1987 BAR EXAMINATION

Question No. 1:
B forged As signature as drawer of a check drawn on Citibank. The check
was purportedly payable to the order of B. B then indorsed the check to C, a
holder in due course, who deposited the same to his account with Bank of P.I. The check
passed through the normal course of clearing and accordingly the drawee, Citibank,
credited the collecting bank, Bank of P.I., with the amount of the check which Citibank in
turn debited from As deposit account. Upon receiving his monthly statement from
Citibank, together with the cancelled checks debited from his deposit account, A
discovered the forgery.
(a) Can A compel Citibank to re-credit to his account the amount of the forged
check?
(b) Does Citibank in turn have a recourse against the collecting bank, Bank of
P.I.? Explain.
(c) Can Citibank or Bank of P.I., as the case may be, proceed against C as
indorser? Explain.
Answer:
(a) A can compel Citibank to re-credit to his account the amount of the forged
check, he being not a party to the instrument. Forgery renders the forged signature totally
inoperative. Additionally, the drawee bank is charged with knowledge of the drawers
signature. (Note: Any of the above reasons, it is believed, should suffice).
(b) Citibank has no right of recourse against Bank of P.I. Having gone through
the normal course of clearing, the latter can assume that the check was properly drawn
by the drawer. The drawee bank is charged with knowledge of the drawers signature.
The negligence, if at all, is attributed more to Citibank than with the Bank of P.I.
Note: An answer stating that such recourse by Citibank may be had against Bank
of P.I. because having gone through the normal course of clearing the latter must be
deemed to have warranted or guaranteed previous indorsements, it is believed should
likewise be given credit. In PNB vs. BPI (G.R. 27838, 4 August 1986), the Supreme
Court had recognized the practice of guaranteeing such indorsements in accordance with
the Bankers Associations Rules that may have influenced an examinee to apply the rule
to all prior parties.
(c) Recourse may be had by either against C as indorser because of his
warranty. Ion the case particularly of Bank of P.I., its right of recourse may be based
likewise on the agency rule that puts the risk of loss on the principal (Bank of P.I.)

Alternative Answer:
(c) If ever Bank of P.I. is held liable, it can proceed against C as an indorser
under the latters warranty.
Citibank, as drawee, cannot proceed against C, as indorser, under the doctrine of
comparative negligence. Under the facts, it is the negligence of Citibank, which had
access to the signature specimen of the drawer, which is the proximate cause of the loss.
As between Citibank and C, the former is more negligent than the latter and it is the
formers negligence that gave rise to the loss.
Another Alternative Answer:
(b) Yes, the Citibank has recourse against Bank of P.I. As a collecting agent of C
who acquires no title on the check for reason of the forged signature of the drawer, Bank
of P.I. must reimburse Citibank of the amount it had received from Citibank.
(c) As to Citibank, it loses its right of recourse against C, the indorser. The check
already having been accepted by Citibank as the drawee bank, all indorsers are
discharged from liability thereon. (Sec. 188, NIL)
As to the Bank of P.I., in the event that it was made liable in the check, it has
recourse against C, since it was merely acting as the collecting agent of the latter.
Question No. II:
Jose Villa leased his house in Dasmarinas Village to Peter Booth, an executive of
a New York company with a branch office here. The lease contract, which had a term of
three years, stipulated that rentals shall be payable in U.S. dollars in New York to the
lessors son who happened to be residing in Manhattan. On the second year of the lease,
Peter Booth resigned from his company but decided to remain in the country and
continue the lease. Since the company was no longer paying his rentals, Booth informed
his landlord, Villa, that he would henceforth be paying his rentals in Philippine pesos out
of his local earnings. Villa refused to accept payment in pesos and insisted on the
provisions of the lease contract stipulating payment of rentals in U.S. dollars.
Is there a legal basis for the landlords position? Explain your answer.
Answer:
There is no legal basis for the landlords position. The Uniform Currency Act
prohibits and renders void a stipulation requiring payment of money obligations in
foreign currency or in gold or in Philippine currency measured in foreign currency or in
gold. There are, to be sure, expressed exceptions from the rule-the instant case, however,
does not fall under any of those exceptions.

Question No. III:

Phil-Hong, Inc. (PHI) is a joint venture corporation organized in the Philippines,
60% of which is owned by Filipino citizens and 40% by Hong Kong residents who are
British nationals. PHI owns and operates the Lancelot Hotel in Makati. PHI decides to
expand into the restaurant business and so, with the requisite approval of its Board of
Directors and stockholders, PHI sets up a wholly-owned subsidiary, Guinevere Bistro,
Inc. (GBI) and proceeds to set up an adjunct restaurant in the Lancelot Hotel and another
one in a rented space in SM City along EDSA, Quezon City.
PHI consults you for legal advise on whether or not it is legal for GBI to operate
the Guinevere Bistro:
(a) in the Lancelot Hotel and
(b) in SM City
How would you answer the query? Explain.
Answer:
(a) GBI may operate the Guinevere Bistro in the Lancelot Hotel. The Retail
Trade Act, nationalizing retail trade, exempts keepers of restaurants included in, or
incidental to, the hotel business.
(b) It is not legal for GBI to operate the restaurant business in SM City since the
latter is not a hotel; hence, the restaurant operation will not fall under the exemption
clause of the Retail Trade Law.
Question No. IV:
Blanco took out a P1 million life insurance policy naming his friend and creditor,
Montenegro, as his beneficiary. When Blanco died, his outstanding loan obligation to
Montenegro was only P50,000. Blancos executor contended that only P50,000 out of the
insurance proceeds should be paid to Montenegro and the balance of P950,000 should be
paid to Blancos estate.
Is the executors contention correct? Reason out your answer.
Answer:
The contention of the executor is incorrect. The beneficiary of a life insurance
need not have any insurable interest in the life of the insured.
Alternative Answer:

The executors contention is not correct because it was Blanco himself who took
out the life insurance policy on his own life, naming only Montenegro as the beneficiary.
It would have been different if it was Montenegro, as creditor, who took out a life
insurance policy on the life of Blanco, as a debtor. In that case, Montenegros insurable
interest in the life of Blanco would be only to the extent of P50,000, which is the amount
of his credit.
Question No. V:
On February 3, 1987, while Jose Palacio was in the hospital preparatory to a heart
surgery, he called his only son, Boy Palacio, and showed the latter a will naming the son
as sole heir to all the fathers estate including the family mansion in Forbes Park. The
following day, Boy Palacio took out a fire insurance policy on the Forbes Park mansion.
One week later, the father died. After his fathers death, Boy Palacio moved his wife and
children to the family mansion which he inherited. On March 30, 1987, a fire occurred
razing the mansion to the ground. Boy Palacio then proceeded to collect on the fire
insurance he took earlier on the house.
Should the insurance company pay? Reasons.
Answer:
In property insurance, insurable interest must exist both at the time of the taking
of the insurance and at the time the risk insured against occurs. The insurable interest
must be an existing interest. The fact alone that Boy Palacio was the expected sole heir
of his fathers estate does not give the prospective heir any existing interest prior to the
death of the decedent.
Note: An examinee who has considered the factual settings in the problem as having
given rise to an inchoate interest should be given, it is suggested, some credit considering
that before the loss occurred, that interest was coupled by an existing interest.
Comment on the Proposed Alternative Answer:
While it is clear that there is an inchoate interest on the part of the son, Boy
Palacio, there is no existing interest on his part. Hence, the possibility of an insurable
interest arising from an inchoate interest coupled with an existing interest does not exist.
Question No. VI:
On July 14, 1985, X, a homosexual, took an insurance policy on the life of his boy
friend, Y. In the insurance application, X misrepresented that Y was in perfect health
although he knew all the time that Y was afflicted with AIDS. On October 18, 1987, Y
died in a motor accident. Shortly thereafter, X filed his insurance claim.

Should the insurer pay? Reasons.

Answer:
The insurer is not obligated to pay. Friendship alone is not the insurable interest
contemplated in life insurance. Insurable interest in the life of others (other than ones
own life, spouses or children) is merely to the extent of the pecuniary interest in that life.
Assuming that such pecuniary interest exists, an insurer would be liable despite
concealment or misrepresentation if the insurance had been in effect for more than 2
years (incontestability clause).
Question No. VII:
There was a severe typhoon when the vessel M/V Fortuna collided with M/V
Suerte. It is conceded that the typhoon was a major cause of the collision, although there
was a strong possibility that it could have been avoided if the captain of M/V Fortuna was
not drunk and the captain of M/V Suerte was not asleep at the time of the collision.
Who should bear the damages to the vessels and their cargoes?
Answer:
Under the doctrine of inscrutable fault, neither of the carriers may go after the
other.
The shippers may claim damages against the shipowners and the captains of both
vessels, having been both negligent. Their liability is solidary.
The shipowners have the right to recovery damages from the masters of the
vessels who were both guilty of negligence. The presence of a typhoon in the area had in
fact warranted a greater degree of alertness on their part.
Question No. VIII:
Philip Mauricio shipped a box of cigarettes to a dealer in Naga City through Bicol
Bus Company (BBC). When the bus reached Lucena City, the bus developed engine
trouble. The driver brought the bus to a repair shop in Lucena where he was informed by
the mechanic that an extensive repair was necessary. Which would take at least two days.
While the bus was in the repair shop, Typhoon Coring lashed at Quezon Province. The
cargoes inside the bus, including Mauricios cigarettes, got wet and were totally spoiled.
Mauricio sued BBC for damage to his cargoes.
Decide.
Answer:

The Bicol Bus Corporation (BBC) is liable for damages to the cargoes lost by
Mauricio. A natural disaster would relieve liability if it is the proximate and only cause
of the damage. The carrier itself, in this case, had been negligent. The presumption of
negligence in culpa contractual is not overcome by engine trouble which does not
preclude its having been due to the fault of the common carrier. The fact that an
extensive repair work was necessary which, in fact, took 2 days to complete somehow
justifies an impression that the engine trouble could have been detected, if not already
known, well before the actual breakdown.
Note: An answer, which negates liability on the part of BBC on the ground that
the proximate cause being typhoon Coring and an engine failure being one that may not
totally be discounted on long trips even when there is no fault or negligence or like
circumstances, should be given some due consideration.
Alternative Answer:
BBC can be held liable for damages for the cargoes of Mauricio on the ground of
breach of contract of carriage. BBC is guilty of negligence arising from its failure to
tranship the cargoes while the bus was undergoing extensive repair. Ordinary prudence
or diligence dictates that necessary precaution should have been taken by BBC by
keeping the goods safely and one of these means was either to tranship the goods through
one of its buses or on board another bus or to keep the goods in the meantime in storage
in the warehouse.
Question No. IX:
During the elections last May, AB, a congressional candidate in Marinduque,
chartered the helicopter owned by Lode Mining Corporation (LMC) for use in the
election campaign. AB paid LMC the same rate normally charged by companies
regularly engaged in the plane chartering business. In the charter agreement between
LMC and AB, LMC expressly disclaimed any responsibility for the acts or omissions of
its pilot or for the defective condition of the planes engine. The helicopter crashed
killing AB. Investigations disclosed that pilot error was the cause of the accident. LMC
now consults you on its possible liability for ABs death in the light of the above findings.
How would you reply to LMCs query?
Answer:
I would reply to LMCs query as follows:
Lode Mining Corporation may not be held liable for the death of AB. A
stipulation with a private carrier that would declaim responsibility for simple negligence
of the carriers employees is a valid stipulation. Such a stipulation, however, will not
hold in cases of liability for gross negligence or bad faith.

Question No. X:
Martin Nove shipped an expensive video equipment to a friend in Cebu. Martin
had bought the equipment from Hongkong for U.S. $5,000. The equipment was shipped
through M/S Lapu-Lapu under a bill of lading which contained the following provision in
big bold letters:
The limit of the carriers liability for any loss or damage to cargo
shall be P200 regardless of the actual value of such cargo, whether
declared by its shipper or otherwise.
The cargo was totally damaged before reaching Cebu. Martin Nove claimed for
the value of his cargo ($5,000 or about P100,000) instead of just P200 as per the
limitation on the bill of lading.
Is there any legal basis for Noves claim?
Answer:
There is legal basis for the claim of Martin Nove. The stipulation limiting the
carriers liability up to a certain amount regardless of the actual value of such cargo,
whether declared by its shipper or otherwise, is violative of the requirement of the Civil
Code that such limiting stipulations should be fairly and freely agreed upon. (Arts. 17491750 Civil Code). A stipulation that denies to the shipper the right to declare the actual
value of his cargoes and to recover, in case of loss or damage, on the basis would be
invalid.
Another Alternative Answer:
None. There is no legal basis for Noves claim. A stipulation in the bill of lading
which limits the carriers liability to a specified amount unless the shipper declares a
higher value and pays a higher rate of freight, is valid and enforceable. (Feixas & Co.,
vs. Pacific Mail Co., 42 Phil. 198; Phil. Commercial Laws by Martin, 1981 Edition Vol.
111, p. 79-80; Ong Yien vs. CA & PAL, June 29, 1979). There being no showing that
Nove had declared a higher value of the video equipment and had paid a higher rate of
freight, he is bound on that stipulation in the bill of lading.
Question No. XI:
Taurus Corporation (TC) commenced operation in 1985. During that year TCs
loss from operation amounted to P500,000. In 1986, TC recouped all its losses in 1985,
registering a net after tax profit of P500,000. In the same year, the management of the
company discovered that a parcel of land originally acquired in 1985 for P300,000 had at
least doubled in value and accordingly the Board of Directors of TC, with the conformity

of the external auditors and backed up by a valuation report of a reputable appraiser,

recognized a revaluation or appraisal surplus of P300,000.
May the Board of Directors of TC declare a cash dividend out of this surplus?
Explain.
Answer:
The Board of Directors cannot declare cash dividends out of the revaluation or
appraisal surplus that may fluctuate from time to time. Dividends can only be declared
from surplus profits arising from its operations.
Alternative Answer:
Dividends can be declared only out of unrestricted retained earnings. Supposed
profits recognized by virtue of revaluation or reappraisal of property does not constitute
unrestricted retained earnings. Hence, the Board of Directors cannot properly declare
dividends out of said recognized revaluation or appraisal surplus of P300,000.
Question No. XII:
The stockholders of People Power, Inc. (PPI) approved the following two
resolutions in a special stockholders meeting: (i) Resolution increasing the authorized
capital stock of PPI, and (ii) resolution authorizing the Board of Directors to issue for
cash payment the new shares from the proposed capital stock increase in favor of outside
investors who are non-stockholders. The foregoing resolutions were approved by
stockholders representing 99% of the total outstanding capital stock. The sole disenter
was Jose Estrada who owned the rest (1%) of the stock.
(a) Are the resolutions binding on the corporations and its stockholders, including
Estrada, the dissenting stockholder?
(b) What remedies, if any, are available to Estrada?
Answer:
(a) The board resolutions (i) increasing the authorized capital stock of the
corporation and (ii) authorizing the board to issue new shares from that increase of capital
stock in favor of outside investors in binding on the stockholders since the said
resolutions were approved by the stockholders representing at least 2/3 of the total
outstanding capital stock.
(b) Estrada, the dissenting stockholder, may avail himself of the appraisal rights
by claiming that since the resolutions appear to favor outside investors, as against
incumbent stockholders, on the increase in capital stock, he may demand the payment of
the appraised value of his shares.

Alternative Answer:
(a) Even if the resolutions in question have been approved by stockholders
representing 99% of the outstanding capital stock, they cannot be binding on the
corporation and stockholders since there is no showing that the same have been approved
by a majority vote of the Board of Directors. This is especially so in the case of the first
resolution increasing the authorized capital stock which, in effect, requires an amendment
of the articles of incorporation.
(b) Since the resolutions in question have the net effect of depriving him of his
preemptive right as a stockholder of record of the corporation, Estrada can resort to the
remedy of exercising his appraisal right.
Question No. XIII:
The proposed Amended By-laws of CXT Inc., a corporation listed in the Makati
Stock Exchange, contain the following provisions:
(a) That the holders of a majority of the outstanding capital stock may elect all
the members of the Board of Directors;
(b) That no officer of the corporation shall be required to be a stockholder;
(c) That the directors bonuses shall be equivalent to 10% of gross revenues in any
given year;
(d) That a candidate for director must own at least 1,000 shares;
(e) That meetings of the Board of Directors need not be held in the principal
office and may even be held outside the country.
As Corporate Secretary of CXT, you are asked to comment on the validity of the
above proposed amendments.
Answer:
As Corporate Secretary of CXT, I would give the following comments on the
question of validity of the various proposed amendments to the By-Laws, as follows:
(a) The minority stockholders may not be deprived of their right to vote in
electing the members of the board of directors; hence, the proposed amendment would be
invalid.

(b) The President should be a director who should thus own at least one share of
stock. Therefore, the suggested amendment would be invalid unless the President is
excluded from the proposed amendment.
(c) The directors bonuses (total compensation) cannot exceed 10% of net income;
accordingly, the proposed amendment fixing the directors bonuses to 10% of gross
revenues in any given year would be invalid.
(d) While the By-Laws may provide additional qualifications for directors such
qualifications must not be unreasonable. A qualification requiring a director to own at
least 1,000 shares, in my view, would be unreasonable and a denial of the right of
representation by the minority shareholders in the Board of Directors.
(e) The meetings of the Board of Directors, unlike those of the stockholders, may
be held outside the Philippines; accordingly, the proposed amendment to the by-laws on
the matter can be valid.
Alternative Answer:
(a) The provision deprives the minority stockholders of the right to cumulative
voting, and hence, to be represented in the Board of directors in proper cases.
Question No. XIV:
Okura International, Ltd. (OIL), a Japanese company, obtained a license from the
SEC to set up a regional headquarters in the Philippines. OIL has a substantial
investment in a Philippine joint venture company, JAPIL, Inc., which OIL manages under
an existing management contract. In fact, the Manager of OILs regional office in Manila
doubles as the General manager of JAPIL. Because of an intracorporate dispute in
JAPIL, OIL filed suit before the Philippine SEC against its fellow stockholders in JAPIL.
Will such suit prosper? Reasons.
Answer:
The suit will not prosper. Under Rep. Act 5455, OIL would be prohibited from
entering into a management contract without having the license therefor. The license that
OIL had obtained from the SEC, was merely for setting up regional headquarters in the
Philippines. Without an appropriate license, a foreign corporation engaged in business in
the Philippines cannot sue judicially or administratively.
Note: It is suggested that an answer stating that the suit filed with the SEC, being
intracorporate in nature, would prosper should be given due consideration. The
possibility that the examinee may have concentrated on the issue of SECs jurisdiction,
rather than on the licensing requirement under Rep. Act 5455 or the Corporation Code, is
not totally uncalled for.

Question No. XV:

Mars Trading, Inc. (MTI) imported various construction materials from Japan,
under a letter of credit-trust receipt (LC/TR) line provided by Filipinas Bank. When the
goods arrived in Manila, the same were released to MTI upon the latters execution of a
trust receipt whereby MTI undertook to hold the goods in trust for the bank. The trust
receipt further provided that upon sale of the goods, the entrustee (MTI) will turn over the
proceeds of sale to the entrusting bank to the extent of the amount of U.S. $100,000
owned by MTI to the bank on account of its importation, which amount shall be paid in
Philippine currency based on the rate of exchange prevailing at the time of payment.
MTI sold the goods six months later, during which time the peso-dollar rate of exchange
deteriorated substantially. MTI refused to pay Filipinas Bank contending that:
(a) the trust receipt stipulation to pay the peso equivalent of $100,000 violated
the Uniform Currency Act, rendering the trust receipt void, and
(b) assuming arguendo that such stipulations were enforceable, MIT should pay
only on the basis of the rate of exchange prevailing on the date when the goods were
released.
Decide the case with reasons.
Answer:
(a) MTI is still liable since only the stipulation requiring payment on foreign
currency is violative of the Uniform Currency Act. The obligation itself under the law
subsists, which can be discharged by a payment in Philippine currency.
(b) The basis of payment would be the rate of exchange prevailing at the time of
payment since the obligation was incurred in foreign currency. Had the obligation been
incurred in Philippine currency then the rate of exchange at the time the obligation was
incurred would have been the basis of payment.
Note: The decisions on this point had not been that consistent. It is, therefore,
suggested that an answer stating that MTI should instead pay on the basis of the rate of
exchange prevailing on the date that the obligation was incurred should be acceptable.
Considering that the obligation may also be deemed as having been effectively incurred
in the peso equivalent of the dollar L/C at the time the trust receipt was issued, it could
well be argued that payment in Philippine currency should be measured at the rate
prevailing at that time.
Alternative Answer:

(a) The stipulation in the trust receipt to pay the peso equivalent of $100,000 does
not violate the Uniform Currency Act. The stipulation does not require payment in
foreign currency but in Philippine pesos.
Assuming for the sake of argument that such stipulation is invalid, it does not
affect the validity of the entire trust receipt, but only the stipulation itself.
(b) There is an express stipulation in the trust receipt that the obligation shall be
paid in Philippine currency based on the current rate of exchange prevailing at the time of
payment. Since the obligation was incurred in foreign currency, the rate prevailing at the
time of payment shall be govern.
Question No. XVI:
Eastern Motors, Inc. (EMI), an automotive dealer, sold a Toyota station wagon to
Alran Tuason, payable in 10 monthly installments. The installments were evidenced by a
promissory note and secured by a mortgage on the car. EMI assigned the credit to Island
Finance Corporation (IFC), subject to IFCs right of recourse to EMI if the car buyer
(Tuason) was unable to pay the credit in full. Upon Tuasons default, IFC foreclosed on
the mortgage. Since a deficiency remained, IFC sought to collect the same from EMI.
Is IFC justified in doing so? Reason out your answer.
Answer:
IFC is not justified in collecting the deficiency from EMI. An assignee is merely
a successor-in-interest of the assignor and, therefore, unless otherwise expressed in the
deed of assignment, the right of recourse stipulated in favor of IFC must be deemed
confined only to a case where the car buyer is unable to pay the credit in full. By
foreclosing on the car, the right to the deficiency is lost and no further amount is thus due
from the car buyer.
Note: It is suggested that an answer which expresses that IFC may still go after
EME should also be given full credit if the reason advanced is that the Recto law (Art.
1484, Civil Code) is one that governs the relation between the installment buyer and the
seller or its assignees but not necessarily between the assignor and the assignee, who are
free to stipulate in their respective covenants. The right of recourse against EMI may
have also been considered as referring to a situation where precisely no deficiency can
further be collected from the installment buyer.
Question No. XVII:
Jose Molina, Jr. inherited the musical works of his talented father, Jose Molina,
Sr., who, before his death, had composed a number of well known songs. When he was
alive, the senior Molina never took the precaution of procuring copyright registration for
his compositions, but his son, Molina Junior, who appears to be more practical-minded,

succeeded in having his fathers intellectual creations registered under the Copyright
Law. One such composition was a song entitled Habang Buhay, which had been
popularly sung and has in fact received international acclaim long before the senior
Milinas demise.
Vilma Aunor, a popular singer, was requested to sing Habang Buhay in a free
cultural presentation at the Luneta Park.
Jose Molina, Jr. sued Vilma Aunor for infringement of copyright.
How would you decide the case?
Answer:
I would rule in favor of Vilma Aunor. There is no infringement of copyright
where the performance is in a free cultural presentation. Additionally, the problem
speaks of a musical composition that had been popularly sung and had received
international acclaim long before the creators demise, indicating that the composition
must have been during the regime of the then copyright law where registration of the
copyright (within 30 days in the case of Manila and 60 days elsewhere) from publication
was required; otherwise, the creation under that law would thereby become public
property.
Note: An answer based on the new copyright law (Presidential Decree No. 49)
that no longer requires registration for musical compositions should not be considered as
an incorrect statement.
Question No. XVIII:
Union Corporation was declared insolvent by order of the court. All creditors of
Union were asked to file their claims and attend a meeting to elect the assignee in
insolvency. Merchant Finance Corporation (MFC) has a claim for P500,000, which is
secured by a mortgage on a piece of land worth P1 million. MFC seeks your advice as
counsel whether it should participate in the foregoing proceedings.
What advice would you give MFC?
Answer:
I would advice MFC that, having a contractual mortgage (the value of the
mortgaged property being well over the secured obligation), it should refrain from
participating in the proceedings and instead pursue its preferential right to foreclose the
mortgage.