)
9)Any stockholder may, for any reason, w/draw from the corporation & demand that the corporation buy his stocks at their fair value w/c shall not be less than par or issued value; provided that the corporation has sufficient assets to cover its liabilities
10)Any stockholder may petition the SEC for the dissolution of the corporation by reason of illegal, fraudulent, dishonest, oppressive, or unfair acts of directors or officers, or misapplication of corporate assets;
11)Notwithstanding the presence of the foregoing characteristics of a close corporation, a corporation is deemed not q close corporation when at least 2/3 of its voting stock is owned or controlled by another corporation w/c is not a close corporation &
12)The ff cannot be organized as close corporations:
	1)mining or oil companies
	2)stock exchanges
	3)banks
	4)insurance companies
	5)public utilities
	6)educational institutions &
	7)corporations vested w/ public interest

*XYZ, Inc is a close corporation w/ 20 stockholders consisting of family members. A, a stockholder, is desirous to get out from the corporation. He then gave a 3 month option to buy his shares in favor of XYZ, Inc. & to all other stockholders at par value. XYZ, Inc. refused to buy shares on the ground that its assets are not sufficient to cover its debts & liabilities. The remaining 19 stockholders likewise refused for lack of funds to pay for the same. After 3 months, A sold shares to B, a stranger to the corporation. XYZ, Inc, refused to register the shares in the name of B, contending that the AOI expressly prohibit non-family members from becoming stockholders of XYZ, Inc. Is the refusal of XYZ, Inc to register the sold shares in the name of B justifiable?
No, the refusal to register the shares in the name of B is not justifiable.  A close corporation is allowed by law to stipulate restrictions on transfer of shares provided such restrictions appear in the AOI, by-laws & certificates of stock. But it has no right to restrain a transfer to strangers where the shares were first offered to the corporation & the other stockholders, but they themselves refused to exercise the option to buy the said shares. The SEC even limits the option period to only 1 month, making the 3 month period granted by Z even more reasonable. Therefore, B can compel the registration of his shares in XYZ, Inc.
NON-STOCK CORPORATIONS
*A non-stock corporation has the ff elements:
1)No part of its income is distributed as dividends to its members- the objective of a non-stock corporation is not for profit; although it is not prohibited in earning income as an incident to its operation, these profits should never be given as dividends or any other form of pecuniary benefits in favor of the members.
2)Any incidental profit obtained shall be used for the furtherance of its purpose or purposes- a non-stock corporation may be formed for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civic service, or similar purposes like trade, industry, agriculture & the like chambers or any combination thereof.

*Determine whether or not each of the ff provisions in the AOI &/or by-laws are valid & effective insofar as non-stock corporations are concerned:
1)Only members whose membership term has reached 3 years or more are entitled to vote (only if provided)
2)Cumulative voting may be used in the election of the board of trustees (if provided)
3)Officers shall be directly elected by the members & not by the board of trustees (if provided)
4)Proxy (proxy may be denied in the AOI/by-laws in the non-stock unlike stock cannot be denied) voting (statutory right but in close corporation unless expressly allowed) in membership meetings shall not be permitted (if provided)
5)The authorized representatives of corporate members shall be considered as member qualified to be nominated & elected in the board of trustees (if provided)
6)Membership meetings may be held anywhere in or outside the Philippines
7)The number of incorporating trustees shall be 18 &
8)The corporation may be converted into a stock corporation by an amendment of the AOI duly approved by the majority of the board of trustees & at least 2/3 of the members.

The first five provisions are valid & effective if provided in the AOI &/or the by-laws of a non-stock corporation.

Provisions 6 is not valid because the law allows membership to be held only in the Philippines. But, board meetings may be held outside the country, unless provided otherwise.

Provisions 7 is not valid because the law requires that the number of incorporators of both stock & non-stock corporation must not be less than 5 nor more than 15, majority of whom must be residents of the Phjilippines. However, the board of trustees of the non-stock corporation may later on exceed 15 in number after its incorporation, all of whom must be members of the corporation

Provisions 8 is not valid. A non-stock corporation cannot simply be converted itself into a stock corporation by virtue of an amendment of its AOI because this would result into the distribution of corporate assets to the members, w/c is expressly prohibited by the Code. If conversion is really intended, the non-stock corporation must be dissolved & the members may then form a stock corporation in accordance w/ the requirements of the Code.
SPECIAL CORPORATIONS
*What corporations are classified as special corporations under the Corporation Code?
The Corporation Code classifies the ff as special corporations:
1)Educational corporation- (school teaching) a stock or non-stock corporation organized for educational instruction to students; this is different from the ordinary non-stock corporation organized for educational purposes (supply of books) &
2) Religious corporation- (church) a corporation organized for the furtherance of religion; this is different from the ordinary non-stock corporation organized for religious purposes

*Can the board of trustees or directors of educational corporations exceed 15 in number?
No, unlike ordinary non-stock corporations, the board of trustees (if non-tock) or directors (if stock) of an educational corporation shall not be less than 5 nor more than 15. Moreover, in the case of non-stock educational corporations, the number of the board of trustees must be in multiples of five (5, 10, or 15) w/ the term of office staggered w/ 1 year interval

*RA No. 7798, in amending section 25 of BP Blg 232 (educational Act of 1982), provides that :”any private school proposed to be established must incorporate as either a non-stock or a stock corporation in accordance w/ the provisions of the Corporation Code of the Philippines” Is there an exception to this requirement?
Yes, the same law provides that the said requirement to incorporate may be waived in the case of family-administered pre-school institutions (toddler).

*What are the 2 classes of Religious Corporation?
Corporation Sole- it is incorporated by only 1 person who is the presiding officer of a religious denomination, sect, church. The roman Catholic Church is a corporation sole, although it is not registered because its juridical personality has been in existence & universally recognized for a very long time	Religious society- it is incorporated by an aggregate of individuals composing any religious society or order

*Is the approval of the SEC necessary in the incorporation of special corporations?
An educational corporation, upon favorable recommendation of the DECS, shall file their AOI & by-laws w/ the SEC. Therefore, the approval of the SEC is necessary for its incorporation

On the other hand, a religious group, sect, or denomination is not required by law to incorporate as a religious corporation. And in case it does, the approval of the SEC is not necessary since the mere filing of the AOI is sufficient to incorporate it

*What is the advantage of incorporating a religious order, sect or denomination, considering that there is no legal requirement for the group to do so?
The advantage of incorporating a religious order, sect, order or denomination lies in the acquisition of a legal personality in administering their properties. If incorporated, the religious group mat then acquire properties in its own name

*A religious corporation filed its AOI as a corporation sole w/ the SEC naming Bishop X, a German national, as its incorporator & incumbent head. The corporation purchased a piece of land & sought the registration of the same w/ the Register of Deeds. The Register of Deeds denied its registration for lack of proof that at least 60% of the corporation sole’s capital is owned by Filipino citizens. Is the Register of Deeds correct?
No, the Register of Deeds is not correct. The 60% citizenship requirement does not apply to a corporation sole that is composed of only 1 person. A corporation sole has no nationality & all its temporalities belong to the faithful
DISSOLUTION (voluntary or involuntary)
*What are the ways whereby a corporation may voluntarily dissolve itself?
A corporation may voluntarily dissolve itself by any of the ff ways:
1)By the majority vote of the BOD or trustees, & at least 2/3 vote of the OCS or members- publication of notice for 3 consecutive weeks in a newspaper, & notice to each stockholder or member (at least 30 days prior to the meeting); issuance of the certificate of dissolution by the SEC
2)Petition for dissolution before the SEC by majority of the BOD or trustees, & at least 2/3 of the OCS or members- publication of notice 3 consecutive weeks in a newspaper; hearing of the petition by the SEC; judgment of dissolution may include the appointment of a receiver to collect assets & pay liabilities
3)Amendment of AOI to shorten corporate term any majority vote of the BOD or trustees, & at least 2/3 of the OCS or members- corporation is deemed  dissolved upon approval by the SEC or expiration of the shortened term w/o any further proceedings (Sec188-120, Corp Code)

*How may a corporation be dissolved involuntarily?
By any of the ff:
1)Legislative revocation of franchise
2)Judicial Decree
3)Order of the SEC

*After the dissolution of a corporation, the ff shall take place:
1)Liquidation- involves the sale or conversion of all corporate assets into cash & payment of all liabilities &
2)winding up- involves the final distribution of whatever remains, if any, to the stockholders as a return of their investment

*X Corporation was dissolved on June 1, 2007. It anticipated that its various cases filed in court against the corporate debtors would drag for a very long time. As corporate counsel of X corporation, what move would you advise on this matter?
Since X corporation has only a period of 3 years from the time it was dissolved, or until June 1, 2010, w/in w/c to liquidate its affairs, I will ask the court for the appointment of a trustee who will take charge of the corporation’s liquidation. All he corporate assets, including the collectibles that are subject of litigation, will then be conveyed to the said trustee. By doing this, the prosecution of cases may go on w/o fear of being abated since the 3 year limitation on liquidation will no longer apply.

*In what order shall the ash proceeds from the sale of all corporate assets upon liquidation be distributed in the winding up of the corporate affairs?
Distribution of cash realized from the sale of corporate assets shall be done in the ff order of priority:
1)Corporate creditors who do not belong to the corporation
2)Corporate creditors who are also stockholders, members, directors or officers of the corporation &
3)stockholders or members in proportion to their interest in the corporation.

*X is a preferred stockholder of RST Corporation whose affairs are in the process of being wound up as a result of its dissolution. Is X entitled to any preference over the common stockholders?
Preferred shares of stock may either be preferred as to dividends or preferred as to assets in the event of liquidation. In the absence of any stipulation as to its preferences, the preferred stock shall only enjoy preference as to dividends

However, if it clearly stated in the certificate of stock that preference is on assets upon liquidation, then X shall receive the liquidation value of his shares (may be more than par value) ahead of the common shareholders
FOREIGN CORPORATIONS
*A foreign corporation is one that is organized or existing under the laws of a foreign country. For purposes of securing a license to do business in the Philippines, the laws of the country to w/c the foreign corporation is organized should allow Filipino citizens & corporations to do business thereat (Sec 123, Corp Code)

*what does “doing business in the Philippines” mean that requires foreign Corporations to secure a license from the SEC?
The phrase “doing business in the Philippines” in reference to a foreign corporation has been interpreted to mean that the foreign corporation engages in a business activity or enters into a contract that is ordinary or customary to its operations. The fact that there is only a single act done is not material since other circumstances are to be taken into account. And the fact that it enters into a contract does not necessarily mean it is “doing business in the Philippines”. If such contract is consummated abroad & the foreign corporation does not exercise any control or supervision over the activities into the Philippines, it may not be doing business here. It is the performance of the act for w/c the foreign corporation was created that determines whether or not it is doing business in the country.

 A foreign corporation shall not be permitted to transact or do business in the Philippines until it has secured a license for that purpose from the SEC & a certificate of authority fro the appropriate government agency. Failure to secure the necessary license shall bar the foreign corporation its successors or assigns from maintaining or intervening in any action of the Philippines, but such corporation may be sued or proceeded against before the Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. (Sec126 & 133, Corp Code)

*Z International, Inc, a garment manufacturer, entered into a contract w/ ABC Corporation, a domestic corporation, whereby the former would supply garments to the latter at a certain volume for a certain period of time. After several shipments, Z International, Inc ceased sending the garments for failure of ABC Corporation to abide by their contractual conditions’ International, Inc is not licensed to do business in the Philippines. (The non-securing of a license the contract is not void because the defect can be cured)
1)Can Z International, Inc. file an action for the contractual breach in the Philippines courts? No, Z International, Inc shall not be permitted to maintain or intervene in any action suit or proceeding in any court or administrative agency of the Philippines because it is deemed “doing business in the Philippines” w/o license.

2)Can Z International, Inc be sued in the Philippine courts?
Yes, a foreign corporation doing business in the country w/o a license may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. Z International, Inc. should not be permitted to use the lack of license as a defense under the doctrine of quasi-estoppels by acceptance of benefits

3)Is the contract entered between Z International, Inc & ABC Corporation valid or not?
The law is silent as to the validity or invalidity of a contract entered into by a foreign corporation doing business in the Philippines w/o a license. But the better view holds that such contract need not be declared void because the penal sanction imposed on such violation & the statutory prohibition to sue in our courts are enough. In other words, the defect may be cured & the foreign corporation will be allowed to bring an action here once it is able to secure the requisite license

*give some examples of activities of foreign corporations that are considered:
1)Doing business in the Philippines: the ff activities were held by the Court:
	a)A foreign corporation that manufactures cars appointed a Philippine distributor who merely transmits to it orders from buyers, the former fixing the price & the down payment, receiving payment directly from buyers, & shipping the cars directly to the buyers (Hahn vs CA)
	b) A foreign corporation licensed a domestic corporation to manufacture its products (Top-Weld manufacturing, Inc, vs Eced, S.A)
	c)A foreign corporation appointed an exclusive distributor of its products in the Philippines, registered its trade name, & sent an officer to conduct a training program 4 times (Wang Laboratories, Inc vs Mendoza)
	d)A foreign corporation solicited from a domestic corporation a contract to supply a lime plant through its Mnail branch (Marubeni Nederland BV vs Tensuam)
	e) A foreign corporation that is engaged in the manufacture of uniforms purchased soccer jerseys from the Philippines (Litto Mills, Inc vs CA)
2)not doing business in the Philippines: The ff activities were held by the court:
	a)A foreign shipping company loaded cargoes in the Philippines once a year for 2 consecutive years (NV Reedrij Amsterdam vs CIR)
	b)A foreign corporation purchased copra in the Philippines & modified the contract twice for failure of the seller to deliver (Antam Consolidated, Inc, vs CA)
	c)A foreign corporation sold construction equipment in an isolated transaction (Gozales vs raquiza)
	d)A foreign insurance company issued a policy to the consignee of exported steel pipes (Lorenzo shipping corporation vs chubb & Sons, Inc)
	e)A foreign subsidy assumed the payment of the loan by a foreign corporation doing business in the Philippines & the subsequent acquisition by the former of the latte (MR Holdings, Ltd vs Bajar)
SECURITIES REGULATION CODE (RA 8799)
A broker is a person engaged in the business of buying & selling securities for the account of others; whereas a dealer is a person who buys & sells securities for his/her own account in the ordinary course of business	An associated person of a broker or dealer is an employee thereof who directly exercises control of supervision authority, but does not include a salesman, agent or person whose functions are solely clerical or ministerial

&The SEC Code has amended Sec5 of PD No. 902-A, in effect transferring the SEC’s jurisdiction over certain cases to the regular courts. What are these cases?
The cases now fall under the jurisdiction of the regular courts & no longer w/ the SEC:
1)fraudulent devices or schemes employed by the boars of directors, business associates, its officers or partners
2)Intra-corporate or partnership controversies (conflict or disagreement between the corporation/partnership & its stockholders/partners;
3)Controversies in election or appointment of directors, officers or managers of such corporations partnerships or associations
4)Petition for suspension of payments where the corporation partnership or association has sufficient assets to cover its debts but foresees the impossibility of meeting them as they fall due &
5)Where the corporation, partnership, or association has no sufficient assets to cover its debts but is under management of a Rehabilitation Receiver or Management Committee pursuant to PD No.902-A.
Note: The SEC continues to exercise jurisdiction over pending intra-corporate disputes submitted for final resolution that must be resolved w/in 1 year from enactment of the Code, & pending suspension of payments/rehabilitation cases filed as of June 30, 2000 until finally disposed

*What is the nature of rehabilitation proceedings on corporations, partnerships & associations under the Interim rules of Procedure on Corporate Rehabilitation?
Te rehabilitation proceedings are considered in rem Jurisdiction over all those affected is acquired upon publication of the notice of commencement of proceedings in any newspaper of general circulation. The proceedings are summary & non-adversarial in nature. (Sec1, Rule 3, Interim rules)

*Who may file a petition for rehabilitation under the Interim Rules of Procedure on Corporate Rehabilitation?
A petition for rehabilitation may be filed before the proper RTC by any corporation, partnership, or association that foresees the impossibility of meeting its debts when they respectively fall due, or by any creditor or creditors holding at least 25% of the total liabilities of a corporation, partnership, or association (Sec2, Rule 3 & Sec 1, Rule 4, and Interim Rules)

*What follows when the court finds the petition for rehabilitation sufficient in form & substance?
The court, upon finding the petition to be sufficient in form & substance, shall issue an order appointing a Rehabilitation receiver & staying enforcement of all claims (stay order) against the debtor-corporation, debtor partnership or debtor-corporation. The reason behind this staying order is give way for the rehabilitation plan to be observed & implemented to the end that the debtor may be rehabilitated & at the same time the creditors may be paid. The stay order shall be effective from the date of its issuance until the petition is dismissed or the rehabilitation proceedings terminated (Sec6, Rule 4, Interim Rules)

At this time, the debtor shall be prohibited from selling encumbering transferring or disposing its properties, except in the ordinary course of business. The court may declare such transfer as void upon motion or motu propio (Sec 8, Rule $, Interim rules). It is likewise prohibited in making any payment of its liabilities. The suppliers shall also be obliged to continue supplying goods or services to the debtor for as long as payment is made after the issuance of the stay order.

*Under what instances may the stay order be terminated or modified, or a creditor’s claim relieved from the coverage thereof?
Under any of the ff instances:
1)Any allegation in the petition, its attachment or verification has ceased to be true
2)A creditor does not have adequate protection over property securing its claim or
3)the debtor’s secured obligation is more than the fair market value of the property subject of the stay order, & such property is not necessary for the debtor’s rehabilitation (Sec12, Rule 4, Interim rules)

*What shall constitute the creditors’ “lack of adequate protection? Whenever:
1)the debtor fails or refuses to honor a pre-existing agreement w/ the creditor to keep the property insured;
2)the debtor fails or refuses to take commercially reasonable steps to maintain the property or
3)the property has depreciated to an extent that the creditor is undersecured
The court shall order the Rehabilitation receiver to have the property insured or to make payments or otherwise provide additional or replacement security for the debt. If these arrangements are not feasible, the court shall modify the saty order allowing the secured creditor lacking adequate protection to enforce its claim against the debtor; provided, that the court may deny the creditor of these remedies if such would prevent the continuation of the debtor as a going concern or otherwise prevent the approval & implementation of the rehabilitation plan. (Sec 12, Rule 4, Interim Rules)

*In what cases shall the rehabilitation proceedings be terminated by the court? Under any of the ff cases:
1)failure of debtor to submit the rehabilitation plan
2)disapproval by the court of rehabilitation plan
3)failure to rehabilitate the debtor due to failure to achieve the desired targets or goals in the rehabilitation plan
4)rehabilitation plan may no longer be implemented or
5)successful implementation of the rehabilitation plan (Sec 28, Rule , Interim Rules)

*A public offering of securities, save those that are exempt, has to be registered & approved by the SEC as opposed to a private offering. What is the distinction between a public offering & a private offering?
A public offering refers to the sale of securities to the general public, usually w/ the intervention of an investment banker; A public offering involves the general public that has little or no knowledge about the securities offered to them. This is why registration & approval of the Sec is necessary.	whereas a private offering refers to the sale of securities to a limited number of subscribers by the issuer himself; A private offering, on the other hand, involves a few subscribers who may well be familiar w/ the securities offered to them.

*Give 3 examples of exempt securities that do not have to be registered & approved by the SEC:
The ff 3 examples of exempt securities that may be sold w/o need of SEC registration:
1)Securities issued & guaranteed by the government of the Philippines
2)Securities issued & guaranteed by the government of any country w/ w/c the Philippines has diplomatic relations or where there is reciprocity &
3)Securities issued by a bank, except its own shares of stock (Sec9 SRC)
The ff 3 examples of exempt transactions that do not need SEC registration & approval:
1)At any judicial sale or sale by an executor administrator guardian or receiver or trustee in insolvency or bankruptcy
2)sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid
3) Broker’s transactions, executed upon customer’s orders, on any registered Exchange or other trading market (Sec10 SRC)

*Pre-need plan- it provides for the performance of future services or the payment of future monetary considerations at the time of actual need. It includes life, pension, education, interment (death) & other plans that the SEC may approve

Wash sale- a manipulative transaction purporting to be a sale when in fact there is no actual change in ownership of the securities

Commodity future contract- an agreement to buy or sell a specified quantity & grade of a commodity at a future date at a price (acceptable except when contrary to public policy) established at the floor of the exchange

*When is a commodity futures contract against public policy?
A contract w/ a commodity futures broker for the purchase & sale of commodities for future delivery is b=gambling & against public policy where the parties did not intend actual delivery but merely speculated on the rise & fall of the price of the commodities. The customer is entitled to the refund of what was paid to the broker (Onapal Philippine Commodities, Inc vs CA)

*The prevailing market price of ABC, Inc. shares at the exchange is P150 per share. X anticipates the price to go down & so sells to A 1TABC, Inc shares at P150 per share for 150T. X borrows 1T ABC, Inc.shares from B, giving B the P150T paid by A as security, then delivers the shares to A. When the market price drops to P100 per share, X buys 1T shares for P100T & delivers the same to B who returns the P150T to X. X therefore, makes a profit of P50T on the sale. What kind of sale is effected by X?
The sale is a short sale. The seller sells a security or commodity, w/c he does not own expecting to make a profit when the market price will decline. It is unlawful when made contrary to the rules & regulations prescribed by the SEC to protect public interest.

*What is insider trading?
There is insider trading when someone sells or buys a security while in possession of material information w/ respect to the issuer or the security that is not generally available to the public w/c he gained from his insider relationship & w/c he did not disclose to the other party or he had no reason to believe is in possession of the other party.
BANKING LAWS THE NEW CENTRAL BANK ACT (RA 7653) LAW ON SECRECY OF BANK DEPOSITS (RA 1405, AS AMENDED)
*What is the mandate of the bank Secrecy law?
It mandates that all deposits of whatever nature w/ banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions & its instrumentalities, are of absolute confidential nature & may not be examined, inquired or looked into by any person government official bureau or office, subject to few exceptions as provided by law

*What are the exceptions to the confidential nature of bank deposits?
1)written permission of the depositor
2)impeachment cases
3)court order in bribery & dereliction of duty cases against public officials including cases of unexplained wealth & money laundering
4)deposit is the subject matter of the litigation
5)ANTI-GRAFT CASES, AS PROVIDED IN THE Anti-graft Law
6)deposit may be inquired into by the AMLC (Council) w/o a court order in cases of kidnapping for ransom, drug trafficking & hijacking destructive arson & murder
7)reporting of covered transactions or suspicious transactions by banks & other covered institutions to the AMLC &
8)deposit of a decedent in order to determine his gross estate, as provided by Section 6 (F) of the Tax Reform Act of 1997

*ABC Bank, thru its manager, disclosed to the court sheriff the outstanding baklance of X’s depositr w/ the bank upon its receipt of the garnishment notice. X filed a criminal complaint against ABC bank fro violation of RA No.1405 otherwise known as the Bank Secrecy Law. Will the complaint prosper?
No, the complaint will not prosper. The bank secrecy law does not preclude a bank deposit from being lawfully garnished in order to satisfy a judgment. The disclosure is merley incidental to the execution of a court judgment.

*X is the proprietor of a hardware that normally grants credit to its customers. Upon examination of his records, X discovered that a postdated check for P20T has been received bu=y his manager from a customer. X went to ABC Bank, the drawee bank, & asked its manager who the drawer of the said check is. The manager refused to give any information about the drawer on the ground that the Bank secrecy Law prohibits him from divulging such information. Is the bank manager justified in his refusal to reveal the identity of the drawer?
No, the bank manager is not justified in refusing to reveal the identity of the drawer of the check. X just wanted to identify w/ certainty who the drawer of the check was. He was not inquiring about the details & balance of the drawer’s deposit w/ ABC Bank. Revealing the identity of the drawer does not fall w/in the ambit of the Bank Secrecy Law.

*X died intestate. His administrator filed the state tax return w/ the revenue district officer declaring, among others, a deposit of P200T w/ RST Bank as part of the decedent’s gross estate. Y, a dedicated BIR examiner, went to RST Bank equipped w/ a letter of authority for the Commissioner in order to examine the deposit of X. Z, the bank manager refused to give access of X’s deposit records to Y w/o a court order on the ground that it would violate the confidential nature of bank deposits under the bank secrecy law. Who between Y & Z is correct?
Y, the BIR examiner is correct. Sec 6 (F) of RA No. 8424 ( The Tax reform Act of 1997) expressly provides as follows: “Notwithstanding any contrary provision of RA No. 1405 & other general or special laws, the Commissioner is hereby authorized to inquire into the bank deposits of a decedent to determine his gross estate”.

*What conditions must concur in order that the ombudsman may be able to examine a bank account?
When the ff conditions concur:
1)there is a pending case in court & the account is clearly identified
1)the inspection must be limited to the subject matter of the case
3)the bank personnel & the account holder must be notified to be present during the investigation &
4)the inspection may cover only the account identified in the pending case (Marquez vs Desierto)
GENERAL BANKING ACT (RA 8791)
*XYZ Investment Corporation is engaged in the business of buying accounts receivable. To fund the purchase, XYZ Investment Corporation sells it bonds from time to time to the general public. Is XYZ Investment Corporation a bank w/in the purview of the General Banking Law of 2000?
No, XYZ Investment Corporation a bank. The General banking Act of 2000 defines a bank as an entity engaged in the lending of funds obtained in the form of deposits. XYZ Investment Corporation does not lend money; instead it borrows from the public. It does not accept deposits, instead it buys receivables.

*It is an entity engaged in the borrowing of funds through the issuance, endorsement, or assignment w/ recourse or acceptance of deposit substitutes for purposes of re-lending or purchasing of receivables & other obligations.

*What are the limitations in organizing a bank?
The Monetary Board may authorize the organization of a bank or quasi-bank subject to the ff conditions:
1)that the entity is a stock corporation
2)that its funds are obtained from the public, w/c shall mean 20 or more persons &
3)that the minimum capital requirements prescribed by the Monetary Board for each category of banks are satisfied (Sec 8, GBL)

*May banks issue no-par value shares? No, banks cannot issue no-par value stocks because the GBL expressly provides that banks shall issue par value stocks only. (Sec 9 GBL)

May banks acquire treasury stocks? As a GR, banks are prohibited from purchasing or acquiring its own shares or accepting the same as security for a loan. E: when authorized by the Monetary Board: provided, that the treasury shares shall be sold or disposed of w/in 6 months from the time of their purchase or acquisition (Sec 10 GBL)

*What is an independent director in relation to the BOD of a bank?
An independent director is a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests. The GBL requires the number of the BOD in banks to be not less than 5 nor more than 15, 2 of whom shall be independent directors (sec 15 GBL)

*The members of the BOD of DEF Bank conducted their board meeting through “video conferencing”. Was the board meeting properly conducted? Yes, the board meeting was properly conducted. The GBL expressly allows board meetings of the bank directors to be conducted through modern technologies such as, but not limited to, teleconferencing & video conferencing (Sec 15 GBL)

*What is meant by the “fit & proper rule” as applied to the BOD & officers in banks?
In order to maintain the quality of bank management & afford better protection to depositors & the public in general, the Monetary Board shall prescribe, pass upon & review the qualifications of the bank directors & officers, taking into account their integrity, experience, education, training & competence. The Monetary Board, after due notice, has the power to disqualify, suspend, or remove any bank director or officer found unfit for his position (sec 16 GBL)

*X is the vice-president of ABC Banking Corporation. Y applied for a loan at the bank w/ X as his guarantor. The majority of all directors approved the loan in writing & subsequently furnished a copy of the written approval to the Bangko Sentral. The examining officer of the Bangko Sentral then instructed ABC Banking Corporation to have Y secure another guarantor because X is disqualified to act as one being an officer of the bank.
1)Is the Bangko Sentral officer correct? No, the Bangko Sentral officer is not correct. No director or officer of any bank shall, directly or indirectly, for himself or for another, borrow from such bank nor shall he become a guarantor, endorser, or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank, except w/ the written approval of the majority of all the bank directors & a copy of such written approval to be transmitted forthwith to the Bangko Sentral. Having secured the required written approval of the majority of all the bank directors, X can validly act as a guarantor of Y.

2)Assuming X himself applied for a loan by virtue of a fringe benefit plan approved by the Bangko sentral, may the loan be granted w/o the written approval of all the bank directors? Yes, the loan may be granted to X. The written approval of all the bank directors is not required for loans, other credit accommodations & advances granted to officers under a fringe benefit approved by the Bangko sentral (Sec 36 GBL)

*May a bank engage in insurance business?
No, the GBL prohibits a bank from directly engaging in insurance business as the insurer (Sec 54 GBL)

*X rented a safety deposit box at PQR Bank & placed his valuable stamp collection therein. A flood gradually managed to enter the bank premises & water inundated the room where the safety deposit boxes were located. PQR bank failed to inform X to retrieve his deposited items on time & so his stamp collection was destroyed. The contract between the PQR bank & X stipulated that the bank would not be liable as a depository for any contents stored in the safety deposit box. Is PQR bank liable for the loss of the stamp collection of X?
Yes, PQR Bank shall be liable for damages due to the loss of the stamp collection stored in its safety deposit box. PQR bank is a depositary in this case & any stipulation that it shall not be held liable as a depository for the contents of the safety deposit boxes is void & contrary to law & public policy (Sia vs Ca)

*Is a stipulation exempting the bank from liability for damages in case of error or delay in transmitting a telegraphic transfer?
No, any stipulation exempting the bank from liability for damages in case of error or delay in transmitting a telegraphic transfer is void because it is contrary to public policy

*JKL banking Corporation employed X as a casual employee in charge of the time deposits of its depositors. Did JKL banking Corporation violate any law?
Yes, JKL Banking Corporation violated the provision of the GBL that provides that no bank shall employ casual or non-regular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits, consistent w/ the provisions of RA 1405 otherwise known as the Bank Secrecy Law (Sec 55 GBL)

*RST bank, a commercial bank, was able to acquire real property that was mortgaged to it in good faith by way of security for a loan. For how long may RST Bank hold such real property?
RST Bank is required by law to dispose the real property w/in a period of 5 years or as may be prescribed by the Monetary Board of the Bangko Sentral. However, RST Bank may, after said project, continue to hold the real property for its own use subject to the limitation that its total investment in real estate & improvements thereof including bank equipment shall not exceed 50% of the Bank’s combined capital accounts (Sec 51 GBL)

*What is conservatorship as applied to banks?
Whenever the bank is in a state of continuing liability or unwillingness to maintain its liquidity, the Monetary Board of the Bangko Sentral may appoint a conservator to take charge of the assets liabilities & management of such bank fro the protection of depositors & creditors. The conservatorship shall be terminated when the Monetary Board is satisfied that the bank can operate on its own or when liquidation is warranted. The conservatorship shall not exceed 1 year & the conservator may come from the Bagko Sentral itself or from outside, the latter being entitled to a salary (Sec 29 CBA)

*What is receivership as applied to banks?
The Monetary Bard may summarily & w/o need fro prior hearing forbid the bank from doing business & designate the PDIC as receiver for quasi-banks, any competent person may be the receiver) in any of the ff cases:
1)Inability to pay its liabilities as they become due in the ordinary course of business, unless due to extraordinary demands induced by financial panic in the banking community
2)Insufficient realizable assets to meet its liabilities
3)Inability to continue w/o probable losses to its depositors & creditors or
4)willful violation of ac ease & desist order involving acts or transactions amounting to fraud or a dissipation of the bank’s assets.
The receiver shall take charge of the assets & liabilities & shall be determine w/in 90 days from take-over whether the bank shall be rehabilitated or permitted to resume its operations or shall be liquidated subject to the approval of the a Monetary Board (Sec 30 CBA)

*Can a debtor compel his creditor to accept payment of a P50 debt in the ff denominations?
P0.10 centavo coins-P10
P0.25 centavo coins- P15
P0.50 centavo coins- P20
P1       centavo coins- P5
Yes, the debtor may compel his creditor to accept the foregoing payment. Coins w/ denominations of P0.01 – P0.05 are legal tender up to P20, & coins w/ denominations of P0.10 – P1 are legal tender up to P50
(1)5 centavo coins & 10 centavo coins until P20 legal tender may compel a person to pay such.
(2) 25 centavo coins legal tender up to P50
PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT (RA 9302)
*The PDIC is a government corporation tasked in insuring the deposit liability of banks up to amount of P250T per deposit liability of banks up to the amount of P250T per depositor; provided, that n owner or holder of any negotiable certificate of deposit shall be recognized as a depositor entitled to the rights provided by the Act unless his name is registered as the owner or holder thereof in the books of the issuing bank. This insurance is compulsory, the premiums thereof being paid by the banks to the PDIC

*X maintained w/ VWX Bank a current account & a savings account. VWX bank underwent involuntary liquidation ordered by the Bangko sentral ng Pilipinas due to financial reverses suffered by the bank. At the time the bank was closed, X’s current account & savings account had remaining balances of P130T & P170T respectively. How much could X recover from his deposits? X could recover up to P250T only. The insurance w/ the PDIC puts the ceiling at P250T for each depositor & not from each account (not per account) maintained in the bank. So even if each account did not exceed the limit, X could only recover up to P250T from the insurance (there is a pending bill increasing P500T)

*X pre-terminated his certificates of time deposit fro P30T w/ RST bank & opened new time deposit accounts in the names of A, B, C, & D in the sum of P75T each. The next day the bank was placed under receivership by the Bangko Sentral. Are A, B, C, & D entitled to collect from the PPDIC?
Yes, A, B, C, & D are all entitled to collect P75T each from the PDIC since these deposits are in the names of various depositors w/ each deposit not exceeding the ceiling of P250RT per depositor, unless there is bad faith amounting to X’s knowledge of an impending receivership (PDIC vs CA)

*LMN Bank issued a check for the matured time deposit of X. The Bank was closed by order of the Monetary Board & the check was subsequently dishonored for lack of funds. Is the PDIC liable for the value of the check?
No, the PDIC is not liable on the check paid to X because there is no deposit anymore (PDIC vs CA)
INTELLECTUAL PROPERTY CODE (RA NO 8293) (EXCLUDING IMPLEMENTING RULES AND REGULATIONS)
*What is the organizational structure of the IPO? (Dir-Dir Gen- CA MR- SC)
The IPO is headed by a director general who is assisted by 2 deputies director general. It has the ff bureaus, each headed by a director & assisted by an assistant director:
1)Bureau of Patents
2)Bureau of trademarks
3)bureau of legal affairs
4)documentation information & technology transfer bureau
5)management information system & EDP (electronic data processing) services bureau
6)administrative financial & personnel services bureau (Sec 6 IPC)

*What are the powers & functions of the director general?
The director general shall exercise the ff power & functions:
1)manage & direct all functions & activities of the office
2)exercise exclusive appellate jurisdiction over all decisions rendered by the:
	1.director of legal affairs
	2.director of patents
	3.director of documentation information & technology transfer bureau
The decisions of the director general in respect to Nos. 2 & 3 are appealable to the CA while those in respect to No4 are appealable to the secretary of trade & industry
3)exercise original jurisdiction over license disputes involving the author’s right to public performance or other communication of his work.
The decision of the director general in no.3 is appealable to the secretary of trade & industry (sec 7 (IPC)

*What are functions of the Bureau of Legal Affairs? The ff are the functions:
1)hear & decide the ff:
	a)opposition to application from registration of marks
	b)cancellation of trademarks
c)cancellation of patents, utility models & industrial designs; provided, that in cases involving highly technical issues, a Committee of 3 Director of Legal Affairs as chairman & 2 experienced or expert members coming from the field of technology involved) may hear & decide the cases upon motion of any party &
2)Exercise original jurisdiction in administrative complaints for violation of laws on intellectual property rights; provided that the total damages claimed are not less than P200T; provided further, that provisional remedies may be granted in accordance w/ the rules of court, including the power to hold a ;arty in contempt
3)Impose any of the ff penalties after form investigation:
	a)issuance of a cease & desist order
	b)acceptance of voluntary assurance of compliance or discontinuance as may be imposed
	c)condemnation or seizure of products subject of the offense
	4)forfeiture of paraphernalia & all real & personal properties used in committing the offense
	5)imposition of fines (not less than P5T nor more than P150T, plus not more than P1T for each day of continuing violation)
	6)w/holding cancellation or suspension (not more than 1 year) of permit, authority or registration granted by the IPO
	7)assessment of damages
	8)censure & (reprimand)
	9)other analogous penalties or sanctions (sec 10 IPC)

*Sec 67 IPO                                                                             PATENTS
*What is the agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS Agreement)?
The TRIPS agreement provides the minimum standards for intellectual property rights to be adopted & observed by the WTO member countries. It mandates the said members to abide by the Paris Convention (on patents & trademarks) & the Berne Convention (on copyright). Our Intellectual Property Code is enacted to comply w/ such commitments. (It does not mean that there exists a uniform law of different countries.

*What is a patent & what are the elements of patentability?
Patent is the exclusive right granted to an inventor to exploit his invention by the production use sale & importation of the product that includes the invention. Any technical solution of a problem in any field of human activity shall be patentable, provided it is:
1)new- (do not compare it w/ the word novelty from original) the invention must be novel: novelty is the essence of invention: an invention is not new or novel if it forms part of a prior art such as the ff cases:
		1.it was known or used by others in the Philippines before the filing date or priority date of the patent application:
		2.it was patented or described in a printed publication here or abroad for more than 1 year before the patent publication
		3.it had been in public use or on sale in the Philippines for more than 1 year before the patent application or
		4.it is the subject matter of a valid patent in the Philippines granted on an earlier patent application
2)inventive step- the invention mst not be obvious to a person skilled in the art at the time of the filing date or priority date of the patent application. The 4 factors considered in determining obviousness are:
	1.scope & content of the prior art
	2.difference between the prior art & the claimed invention
	3.level of ordinary skill in the field of the investigation &
	4.secondary factors such as commercial success long-felt need & copying
3)industrial applicability- the invention must have a practical use or purpose in any industry, not purely theoretical; patent dwells in the world of commerce not in the world of philosophy (Sec 21 IPC)

*X designed & built a store counter w/ a 3 sided rack that allows the goods stored on it to be drawn or pushed  from one place to another w/o falling off from the counter because of the installation guide rails as support. Can X successfully apply for patent on his invention?
No, X’s store is not patentable. The store counter t be granted a patent, must be more than just a combination of old elements that do not perform any additional or different functions. The rack remains just a rack, doing what is supposed to do tom slide on a smooth surface; & they have ever done & nothing more. Therefore, X’s invention lacks the element of novelty because he, merely brought together segments of a prior art. As the US Supreme Court put it: 2 & 2 have been added together & still they make only four”

*X an engineer, applied for a patent oh his invention that is related to the field of engineering. The patent examiner denied his application on the ground that his invention lacked the element of “inventive step”. On his appeal to the Director of Patents, X objected to the patent examiner’s favorable appreciation of the testimony of Z, a professor of engineering, rather than those of his 5 non-engineer witnesses who all claimed the uniqueness & originality of his invention. X contended that his invention, although expectedly obvious to one who is also an engineer like Z, is not at all obvious to the eyes of ordinary men to whom he plans to market & sell his invention. Is the contention of X tenable?
No, the contention of X is not tenable. In determining the element of “inventive step”, the invention must not be obvious to a person skilled in the art. Therefore, the testimony of Z is to be received & appreciated, & not those of persons who know nothing about the art. This does not mean, however, that X is prohibited from exploiting his invention, but the law will give him patent protection for it. (May exploit but not protection)

*X was able to develop & invent a chemical process in the field of science. As of filing date of his application for patent, there is yet no definite & known use of his invention, but X wants it patented anyway just in case it will prove useful in the future. Will the application from patent be granted?
One of the essential elements for the grant of a patent to an invention is industrial applicability. This means that the invention must serve a useful purpose in any industry. X’s invention definitely lacks this element & therefore, is US Supreme Court, is not a hunting license. It is not a reward for the search, but compensation for its successful conclusion. Patent system must be related to the world of commerce rather than to the realm of philosophy

First to file rule- dictates that as between 2 or more inventors, the one who filed an application for his invention owns the patent thereto & if there be more than 1 application, the applicant w/ the earliest filing date or priority date owns the patent.	First-to-invent rule- dictates that the patent shall belong to the first true & actual inventor
The first-to-file rule is adopted by the Intellectual Property Code, hereby abandoning the “first-to-invent” rule under the old Patent Law. There are, however, safeguards against fraudulent acts that may result from the “first-to-file” rule:
1)A person deprived of a patent w/o his consent or through fraud may be declared by the court as the true actual inventor &
2)A prior use in good faith shall have the right to continue using the invention in the territory where the patent produces its effects (otherwise, will prejudice economic rights of the other)
(2 options: 1.substitution- no award of damages 2) cancellation- court award damages if warranted)

*What is meant by the “right of priority” in relation to an applicant who has previously applied for the same invention in another country?
A patent application filed by 1 who has previously applied for the same invention in another country that affords similar privileges to Filipinos (reciprocity) shall be considered filed as of the date of filing the foreign application, provided:
1)the local application expressly claims priority
2)it is filed w/in 12 months from the date the earliest foreign application was filed &
3)a certified copy of the foreign application together w/ an English translation is filed w/in 6 months from the date of filing in the Philippines (Sec 31 IPC)

*What inventions are not afforded patent protection?
The ff shall be excluded from patent protection: (machine for blood patentable)
1)discoveries (not an invention)scientific theories & mathematical methods
2)schemes rules & methods of performing mental acts playing games or doing business & programs (however may be copyright) for computers
3)methods for treatment of the human or animal body by surgery or therapy & diagnostic methods practiced on then human & animal body (E:not applicable to products & composition for use & composition for use in any of these methods)
4)aesthetic creations  &
5)anything w/c is contrary to public order or morality (Sec 22 IPC)

*X, a basketball coach, is able to formulate an effective defensive method in positioning his 5 players on the fllor that will almost guarantee a “steal” of the ball from the opposing team. This position has never been used before in basketball history, locally or internationally. X then applies for a patent to his original basketball strategy.
Y, a fighting cock enthusiast, finally arrives at a superb breeding combination for his fighting cocks consisting of 5 different bloodlines to be infused at different percentages in order to produce the desired offspring. Afraid that others may duplicate his breeding process, Y went to the IPO to have it patented.
Are the above qualified to be granted patents?
1)No, X cannot secure a patent for his basketball strategy. The law excludes rules & methods of playing games, among others, from patent protection
2)No, Y cannot also secure a patent because the law excludes animal breeds , among others, from patent protection

*X is employed in the government. During his spare time, he oftentimes used the available materials & facilities of his department to develop & put into practical use his invention. Who, as between, X & the government, is entitled to the patent on the invention?
W owns a patent. The patent belongs to the employee if the inventive activity is not part of his regular duties even if he uses the time, facilities & materials of the employer. The government (employer) would have no more right to appropriate such property than any other proprietor would have.
In other cases, 1 the person who commissions the work shall own the patent, unless otherwise provided in the contract & 2 the employer owns the patent if the invention is the result of the employee’s regularly-assigned duties unless there is an agreement to the contrary (Sec 30 IPC) ‘

*In his patent application, X limited the disclosure of his invention by w/holding most of its important descriptions & specifications for fear that someone might copy & practice his creation.
1)What are the 2 tests in determining whether or not a patent application has passed the disclosure requirement/
The 2 test relative to the disclosure requirement of a patent application are:
	1.best mode test- determining whether the inventor both knew of & concealed a netter mode of carrying out the claimed invention than what was set forth in the specification & (alam at tinago)
	2.enabling test- determining whether the specification supplies the novel aspects of the invention so as to enable one skilled in the art to practice it. (supplies)
2)The purpose of the law in requiring the patentee to describe clearly & completely his invention is 2 fold:
	1,to secure him all the protection he is entitled &
	2.to apprise the public of what is still open for them to appropriate
It is clear that the specification given by X in his patent application does not pass these 2 test. Therefore, his application for patent will not be granted.

*X filed an application for patent on June 1, 2000. Several years later he made some obvious modifications to his invention & filed another application for patent on the modified version on January 2, 2007. Until when shall X exercise exclusive exploitation of his patent rights?
X shall have exclusive rights over his patented invention until June 1, 2020 because the term of a patent is 20 years from the filing (even though not approved) date of the application. After this term, the invention belongs to the public domain & may be appropriated by others.
The act of X in filing another application for the same invention w/ obvious modifications is called “double patenting”. This practice is prohibited in order to prevent an inventor from extending the term of exclusivity by the subsequent patenting of variations that are not patentably distinct from the first-patented invention. (not again but second)

*X filed his application for patent w/ the BOP on April 1, 2007.
1)when will the patent be granted to X, assuming that his invention meets all the requirements? (IPO Office)
The patent application of X will be published in the IPO Gazette after the expiration of 18 months from the filing date, or in this case, after October 1, 2008. W/in 6 months from publication date, X must file a written request for examination: 1) to determine if the application meets all the requirements & 2) if the dues are paid on time. Thereafter, the patent shall be granted to X & his patent will take effect on the date of publication of the grant in the IPO Gazette.

2.Assuming that the application is published in the IPO Gazette on December 1, 2009, when will X start to pay his annual dues? X shall pay the annual dues upon the expiration of 4 years from the date of publication of the application or on December 1, 2013, & every year thereafter.

3.Failure to pay the annual dues will mean the withdrawal of the application, or the lapse of the patent, on the day ff the expiration of the period w/in w/c the annual dues were due. But a 6-month grace period may be granted upon payment of a surcharge.

*What are the grounds for cancellation of patent?
Any interested person may file a verified petition for the cancellation of a patent before the Bureau of Legal Affairs on any of the ff grounds:
1)that what was claimed as an invention is not new or patentable
2)that the patent does not disclose the invention in a manner sufficiently clear & complete for it to be carried out by any person skilled in the art or (full disclosure requirement is not disclosed)
3)that the patent is contrary to public order or morality (Sec 61 IPC)

*x is the true & actual inventor, filed a case in court for having been deprived of the patent by Z through fraudulent means. These facts were all proven in the trial. If you were the judge, how would you award the plaintiff?
If I were the judge, I would ask X what would he prefer: substitution as the patentee or cancellation of the patent. If he opts for substitution as the patentee he will no longer be entitled to damages. On the other hand, if he opts for cancellation of the patent, he may be entitled to damages if warranted under the circumstances (Sec 68 IPC)

*What is the concept of infringement of patent?
Patent infringement may consist of any of the ff violations to the owner’s tight of exploitation of his invention:
1)the making using offering for sale selling or importing a patented product or a product obtained directly or indirectly from a patented process or (economic rights)
2)the using of a patented process w/o the authorization of the patentee
The principal rule of patent infringement states that an infringing product or process includes each & every essential element of the claim. Stated otherwise, the omission of an essential element of a patent claim avoids infringement. Only patentees & assignees of patent rights may bring an action for infringement. Mere licenses (not an owner thus, cannot ask for damages nor an infringement suit) of patents may not sue for infringement, but they may attack the validity of a patent.

Doctrine of equivalents- dictates that where 2 devices do the same work in substantially the same way & accomplish substantially the same result, they are the same, even though they differ in name from or shape. Application of this doctrine in determining infringement may work in favor of the patentee but sometimes it may be used against him	Doctrine of inequitable conduct- may be raised against the patent holder on the ground that he failed to disclose material information or submitted false material information, w/ intent to deceive.

*What are the limitations to patent rights?
The patent owner has no right to prevent 3rd parties from performing acts, w/o his authorization, under the ff circumstances:
1)Using a patented product after it has been put on the market by its owner
2)Where the act is done privately & on a non-commercial scale for non-commercial purposes, provided it does not significantly prejudice the economic interest of the owner
3)where the act is exclusively for the purpose of experiments that relate to the subject matter of the patented invention
4)where the act consists of the preparation for individual cases, in a pharmacy or by a medical professional, of a medicine in accordance w/ a medical prescription or acts concerning medicine so prepared &
5)where the invention is used in any ship, vessel aircraft or land vehicle of another country entering the territory of the Philippines, temporarily or accidentally; provide, that such invention is used exclusively for its needs & not used for the manufacturing of anything to be sold w/in the Philippines (Sec 72 IPC)

*Cite instances where the government may exploit an invention even w/o the consent of the patent owner.
The government agency or 3rd persons authorized by the government may exploit a patented invention even w/o the consent of the owner, where:
1)public interest so requires (national security, nutrition, health or development of other sectors) &
2)manner of exploitation by patent owner is anti-competitive as determined by a judicial or administrative body (sec 74 IPC)
(not promoting a healthy a market)

*State the grounds for compulsory licensing of patent.
The Director of Legal Affairs may grant a license to exploit a patented invention, even w/o the agreement of the patent owner, in favor of any person who has shown his capability to exploit the invention, under any of the ff circumstances:
1)national emergency or other circumstances of extreme urgency (guns & epidemic tablets)
2)where public interest so requires
3)where the manner of exploitation by the patent owner has been found to be anti-competitive by a judicial or administrative body
4)in case of public non-commercial use of the patent by the patentee, w/o satisfactory reason or
5)if the patented invention is not being worked in the Philippines on a commercial scale, although capable of being worked, w/o satisfactory reason (Sec 93 IPC)
Note: compulsory license based on grounds 1-4  can be applied anytime after the grant of the patent, but if based on ground 5, compulsory license cannot be applied for before the expiration of 4 years from the filing date of the application or 3 years from the date of the patent, whichever expires last (Sec 94 IPC)
(NB: 1-4 is anytime)
*The director of legal affairs granted a compulsory license to Z on the ground that X, the patent owner, failed to work on his invention in the Philippines on a commercial scale w/o satisfactory reason. X appealed to the director general of the IPO & made string objections to the granting of license on his patent to Z. He submitted evidence of purchase orders & sales invoices of importation of his products to Malaysia. But X could not prove any commercial transaction of his product in our country. If you were the director general of the IPO, how would you resolve X’s appeal?
I would resolve the appeal in favor of X. The law on patents considers the importation of the patented article as an act of working or using the patent. Therefore, absent any other ground for compulsory licensing, the director of legal affairs erred in granting a compulsory license on X’s patented invention. (Importation is already exploitation)

Utility model- refers to an invention in the mechanical field. Its objects are devices or useful objects. AN invention qualifies for registration as a utility model if it is new & industrially applicable. Its registration expires, w/o any renewal, at the end of the 7th year after the filing date of the application.	Industrial designs- is any composition of lines or colors or any 3- dimensional form, whether or not associated w/ lines or colors: provided, that such composition of form gives a special appearance (ornamental) to & can serve a pattern for an industrial product or handicraft. Only industrial designs that are new or original are given protection, while those that are dictated essentially by technical or functional considerations to obtain a technical result or those that are contrary to public order health or morals are not protected. Its registration expires at the end of the 5th year after the filing date of the application, renewable for not more than 2 consecutive periods of 5 years each.
TRADEMARKS SERVICE MARKS & TRADE NAMES
*What are trademarks service marks & trade names?
A trademark is a symbol sign or name used to mark a product in order to distinguish it from other products. If used to distinguish a service rendered from other services, it is a service mark. And if used to distinguish an enterprise from other enterprises, it is a trade name.

*Is registration sufficient to confer rights of ownership over a mark?
No, registration of a mark is not sufficient. It must be coupled w/ actual use in order to perfect the trademaek or tradename right. Actual use need not be prior to registration because the IPC has already dispensed w/ the “prior-use-of – the-mark” requirement before registration adopted by the old Trademark Law. However, the present law still requires the registratnt tp declare its actual use w/ evidence w/in 3 years from the filing date of the application, & another declaration of actual use or non-use (w/ reasons) w/in 1 year from the 5th anniversary of the its registration date: otheriwsse, the mark may be removed from the Register of Marks.
(Abandonment= permanent+voluntary to warrant cancellation of the mark)

*Who is entitled to the exclusive use of the mark in each of the ff cases?
1)the trademark “gallus” for a perfume has been used by X in marketing his product for a good number of years now w/o registration. Y, on the other hand, was able to register the trademark “gallus” for his cologne product that is to be manufactured In the near future & is not yet available in the market.
X has better right over the trademark “gallus”. Actual use in the business is a pre-requisite to the acquisition of the right of ownership over the mark. X may file a petition for the cancellation of registration of Y’s trademark.

2)same facts under 1, except that both X & Y applied for registration of the trademark & both have been using the same trademark in the selling of their products in the Philippines.
Since X & Y are both using their trademarks in the country, priority of use becomes the controlling factor to determine who is entitled to the mark. In other words, the applicant who can establish earlier continuous use of the trademark shall be preferred.

3)same facts under 2, except that X sells his products in the Philippines, while Y only sells his products in Japan.
X shall be preferred over Y. Actual use must be in the Philippines since foreign use confers no trademark right in our country, under the nationality principle adopted by our trademark law.

*A mark cannot be registered:
1)It consists of immoral, deceptive, or scandalous matter
2)it consists of the flag or insignia of a country
3)it consists of the name, portrait, or signature of:
      a)a living person, except by his written consent, or
      b)a deceased President of the Philippines during the life of his widow, except by her written consent
4)it is identical w/ another registered mark or mark with an earlier filing or priority date, in respect of:
      a)the same goods or services
      b)closely-related goods or services
      c)near resemblance with another mark likely to deceive or likely to cause confusion
5)it is identical with, or confusingly similar to, or constitutes a translation of, an internationally and locally well-known mark, whether or not registered in the Philippines
6)it is identical with, or confusingly similar to, or constitutes a translation of, an internationally and locally well-known mark registered in the Philippines with respect to non-competing goods or services, provided:
      a)its use would indicate a connection between the two marks; and
      b)the interest of the owner of registered mark are likely to be damaged by such use.
It is generic or descriptive , unless;
      a)it is used in an arbitrary or fanciful manner- it does not describe  or relate to the product (ex. :Puma” for rubber shoes- although it is the name for a big, ferocious cat, its use to rubber shoes is arbitrary and fanciful:
     b)it acquired a secondary meaning- under the doctrine of secondary meaning, a mark or trade name w/c is otherwise incapable of being registered ma become distinctive of the producer’s goods, services or business through exclusive and continuous use for at least 5 years before the date on which the claim of distinctiveness is made (ex. “Ang Tibay” for shoes- although it is descriptive of durability but it was used ever since pre- World war II);
      c)it is part of a composite mark- registration is subject to the limitation that the generic or descriptive word or words cannot be exclusively appropriated (“20th Century Nylon Shirts Factory” as trade name- registration is allowed but both “nylon” & “shirts factory” have to be disclaimed for being descriptive): and
      d)part of a coined mark-  the generic or descriptive element of the word is lost once it is used as part of a coined word (ex. “Salonpas”, even if “pas” is a descriptive word for medicinal plaster; or “Atussin”, even if “Tussin” actually means cough).

*X filed an application for the registration of the trademark “Instatshyn” for his liquid floor wax products. If you were the Trademark Examiner, would you register the trademark?
I would deny registration of the trademark “Instashyn” for liquid floor wax. The corrupton or contraction of descriptive words will not make the word or phrase non-descriptive of the products on w/c it is applied. “Insta” and ‘Shyn” are simply descriptive words that mean “instant” and “shine”.

*What is the legal effect of non-use or abandonment of a mark or trade name?
A mark or trade name is required by law to be used in commerce w/in 3 years from the filing of application for registration. Failure to do so will mean denial or cancellation of the registration. “Use” does not simply mean plans for manufacture or advertisements. There must be actual use in commerce such as sale of the goods. In the case of abandonment, the same must be permanent and voluntary to warrant cancellation.

*Will a mark or trade name be removed from the Registry of Trademarks if non-use thereof is due to
1)lack of  funds? Yes the mark or trade name will be cancelled. The law specifically provides that lack of funds shall not be an excuse for non-use of a mark. (Sec 152.IPC)

2)Government restriction order? No, the mark or trade name will not be deemed abandoned. Abandonment must not only be permanent, but it must also be voluntary. Non-use of a mark due to a government order restricting its use is involuntary on the part of the owner and, therefore, not the kind of abandonment contemplated by our trademark law.

*What tests are available to ascertain whether 2 marks or trade name are likely to be confusingly similar?
1)Dominancy test- applicable to composite marks: the dominant feature is determined and compared with other composite mark to see if they are likely to be confusingly similar (Planters Cocktail Peanuts & Phil Planters Cordial Peanuts- their dominant feature is Planters & so registration is denied to the Phil Nut Industry, Inc., the junior user (Phil Nut Industry, Inc vs. Standard Brands, Inc)

2)Holistic test- whether or not the purchaser is deceived is guided by his first impression of the mark in its entirety, not just its dominant feature (Ex. Both labels are colored green & yellow, word “catsup” in both bottles is printed in white, & style of print/letter is the same- Sunshine label is a colorable imitation of Del Monte trademark (Del Monte Corp vs CA)

3)Test from buyer’s point view- several factors come into play in determining whether or not 2 marks are likely to be confusingly similar: the age , training, & education of purchaser, nature & cost of article, & conditions under w/c it is purchased, expensive articles like cars & jewelry are normally bought after careful investigation as compared to low-priced mass products like cooking & laundry items w/c are bought w/o much scrutiny (ex. Purchaser of pants is normally knowledgeable w/ his preferences; jeans are not ordinary household items like catsup soy sauce or soap, w/c are of nominal cost; maong lee is not confusingly similar to lee- (Emerald Garden Mfg Corp vs CA)

*The ff marks were held by the SC to be confusingly similar:
1)”Lux” for soap vs. “Lux” for hair pomade (Teodoro Kalaw Ng Khe vs Lever Bros Co)
2)”X-7” for perfume, lipstick & nail polish vs “X-7” for laundry soap (Chua Che vs. Phil. Patent Office)
3)”Ang Tibay” for shoes & slippers vs “Ang Tibay” for pants & shirts (Ang vs Teodoro)
4)”Ambisco” for candy vs “Nabisco” for bakery products (Operators Inc vs Director of Patents)
5)”Selecta” for milk vs “Selecta” for biscuits (Arce Sons & Co vs Selecta Biscuits Co, Inc)
6)”Master Roast” for coffee vs “Flavor Master” also for coffee (Societe de Produits Nestle, S.A vs CA)
7)”Big Mac” for hamburger sandwiches vs. “Big Mak” for low-priced hamburger sandwiches (Mc Donalds Corporation vs LC Big Mak Burger Inc)

But the ff marks were held not confusingly similar:
1)”Alaska” for milk vs “Alacta” for powdered half-skim milk (Mead Johnson & Co. vs NVJ Van Dorp, Inc)
2)”Pertusin” for cough medicine vs “Atusin” for cough medicine (Etepha vs dir of Patents)
3)”Victorias” with diamond design for sugar vs “Valentine” with diamond design also for sugar (Victorias Milling Co Inc vs Ong Su)
4)”Fruit of the Loom” for women’s panties (fruit of the loom Inc vs Ca)
5)SMC’s “San Miguel Pale Pilsen” for beer vs ABI’s Beer Pale Pilsen” also for beer (Asia Brewery Inc vs CA)
6)”Brut” for articles vs “Brut” for briefs (Faberge Inc vs IAC)
7)”Canon” for sandals vs “Canon” for paint, chemical products, toner, & dye stuff (Canon Kabushiki Kansha vs CA)

*What are the basic steps involved in the registration of trademarks, service marks, & trade names?
1)The applicant files his application w/ the Bureau of Trademarks together w/ the labels , drawings & facsimiles;
2)The application is given a filing date upon its completion & payment of the required fee;
3)Examination proceedings are conducted between the applicant & the Trademark Examiner;
4)If favorable, the mark will be published in the IPO Gazette for any possible opposition thereto;
5)Absent any opposition, the certificate of registration will be issued

*What is meant by divisional applications in relation to application marks?
Divisional applications refer to the 2/more applications resulting from the division or distribution of several goods or services contained in the initial application.

*The certificate of registration of mark lasts for 10 years, renewable for a period of 10 years each, provided that:
1)A declaration of actual use w/ evidence thereof shall filed w/in the first three years from the filing date of the application; &
2)A declaration of actual use w/ evidence thereof, or of non-use w/ valid reasons , shall be filed w/in 1 year from the 5th anniversary of the registration date

*The ff benefits are derived from the registration of marks & trade names:
1)The certififcate of registration serves as prima facie evidence of the validity of registration & ownership of the mark
2)It is a pre-requisite to the filing of civil & criminal actions for infringement (except trade names) &
3)Its recordal in the Bureau of Customs will be made the basis of refusing entry of any imported goods that may infringe the registered mark

*What is stamped or marked container? It refers to any container of goods on w/c a distinctive mark is given or molded that cannot be removed or deleted from such container, such as stamped or marked bottles, boxes, casks, kegs, barrels, containers of compressed gasses & other such containers. The rules on trademark registration apply to stamped or marked containers

*Does the sale of beverages contained in marked bottles also include the sale of such bottles?
Yes it has been held that, unless the registered owner specifically stipulates otherwise w/ the buyer, the sale of beverages includes the sale of the bottles or containers. A sales invoice that has been issued by the registered manufacturer to its wholesalers containing a stipulation that the sale does not include the bottle or containers does not bind 3dr parties   who are not privies thereto. Therefore, the buyer owns the bottles & can exercise his rights of ownership thereto, save those that may violate the original owner’s registered rights to the name or other mark of ownership (Distillera Washington Inc vs CA)
Furthermore, such bottles or containers may be used by any person to store sis, bagoong, patis & similar native products (Sec 6, RA No. 623). The underlying reason for this permission is to provide assistance & incentive to the backyard, cottage & small-scale manufacturers of indigenous native products such as patis, sis, & toyo who do not have the needed capital to buy brand new bottles as containers (Twin Ace Holding Corp vs CA)

*X filed a petition to cancel the registration of Y’s trademark. While the cancellation proceedings were still pending before the Bureau of Legal Affairs, X filed an action for unfair competition against Y in the regular court. Y moved to dismiss the case on the ground that the cancellation proceedings before the Bureau constitute a prejudicial question to the court case. Will the action for unfair competition be dismissed? No, the unfair competition case before the court will not be dismissed. The law provides that the earlier filing of a petition to cancel the mark w/ the Bureau of Legal Affairs shall not constitute a prejudicial question that must be resolved before an action to enforce the rights to the same registered mark may be decided, unless the rule against forum shopping in the Rules of Court is violated (Sec 151 IPC)

Infringement of trademark is the unauthorized use of a trademark;	whereas unfair competition is the passing off of one’s goods as those of another
Fraudulent intent is unnecessary	Fraudulent intent is essential
(except trade name) , prior registration is a prerequisite to the action	Registration is not necessary (Del Monte Corp vs CA)

*X has registered his trademark w/ the Bureau of Trademarks of the IPO. 2 years after the registration of X’s trademark, a confusingly similar trademark is used by Y in the local market, w/o the used at all up to this time. As a result, Y filed a petition for cancellation of X’s trademark before the Bureau of Legal Affairs. X countered by filing an infringement suit against Y in the court of justice. Decide the 2 cases at hand w/ reasons?
1)The cancellation proceedings before the bureau of Legal Affairs of the IPO will prosper. Registration alone does not vest ownership over a mark. It is the actual use thereof that prefects its ownership. As between the actual use of the mark w/o registration & the registration of the mark w/o actual use thereof, the former prevails over the latter. Of course, X has a period of 3 years from the filing of his application to declare actual use of the mark. Unfortunately, this period has been pre-empted by Y’s actual use of his mark. Y therefore, can suceesfully file a petition for cancellation of X’s mark w/in 5 years from its date of registration based on his (Y’s) superior right.

2)The infringement suit before the court will fail. Registration alone, absent the actual use of the mark in the country, is not sufficient to maintain an infringement suit. The same will not prosper because there is, in fact, no possibility for a mark to cause confusion or to deceive others when the registrant has not even used it at all. To reiterate, it is actual use that perfects a trademark right.                                                        COPYRIGHTS
Copyright is the protection afforded by law to the author of an original intellectual creation (arts, literally). The element of originality does not mean novelty. All that is required to be eligible for protection is for the author to contribute not just mere trivial violation but something that can appropriately be called his own. (Objective) While the author is protected of his right over his expression, copyright goes beyond by encouraging others to build freely upon the ideas & expression conveyed by his work in order to promote the progress the progress of science & useful arts.
The word “author” is used in a broad sense to include not only writers but also creators of computer programs, choreographers, photographers, sculptors, songwriters & other creators of original intellectual works. The work of an author is protected from the moment of its creation.

*What is meant by the “sweat of the brow doctrine” in relation to factual compilations?
The sine qua non of copyright is originality. In the case of factual compilation, copyright protection extends only to the original selection or arrangement of facts, but not to the facts themselves. The “sweat of the brow doctrine”’ however, has a flaw because of its tendency to provide protection to facts or ideas simply because they result from the “sweat” of the complier of factual data.(Facts & ideas are not copyrightable because for everybody except the manner of expression copyrightable)

*X , Inc is a local publisher specializing in region wide telephone directories. It copied the list of subscribers w/ their addresses found in Y, Inc.’s nationwide directory & incorporated the said data on its own directory. X Inc then sued Y Inc for infringement of its copyrighted directory. Will the case prosper?
No, the case will prosper not prosper. The white pages in Y, Inc’s directory do nothing more than list its subscribers in alphabetical order. There is nothing creative about arranging names in alphabetical order since this is an age-old practice. Y, Inc’s white pages lack the requisite originality & cannot, just because of its “sweat of the brow,” constitute infringement

*X is a ventriloquist w/ a dummy called “Ngek-ngek.” He was able to obtain a copyright for his quite famous & often used lines “Ah, huh, ah, huh, that’s the way…” After several years, an advertisement of Z company’s lotion product was aired on television w/ a famous & sexy actress saying the lines “Ah, huh, ah, that’s the way, baby…” X filed an infringement suit w/ damages against Z Company for violation of his exclusive right ti use such lines. Will the suit prosper?
No, the suit will not prosper. The phrase in question must possess at least some minimal degree of creativity. It fails to evince the requisite degree of originality. It is therefore, a short expression that is uncopyrightable (short expressions are not copyrightable)

*What literally & artistic works are considered original intellectual creations that are protected by copyright from the moment of their creation?
1)Books, pamphlets, articles & other writings;
2)Periodicals & newspapers;
3)Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in writing or other material form;
4)letters- ex. Love letters
5)dramatic or dramatic-musical compositions (opera), choreographic works (mantomine)or entertainment in dumb shows;
6)Musical compositions, w/ or w/o words- rhythm, harmony, melody
7)works of art- paintings, billboards, illustrative catalogs, greeting cards
8)works of applied art- architectural plans but limited to plan but not the structure
9) Illustrations, maps, plans, sketches, charts & 3 dimensional works;
10)Drawings or plastic works of a scientific or technical character
11)Photographic works
12)audiovisual & cinematographic works
13)Pictorial illustrations & advertisements
14)Computer programs &
15)Other literary, scholarly, scientific & artistic works (sec 172 IPC)

*The ff derivative works are protected as new works under our copyright law: Original vs  Derivative (modification)
Dramatizations, translations, adaptations, abridgements, & other alterations of literary or artistic works; &	Collections of literary, scholarly, or artistic works, & compilations of data & other material w/c are original by reason of the selection & coordination or arrangement of their contents (sec 173 IPC)

*X published several volumes of children’s books adapted from classic stories such as Robin Hood, Black Beauty, Oliver Twists & other classic stories of all time. X used simplified language & colorful illustrations so that his books would appeal to youngsters. He then applied for copyright over these works. Is X entitled to copyright over the said books?
Yes, X is entitled to copyright. His books are considered new under the copyright law & therefore entitled to copyright protection. Adaptations of works that belong to the public domain, such as the stores mentioned, may pass the test of originality. It must be stressed, however, that derivative works out of copyrighted original works need permission or license from the owner of such copyrighted original works.

*X entertainment Co. owns syndicate television programs & Z Network owns television stations. X entertainment Co. licensed Z Network to air a particular program called “Kapitana Barbella”. Due to Z Network’s failure to update its unpaid dues, X entertainment Co., suspended its right over the said program. However, Z Network continued to air the remaining 20 episodes of the series. Each episode was produced independently & has its own plot; w/c was individually copyrighted. X entertainment filed 20 separate acts of infringement, one for each unauthorized program aired, w/ damages of P1M for each episode aired totaling P2 M. If you were the judge, how will you decide the case assuming all the facts given were proved?
If I were the judge, I would decide in favor of X Entertainment Co. Although the exclusive right of the copyright owner to perform his work had been transferred by virtue of licensing agreement, such right was suspended due to non-payment of dues. Therefore, Z Network is guilty of infringement when it aired the programs. Furthermore, I will award damages per episode aired because each episode can stand on its own, having an independent plot, & was individually copyrighted.

*X, a sculptor, created a work of art in the form of human figures using a clay model technique. The statuettes were then registered for copyright. Thereafter, X sold these statuettes both as lamp bases & as statuettes. Y copied the statuettes of X, incorporated them in lamps & sold them to the public. In his defense against infringement, Y contended that he is engaged in the manufacture of lamp bases w/c have purely utilitarian functions  & cannot be considered as works of art but instead belong to the field of patents. Is Y’s defense tenable?
Y’s defense is untenable. Although copyright protection does not extend to “useful articles”, a sculptural work does not lose its copyrightability even if it has a utilitarian aspect so long as the sculptural features can stand on their own. When the sculptural features; if they are not separable, the work is not copyrightable. In the case at hand, the statuettes’ expressive elements can independently stand on their own as works of applied art, other than being lamp base. X may not bar others from the idea of using statuettes of human figures in table lamps, but he may prevent others like Y from using copies of his statuettes. Furthermore, on the argument that the statuettes properly belong to the field of patents because of their utilitarian functions, it was held that the patentability of the statuettes properly belong to the field of patents because of their utilitarian functions, it was held unfitted, does not bar copyright as works of art

*The ff are matters not given copyright protection:
1)Any idea, procedure, system, method or operation, concept, principle, discovery, or mer data as such, even if expressed, explained, illustrated or embodied in a work:
2)News of the day & mere items of press information:
3)Any official text of a legislative, administrative or legal nature, as well as any official translation thereof, &:
4)Any work of the Government of the Philippines (Sec 175 IPC)

*The exclusive rights (economic rights) of the owner over his copyrighted work are the ff:
1)The right to reproduce
2)the right to prepare derivative works
3)the right to distribute
4)the right of rental (TRIPS Agreement)
5)The right to display
6) the right to perform &
7)the right to transmit (WIPO Treaty)

*X Publishing Company owns the copyright of fiction book whose copies were distributed to its wholesale dealers. Y Bookstore purchased 500 copies of the book at a discount from 1 wholesale dealer of X Publishing Company & sells them to the public at a retail price of P150 per copy. But on first page of every copy of the book is a notice that reads: “The price of this book at retail is P200 net. No dealer is licensed to sell it at a lower price, & the sale thereof at a lower price will be treated as an infringement of the copyright- X Publishing Company”. X Publishing Company filed an infringement suit against Y bookstore, claiming that defendant infringed upon its distribution right under the copyright law & prayed for an injunction to restrain defendant from further selling the book at only P150 per copy. Will the suit prosper?
No the suit will not prosper. Under the first sale doctrine, the copyright holder has the exclusive right to control the first public distribution of the original & each copy of the work by sale or other forms of transfer of ownership, but this right is exhausted after such first sale or transfer of the ownership. X Publishing Company, in the exercise of its wholesalers, but not the subsequent sale from the wholesaler to Y Bookstore. To do otherwise would be exercising a right included in the terms of the statute

*Does the first sale doctrine apply to digital works? No, the first sale doctrine does not apply to digital works. There is no tangible medium in digital works & the vendee is only given the right to use.

*X & Y are collaborating authors of a novel. X’s contribution consists in the creation of the story plot: a beautiful & sexy woman was stranded on a remote island w/ only the animals thereon as her companions. Y’s contribution consists of the woman’s in depth characterization, the unusual tameness of the wild animal towards her, & their sweet-&-sour relationships w/ each other. X & Y intend to be the co-authors of their work. For purposes of copyrightability, will X & Y become joint authors under the:
1)de minimis test of Professor Nimmer? Professor Nimmer’s de minimis test contends that 2 collaborating author will become joint authors of their work provided that each of them contributions more than just a line or word to the work. Consequently, X & Y will become joint authors of the novel. This test is not favored by US courts because of its tendency to afford protection to uncopyrightability plot ideas contributed by the author. (plot is an idea not copyrightable)

2)copyrightability test of Professor Goldstein? Professor Goldstein’s copyrightability test maintains that an author will not become a joint author will not become a joint author of the work unless he contributes an original expression on that is proper subject of copyright protection. X’s contribution in the novel, consisting of the story plot, is an idea that is not w/in the realm of copyright protection. Therefore, X will not become a joint author to the novel created by Y

*What acts do not constitute infringement of copyright (limitations on copyright)?
1)private performance of the work
2)making quotations from published works, provided they are compatible w/ fair use
3)reproduction or communication to the public by mass media
4)inclusion of work by way of illustration for teaching purposes
5)ephemeral (short time) recordings (for temporary purposes) by a broadcasting organization
6)use of a work by the government, National Library, or educational, scientific or professional institutions, provided use is in the public interest & compatible w/ fair use
7)public performance of a work where no admission fee is charged & for charitable or educational purpose only
8)public display of a work where the work has been published or original copy displayed has been sold or transferred by the author &
9)use of a work fro any judicial proceedings or for giving of professional advice by a legal practitioner
The above uses should not conflict w/ the normal exploitation of the work & should not unreasonably prejudice the right holder’s legitimate interests (Sec 184 IPC)

*what factors are to be considered in determining whether or not there is “fair use” of a copyrighted work?
1)Purpose & character of the use- if the use is for commercial or profit purposes, it is less likely to be fair use; the use of works that are transformative has a greater chance of being fair use, than the use of works that are merely copied from the original (EDUCATIONAL FAIR USE
2)Nature of the copyrighted work- the use of copyrighted work that is substantially creative & original will not likely result into fair use; ) but if they copyrighted work is not available through normal channels, the reproduction thereof may be more justified that those that are already available to the public; factual works may be used freely than works of fiction or fantasy (LEVEL OF ACTIVITY)
3)Amount & substantiality of the portion used- while total reproduction of the copyrighted work may negate fair use, copying of only a small portion thereof may still not be fair use when the material copied is the “heart” of the copyrighted work (if a chapter but the heart? Yes, infringement
4)effect of use upon the potential market of the copyrighted work- a commercial use will most likely be detrimental to the potential market of the copyrighted work rather than a non commercial use (nurse buying a law book? Not important factor)

*X copier ltd is a copy shop that renders photocopy services to the public especially to students of a nearby university. It photocopied the materials given by some professors of the university & bound them as course compilations. These compilations (known as course packs) contained selected excerpts from various copyrighted materials that were then used by the professors in the courses they taught. These students mat either buy these compilations from X copier ltd, or do their own research at the library. It was undisputed that the excerpts copied were very significant portions of the books, & that the professors would not recommend to their students to buy the copyrighted books because only certain portions thereof were needed for class discussion & the cost of these books would not justify buying them. Y publishing house sued X copier ltd for infringement of several excerpts in the compilations that were copied from their copyrighted books.
Is the defense of “fair use” available to X copier ltd in order to defeat the infringement charge? Relate your brief discussion on the 4 factors of “fair use”.
1) Purpose & character of the use: the 1st factor concerns the transformative value of the compilations in question. Obviously, they have little transformative value since the professors merely selected materials that are relevant to their courses. However the inclusion of copyrighted works in a publication by way of illustration for teaching purposes is an exception or limitation on copyright. Another element to be considered is the purpose of the use. Although X copier ltd unarguably derives profit from the compilations, the ultimate use thereof by the students for classroom purposes far outweighs the commercial endeavor of X copier ltd. Therefore, the 1st factor favors a finding of fair use.
2) nature of the copyrighted work- the copyrighted books may certainly be substantially creative & contain original analysis & creative theories of their authors. Therefore, the 2nd factor negates a finding of fair use
3)the 3rd factor relates to the amount & substantiality of the portion used. Although the entirety of the books was not copied, yet the copying of significant portions thereof w/c are the “heart” of the copyrighted books would amount to substantial copying. Therefore, the 3rd factor negates the finding of fair use
4)the 4th factor w/c is the most crucial & most important of the 4 factors, is the effect of the use upon the potential market of the copyrighted books. There can be no possible harm to the potential market of the copyrighted books because the students would not buy them even w/o the compilations. These students then cannot be said to be the potential customers of the copyrighted books. Therefore, the 4th factor favors a finding of fair use

In conclusion, taking into consideration the four factors, a finding of fair use will absolve X copier ltd from the infringement

*What are the moral rights of the author of a work? In addition to the economic rights shall have the ff rights:
1)to have the authorship of his work attributed to him
2)to make alterations of his work
3)to object any distortion, mutilation, modification, or derogatory action in relation to his work &
4)to restrain the use of his name in any work that is not his own or a distorted version of his work (Sec 193 IPC)

*What is the term of the copyrighted work?
GR: During the life of the author & for 50 years after his death. E:
1)joint authorship- during the life of the last surviving author, & for  50 years after his death
2)anonymous or pseudonymous works- 50 years from the 1st lawful publication; provided, if the author’s identity is reveled or is no longer in doubt, the general rule or exception (1) shall apply, as the case may be
3)works of applied art- 25 years from date of making &
4)audio-visual works- 50 years from date of publication or if unpublished from date of making (Sec 123 IPC)

*What are the elements of the copyright infringement?
1)valid copyright of the work infringed &
2)copying of protected elements of the work (proven by either evidence of direct copying or showing of substantial similarity (Sec 226 IPC)

*what is the prescriptive period for recovering damages under the IPC?
No damages may be recovered under the IPC after 4 years from the time the cause of action accrues (Sec 226 IPC)

*X, a well known artist, designed a Valentine’s Day greeting card depicting a boy & a girl looking each other in a very sensual & expressive way in an intimate setting that is adorned by lovely flowers & a quarter moon above. X’s name appears at the bottom part of the card. X was able to sell 5T copies of the card in the Philippines & in the neighboring Asian countries as well. At the early part of the next succeeding year, X was surprised to see an exact replica of his card being sold in the local market by Y. X then sued Y for infringement of copyright. Y put up the defense that X never registered his copyright & therefore has no basis for his infringement charges. Is Y’s defense tenable? (Direct infringement vs contributory infringement)
No, the defense of Y is not tenable. Artistic works, just like literary works & derivative works are protected from the moment of their creation. Registration of copyright is not a condition sine qua non for enforcement of the author’s exclusive rights. Y infringed X’s right to reproduce & distribute his work.
(A COPYRIGHT IS PROTECTED FORM THE MOMENT OF CREATION & NOT FROM THE REGISTRY)
SPECIAL LAWS
THE CHATTEL MORTGAGE LAW (ACT 1508 IN REL. TO ARTS. 1484, 1485, 2140 AND 2141 OF THE CIVIL CODE)
1)What is the effect if a chattel mortgage contract does not contain the requisite affidavit in good faith or is not registered? When the chattel mortgage fails to have the affidavit of good faith or is not registered w/ the proper agency, the contract will not bind 3rd parties. But the contract remains valid as between the chattel mortgagor & the chattel mortgagee.

Ordinarily, registration is made in the Chattel Registry of the Register of Deeds where the property is located & where the mortgagor resides (in both places where different). However, where motor vehicles are involved, registration must also be made at the LTO, or where the motor vehicle is a public utility, also at the LTFRB. & where sea vessels are the subject of chattel mortgage, registration must also be made at the MARINA.

2)Strictly speaking, the house cannot be the subject of a chattel mortgage considering that it is a real property under the Civil Code. However, the Court in a case ruled that the parties are bound to the chattel mortgage contract executed by them under the doctrine of estoppels (Tumulad vs Vicencio)

*A chattel mortgage was constituted over equipment bolted to the floor in a factory. Later on, the mortgagor installed additional equipment in the factory. Later on, the mortgagor installed additional equipment in the factory. The mortgagee now contends that the additional equipment should be deemed included in the chattel mortgage because equipment is actually real property & the rule in real estate mortgage includes future improvements on the property. Is the mortgagee correct?
No, the mortgagee is not correct. Since the parties treated the equipment as chattels than as they are concerned they will be bound by the law on chattel mortgage & not by the law on real estate mortgage (Tsai vs CA)

*What is the so-called Recto Law under Article 1484 of the Civil Code?
In a contract of sale (not a loan) of personal property the price of w/c is payable in installments, the vendor may exercise any of the ff remedies:
1)exact fulfillment of the obligation, should the vendee fail to pay
2)cancel the sale, should the vendees failure to pay cover 2 or more installments or
3)foreclose the chattel mortgage on the thing sold if one has been constituted, should the vendee’s failure to pay cover 2 or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. (Restitution or notification/ sale by a straight term)
The remedies are alternative & are not to be exercised cumulatively or successively & the election of one is a waiver of the right to resort to the others. But, when the vendor has desisted from consummating the foreclosure sale because he is deemed it impractical to do so, such desistance has been held by the court to be timely, & he can still sue for specific performance (filinvest Credit Corp vs Phil Acetylene co, Inc)

*X obtained a loan for P100T from Z. As security, X executed a chattel mortgage, in due from & registered; on his car in favor of Z. X defaulted & so Z foreclosed the chattel mortgage. The car was sold at public auction for P70T. May Z recover the deficiency of P30T from X? Yes, Z may recover the deficiency from X. Recovery of deficiency after foreclosure of chattel mortgage is allowed, the only exception being the Recto Law. However, the Recto Law is not applicable here because the property mortgaged is not applicable here because the property mortgaged is not the subject of an installment sale.

*X purchased the truck of Z under the ff terms: P200T in cash & the whole balance of P500T payable in 3 months thereafter. A chattel mortgage was executed on the truck as security. When X defaulted on the balance, Z foreclosed the chattel mortgage & the public sale realized the amount of P400T. May Z recover the deficiency of P100T from X?
Yes, Z may recover the deficiency from X. A sale of personal property on straight-term, or partly in cash & partly in term to be paid in its totality at the time specified, is not a sale on installment as contemplated by the Recto Law (Levi Hermanos, Inc vs Gervacio)

*X purchased a motorbike from Z for P200T under the ff terms: P50T in cash & the balance of P150T in 10 equal monthly installments of P15T each. The motorbike was then made the subject of a chattel mortgage. X defaulted at the very first installment due. Z sued X for specific performance & the motorbike was subsequently attached & sold by way of an execution sale for P120T. Is Z entitled to a deficiency judgment & an alias writ of execution to satisfy the balance of P30T from X?
Yes, Z may recover the unpaid balance of P30T from X. It must be noted that Z opted for the remedy of specific performance & is therefore entitled to deficiency judgment.  The sale under execution does not amount to a foreclosure of mortgage.

*X purchased a diamond ring from Z for P150T payable in 10 equal monthly installments of P15T each. X executed a negotiable promissory note & a chattel mortgage in favor of Z. Z negotiated the instrument w/ recourse & assigned the chattel mortgage to Y. When X defaulted in 2 installments, the chattel mortgage was foreclosed & the ring was sold at public auction for P100T. Y sued Z for the balance but the latter denied liability on the go=round that under the Recto Law no deficiency was recoverable.
While it is true that there can be no recovery of any deficiency from the buyer (x) when the chattel mortgage upon the thing sold in installments is foreclosed, the Recto Law does not bar the assignee (y) from recovering from the seller-mortgage (Z) the assigned credit in full. The cause of action of Y is based on the promissory note negotiated w/ recourse.

*X purchased 2 vehicles from Z fro P2M under the ff terms: P200T in cash & the balance of P1.8M payable in 12 equal monthly installments. X executed a chattel mortgage on the vehicles in favor of Z. furthermore, Y (guarantor) executed a real estate mortgage on his land in the amount of P1.5M to secure the payment of X’s indebtedness. After X paid P300T on the installments he defaulted thereafter; & so the chattel mortgage was foreclosed & the vehicles were sold at public auction for P1M leaving an unpaid balance of P500T. Y then filed as action for the cancellation of the real estate mortgage. Will the action prosper?
Yes, the action will prosper. The Recto Law, when applicable, bars further recovery by the vendor of any unpaid balance of the price. Any agreement to the contrary is void. To allow Z to recover the deficiency from Y on the latter’s real estate mortgage will, in effect, give Y(guarantor) the right to recover  from X. This will indirectly subvert the protection given by the law to the vendee-mortgagor since X will then ultimately bear the payment of the deficiency.

*X obtained a P25T loan from Z Credit Corporation secured by a chattel mortgage contract provided that the mortgage shall also cover future debts. After X paid in full the P25T loan, he again obtained a new loan from Z Credit Corporation for P20T. This time X failed to pay & so Z Credit Corporation foreclosed the chattel mortgage. Is the foreclosure of the chattel mortgage proper?
No, Z Credit Corporation has no more chattel mortgage to foreclose because the chattel mortgage was already extinguished when the first debt was paid. A chattel mortgage was already extinguished when the first debt was paid. A chattel mortgage cannot secure a future debt since the requirement that the parties shall execute an affidavit stating that it is being constituted to secure the payment of a just & valid obligation will not be complied w/ by such an arrangement (Achme Shoe, Rubber & Plastic corporation vs CA)

*A dragnet clause or blanket mortgage clause specifically subsumes all debts of past or future origins thereby enabling the parties to provide continuous dealings w/o the inconvenience & expense of having to execute additional security documents from time to time. It is a valid & legal contract (Prudential Bank vs Alviar)
REAL ESTATE MORTGAGE LAW (ACT 3135, AS AMENDED BY RA 4118)
*X mortgaged his lot located in CDO City. The mortgaged stipulated that any action brought under the REM contract would be filed in the City of Manila. When X failed to pay, the lot was foreclosed extra-judicially & the foreclosure sale was he in CDO City. Is the foreclosure sale valid?
Yes, the foreclosure sale is valid. It was held in the place where the property is located. A petition for extra-judicial foreclosure is not in the nature of an action (Supina vs De la Rosa)

*Is the extra-judicial foreclosure of REM valid if:
1)the requirements on posting of notices in public places & publication of notice in a newspaper of general circulation are not complied w/? The extra-judicial foreclosure of a REM is void if the requirements on posting of notices in at least 3 public places & publication in a newspaper of general circulation once a week for 3 consecutive weeks are not complied w/ (Toledo vs Toledo)

2)the posting of notices is not made but the sale was published in a newspaper of general circulation? The foreclosure sale is valid even if no notice was posted but it was published in a newspaper of general circulation. Publication in a newspaper gives a greater probability of notice to the public than posting in public places (DBP vs Aguirre)

3)the foreclosure sale is postponed, & a new notice is published in a newspaper only once but no posting of notice in at least 3 public places is made? The foreclosure sale is not valid because neither of the 2 requirements on notice is complied w/ since publication was not made once for 3 consecutive weeks & no posting was made in public places (Masantol Rural Bank vs Ca)

4)the foreclosure sale is postponed, & a new notice is not made because of the waiver of the mortgagor? The foreclosure sale is void. The requirements on posting & publication of notice must be complied w/ & any waiver thereof by the mortgagor is against public policy. (DBP vs CA)

*Is foreclosure of REM, what rules are to be observed in case of any excess or deficiency in the proceeds of the foreclosure sale in relation to the debt? When the proceeds of the foreclosure sale turn out to be less than the debt, the mortgagee has the right to sue the debtor for the deficiency. But when the proceeds thereof turn out to be more than the debt, the excess or surplus shall be turned over to the mortgagor (State Investment House, Inc vs CA)

*Is the one-year redemption period interrupted by the filing of an action questioning the validity of the foreclosure sale? No, the one-year period is not interrupted by the filing of an action questioning the validity of the foreclosure sale (Union Bank of the Philippines Islands vs CA)

*What is the nature of a writ of possession in extra-judicial foreclosure sales? The court has the ministerial duty to issue a writ of possession upon petition of the buyer of the mortgaged property at the extra-judicial sale as long as the verified petition states the facts required by law w/o need of presentation of evidence. It cannot be denied on the ground that there is a pending action for annulment of the foreclosure or of the REM.

*X executed a REM over his residential land. After the foreclosure sale & the expiration of the redemption period, the mortgagee sold the lot to Z. Z then took possession of the lot w/o asking for a writ of possession. What is the remedy of X in the instant case?
Since Z took possession of the foreclosed property w/o asking for a writ of possession. X, may file an ejectment case against him (Joven vs CA)

*Y, mortgagee, purchased the property at the foreclosure sale after he foreclosed the REM extra-judicially. The property is in the possession of Z under a lease contract w/ the mortgagor. The lease contract has not yet expired. Is Y entitled to a writ of possession on the property even if there is a lease contract that has not yet expired, except when:
1)the lease contract is registered (notice to all properties)or
2)the mortgagee (Y) has knowledge of the existence & duration of the lease (tantamount to bad faith)(Ibasco vs Caguioa)

*X purchased the land subject of a foreclosure sale. When he filed a petition for the issuance of a writ of possession, Y & Z, present possessors on the land, intervened & objected on the ground that the subject property was sold to them before it was mortgaged. Will a writ of possession be issued?
No, a writ of possession shall not be issued in favor of X due to the claim of Y & Z that they had bought the property prior to the mortgage. To grant the writ of possession would result in dispossession w/o due process (China Banking Corporation vs Ordinario)

*What is the remedy in case the mortgagor, who failed to redeem the property, refuses to deliver or surrender the certificate of title on the land to the buyer of the foreclosure sale?
The court may order the Register of Deeds to register the final deed of sale in order for the buyer to consolidate his title (San Juan vs CA)                                                  TRUTH IN LENDING ACT (RA 3765)
*What is required to be disclosed by the TLA? It mandates that any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth the ff information:
1)the cash price or delivered price of the property or service to be acquired
2)the amounts, if any, to be credited as down payment &/or trade-in
3)the difference between the amounts in a & b
4)the itemized charges in connection w/ the transaction
5)the total amount to be financed
6)the finance charge expressed in terms of pesos & centavos
7)the percentage of the finance in relation to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance (Sec 4 TLA)

*What is meant by finance charge? Finance charge includes interest fees service charges discounts & such other charges incident to the extension of credit as the Monetary Board may by regulation prescribe (Sec 3 TLA)

*X pledged his gold ring at BCD Pawnshop. His ring was appraised & X was granted a loan for P10T less advance for interest for 1 month at 5% per month. At the expiration of 1 month X went to redeem his pawned ring bringing w/ him P10T. To his surprise, the cashier demanded from him the sum of P10, 120 consisting of the principal (P10T) 1% finance charge (P100) & a fixed charge of P20. An examination of the pawn ticket revealed that the 5% interest rate is written in acceptable size at the front, but the finance & service charges are vaguely written by paragraphs in very small print at the back of the pawn ticket. Do you think BCD Pawnshop violated any law?
BCD Pawnshop may have violated the TLA that categorically requires creditors to furnish a clear statement in writing to the debtor about the charges imposed in the transaction. The very small & vague printed stipulations on finance & service charges may have deprived X from actually knowing how much is his obligation is where the loan matures.
ANTI-MONEY LAUNDERING LAW (RA 9160, AS AMENDED BY RA 9194)
*What is the composition of the AMLA Council?
The AMLC is composed of the ff:
1)Governor of Bangko Sentral ng PIlipinas- chairman
2)Insurance Commissioner- member &
3)Chairman of Securities & Exchange Commission- member

*What are the offenses punishable under the AMLA?
1)crime of money laundering
2)failure to keep records
3)failure to report covered transactions
4)malicious reporting &
5)breach of confidentiality

*What is a money laundering offense?
It is a crime whereby the proceeds of an unlawful activity are transacted; thereby making them appear to have originated from legitimate sources. It is committed by the ff:
1)Any person knowing that any monetary instrument or property represents, involves, or relates to, the proceeds of any unlawful activity, transacts or attempts to transact said monetary instrument or property
2)Any person knowing that any monetary instrument or property involves the proceeds of any unlawful activity, performs or fails to perform any act as a result of w/c he facilitates the offense of money laundering referred to in par (1) above &
3)Any person knowing that any monetary instrument or property is required under the AMLA to be disclosed & filed w/ the AMLC, fails to do so

A person may be charged w/ & convicted of both the offense of money laundering & the unlawful activity, however, shall be given precedence over the prosecution of any offense or violation of the AMLA w/o prejudice to the freezing & other remedies provided (Sec6 AMLA)

The RTC shall have jurisdiction to try cases on money laundering. Those committed by public officers & private persons who are in conspiracy w/ such public officers shall be under the jurisdiction of the SB (Sec 5 AMLA)

*Covered institutions refer to:
1)banks, non-banks, quasi-banks, trust entities, & all other institutions & their subsidiaries & affiliates supervised & regulated by the Bangko Sentral ng Pilipinas
2)insurance companies & all other institutions supervised & regulated by the Insurance Commissioner &
3)securities dealers brokers salesmen investment houses & other similar entities managing securities or rendering services as investment agent advisor or consultant mutual funds close-end investment companies & other similar entities foreign exchange corporations money changers money payment remittance & transfer companies & other similar entities & entities administering or otherwise dealing in currency commodities or financial derivatives based thereon valuable objects cash substitutes & other similar monetary instruments or property supervised & regulated by the Securities & Exchange Commission Sec 3 AMLA)

A “covered transaction” is a transaction in cash or other equivalent monetary instrument involving a total amount in excess of P500T w/in 1 banking day
*A “suspicious transaction” is a transaction w/ covered institutions regardless of the amounts involved, where any of the ff circumstances:
1)there is no underlying legal or trade obligation purpose or economic justification
2)client is not properly identified
3)amount involved is not commensurate w/ the business or financial capacity of client
4)client’s transaction is structured in order to avoid being subject of reporting requirements of the Act
5)any circumstance relating to the transaction is observed to deviate from the profits of client or his past transactions w/ the covered institution
6)transaction is related to an unlawful activity or offense under the AMLA about to be, is being, or has been committed or
7)any transaction that is similar or analogous to any of the foregoing (Sec 3 AMLA)

*What is the obligation of the covered institutions w/ respect to covered transactions & suspicious transactions?
The covered institutions are required to report to the AMLC all covered transactions & suspicious transactions w/in 5 working days from occurrence thereof, unless the Supervising Authority prescribes a longer period not exceeding 10 working days
The reporting shall not be deemed a violation of RA No.1405 as amended (Bank Secrecy Law), RA No.6426 as amended, RA No. 8791 & other similar laws; provided that they are prohibited from communicating to any person any information relative to the report (Sec 9 AMLA)

*What is unlawful activity under AMLA? Unlawful activity refers to any act or omission or series or combination thereof involving or having direct relation to the ff:
1)kidnapping for ransom
2)drug trafficking
3)anti-graft & corrupt practices act
4)plunder
5)jueteng & masiao
6)piracy on the high seas
7)qualified theft
8)swindling
9)smuggling
10)violations of E-commerce act
11)hijacking & other violations under RA No.6235
12)destructive arson & murder including those perpetuated by terrorist against non-combatant persons & similar targets
13)fraudulent practices & other violations under the Securities regulation code
14)act of terrorism
15)felonies or offenses of a similar nature that are punishable under the penal laws of other countries (Sec3 AMLA)

*Briefly discuss the authority of the AMLC to inquire into bank deposits?
Notwithstanding the provisions of RA No.1405 (Bank Secrecy Law), the AMLC may inquire into or examine bank accounts upon order of any competent court when it is established that there is probable cause that the deposits or investments are related to an unlawful activity, except that no court order shall required in cases involving the ff:
1)kidnapping for ransom
2)drug trafficking
3)hijacking, destructive arson & murder &
4)BSP examination (Sec 11 AMLA)

*How can monetary instruments & property be freezed?
The CA, upon application ex parte by the AMLC & after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful; activity, may issue a freeze order shall be for a period of 20days unless extended by the Court (Sec 10 AMLA)

*What are the legal safeguards against possible harassment to candidates for electoral offices?
1)filing of money laundering cases against the candidates; provide that those filed before the period shall not be barred from prosecution
2)Provisional remedy of attachment on assets of the candidate &
3)Judgment of forfeiture of assets to the prejudice of the candidate
FOREIGN INVESTMENTS ACT (RA 7042)