San Sebastian College College of Law Recto, Manila

1999 Commercial Bar Question MCQ Part 2 (numbers VIII-XIV)

ANSWER KEY

SUBMITTED BY: Sir John Paul Galang

VIII A Warehouse Company received for safekeeping 1000 bags of rice from a merchant. To evidence the transaction, the Warehouse Company issued a receipt expressly providing that the goods be delivered to the order of said merchant. A month after, a creditor obtained judgment against the said merchant for a sum of money. The sheriff proceeded to levy on the rice and directed the Warehouse Company to deliver to him the deposited rice. [Garnishment or Attachment of Goods (1999)] Question: (a) What advice will you give the Warehouse Company? Expain your answer. (Analysis and Solution) a. The 1000 Bags of rice cannot be subject of garnishment or be levied upon under execution unless receipt be first surrendered to the warehouseman, or its negotiation enjoined. The Warehouse Company cannot be compelled to deliver the rice until receipt is surrendered or impounded by the court. b. Rule 57 of Rules of Court provide that a thing subject of attachment may be levied or attached after securing a bond. c. The Warehouseman should file an interpleader before the proper court in order to determine who has the best interest over the 1000 bags of rice under the possession of The Warehouse Company. d. The 1000 Bags of Rice under the care and possession of the warehouseman cannot refuse attachment because the judgment rendered by the court is already executory. The warehouse man may be cited for contempt if he will refuse attachment of the said 1000 bags of rice. (b) Assuming that a week prior to the levy, the receipt was sold to a rice mill on the basis of which it filed a claim with the sheriff. Would the rice mill have better right to the rice the creditor? Explain your answer. (Understanding) a. No. The Creditor having a favorable judgment from the court has better right over the 1000 bags of rice.

b. No. Seller shouldve informed of the rice mill of the pending case of attachment over the rice bags. Therefore the buyer is a buyer-at-risk. The buyers right is subject to the outcome of the pending case

c. Yes. The rice mill, as a holder for value of the receipt, has a better right to the rice than the creditor. It is the rice mill that can surrender the receipt which is in its possession and can comply with the other requirements which will oblige the warehouseman to deliver the rice, namely, to sign a receipt for the delivery of the rice, and to pay the warehousemans liens and fees and other charges. d. Yes. The rice mill has a better right over the creditor because the he is a buyer in good faith. The seller did not disclose to him the pending case over of attachment. The remedy of the creditor is to attach other properties of the merchant. IX Borrower obtained a loan against the security of a mortgage on a parcel of land. While the mortgage was subsisting, borrower leased for fifty years the mortgaged property to Land Development Company (LDC). The mortgage was duly advised of the lease. Thereafter, LDC constructed on the mortgage property an office condominium. Borrower defaulted on his loan and mortgagee foreclosed the mortgage. At the foreclosure sale, the mortgage was awarded the property as the highest bidder. The corresponding Certificate of Sale was executed and after the lapse of one year, title was consolidated in the name of mortgagee. Mortgagee then applied with the Regional Trial Court for the issuance of a writ of possession not only over the land but also the condominium building. The mortgagee contended that the mortgage included all accessions, improvements and accessories found on the mortgaged property. LDC countered that it had built on the mortgaged property with the prior knowledge of mortgagee, which had received formal notice of the lease. [Mortgage; Foreclosure of Improvements (1999)] Question: Recommendation: Since the subject matter of these two (2) questions is not included within the scope of the Bar Questions in Mercantile Law, as it is within Civil Law, it is suggested that whatever answer is given by the

examinee, or the lack of answer should be given full credit. If the examinee gives a good answer, he should be given additional credit. (a) How would you resolve the dispute between the mortgagee and LDC? (Knowledge) a. LDC has a better right considering that he built a condominium, which is significantly more valuable than the land over the land mortgage. b. LDC has the option to either sell the building built on the mortgaged land to the mortgagee or enter into a force lease if LDC will not agree to buy the improvement on the land. c. The mortgagor should pay LDC for the improvement built on the mortgaged land because he leased the land that he mortgaged.

d. The mortgagee has a better right to the building. Under Art 2127 of the NCC, the mortgage extends to all improvements on the mortgaged property regardless of who and when the improvements were introduced. LDC cannot complain otherwise, because it knew that the property it was leasing was mortgaged when it built the condominium. (b) Is the mortgagee entitled to the lease rentals due from LDC under the lease agreement? (Understanding)

a. The lease rentals belong to the mortgagor. However, the mortgage extends to the rentals not yet received when the obligation become due and the mortgagee may ran after the said rentals for the payment of the mortgage debt. b. No, the mortgagee is not entitled to the lease rentals because it is a contract between the mortgagor and LDC. There is no privity of contract between the mortgagee and LDC. c. LDC should file a petition for interpleader in order to determine whom between the mortgagor and mortgagee has the better right over the lease rentals. d. The mortgagee may collect from LDC the lease rentals because he is the creditor of mortgagor provided that the latter defaulted in the payment of the mortgage.

X A check for P50,000.00 was drawn against drawee bank and made payable to XYZ Marketing or order. The check was deposited with payees account at ABC Bank which then sent the check for clearing to drawee bank. Drawee bank refused to honor the check on ground that the serial number thereof had been altered. XYZ marketing sued drawee bank. [Checks; Material Alterations; Liability (1999)] Question: (a) Is it proper for the drawee bank to dishonor the check for the reason that it had been altered? Explain. (Knowledge) a. No. The serial number is not a material particular of the check. Its alteration does not constitute material alteration of the instrument. b. Yes. The serial number is an essential part of the check in order to the account owner and bank to cross examine with particularity the issued checks. c. No. There was no instruction from the account owner to stop honoring check issued by him. d. Yes. As provided in the Negotiable Instruments Law, any alteration in a check which is not counter-signed by the payee or account owner is a material alteration. (b) In instant suit, drawee bank contended that XYZ Marketing as payee could not sue the drawee bank as there was no privity between then. Drawee theorized that there was no basis to make it liable for the check. Is this contention correct? Explain. (Analysis and Solution) a. Yes. The drawee bank will only be liable to check if it had accepted the same, otherwise account owner or person whom the check was issued has no recourse against the drawee bank. b. Yes. There being no privity of contract between the payee, no recourse can be had against the drawee bank. c. Yes. As a general rule, the drawee is not liable under the check because there is no privity of contract between XYZ Marketing, as payee, and ABC Bank as the drawee bank. However, if the action taken by the bank is an abuse of

right which caused damage not only to the issuer of the check but also to the payee, the payee has a cause of action under quasi-delict. d. No. Drawee banks contentions are not meritorious because there is creditor-debtor relationship between the issuer and the bank therefore the drawee bank should follow the order of the account owner through checks that are issued. XI Two corporations agreed to merge. They then executed an agreement specifying the surviving corporation and the absorbed corporation. Under the agreement of merger dated November 5, 1998, the surviving corporation acquired all the rights, properties and liabilities of the absorbed corporation. [Effects; Merger of Corporations (1999)] Question: (a) What would happen to the absorbed corporation? Must the absorbed corporation undertake dissolution and the winding up procedures? Explain your answer. (Understanding) a. No. There is no need for the absorbed corporation to undertake dissolution and winding up procedure. As a result of the merger, the absorbed corporation is automatically dissolved and its assets and liabilities are acquired and assumed by the surviving corporation. b. Yes. The Corporation Code dictates that in order for a corporation to dissolve it must undergo a dissolution and winding up procedure in order to protect its creditors for any debts secured by the corporation undergoing dissolution. c. No. There is no need for an absorbed corporation to undertake dissolution and winding up procedure because it would still retain its former name and assets and liabilities. d. Yes. Dissolution and winding up procedures is a prerequisite in order for the absorbed corporation to turn over is assets and liabilities to the surviving corporation.

(b) Pending approval of the merger by the SEC, may the surviving corporation already institute suits to collect all receivables due to

the absorbed corporation from its customers? Explain your answer. (Knowledge) a. No. The approval of the SEC is required because it is the approval that gives personality to the surviving corporation just like the issuance of certificate of incorporation. b. Yes. Being the surviving corporation, it can already collect all receivables due to the absorbed corporation. The approval is only for formality. c. No. The merger does not become effective until and unless approved by the SEC. Before approval by the SEC of the merger, the surviving corporation has no legal personality with respect to receivables due to the absorbed corporation. d. Yes. Because the absorbed corporation already had an agreement to surrender of its assets and liabilities to the surviving corporation. Pending the approval, the surviving corporation can already collect receivables due to the absorbed corporation. (c) A case was filed against a customer to collect on the promissory note issued by him after the date of the merger agreement. The customer raised the defense that while the receivables as of the date of the merger agreement was transferred to the surviving corporation, those receivables which were created after the merger agreement remained to be owned by the absorbed corporation. These receivables would be distributed to the stockholders conformably with the dissolution and liquidation procedures under the New Corporation Code? Discuss the merits of this argument. (knowledge) a. Whether the absorbed corporation incurred the receivable before or after the merger agreement, or before or after the approval thereof by the SEC, the said receivable would still belong to the surviving corporation under Sec 80 of the Corp. Code. b. Those receivables, which were created after the merger, should belong to the creditors of the absorbed corporation so as to protect the creditors of the absorbed corporation. c. Receivables of the absorbed corporation will belong the absorbed corporation. Only after the merger was approved by the SEC should it belong to the surviving corporation.

d. Receivables of the absorbed corporation form part of its assets and ALL assets and liabilities of the absorbed corporation should belong the surviving corporation and can be collected immediately after the merger agreement. XII Various buyers of lots in a subdivision brought actions to compel either or both the developer and the bank to lease and deliver free and clear the titles to their respective lots. The problem arose because notwithstanding prior sales mostly on installments made by the developer to buyers, developer had mortgaged the whole subdivision to a commercial bank. The mortgage was duly executed and registered with the appropriate governmental agencies. However, as the lot buyers were completely unaware of the mortgage lien of the bank, they religiously paid the installments due under their sale contracts. As the developer failed to pay its loan, the mortgage was foreclosed and the whole subdivision was acquired by the bank as the highest bidder. [Credit Transactions (1999)] Question: Recommendation: Since the subject matter of these two (2) questions is not included within the scope of the Bar Questions in Mercantile Law, as it is within Civil Law, it is suggested that whatever answer is given by the examinee, or the lack of answer should be given full credit. If the examinee gives a good answer, he should be given additional credit.

(a) May the bank dispossess prior purchasers of individual lots or, alternatively, require them to pay again for the paid lots? Discuss (Understanding) a. Yes. The Bank may dispossess of the prior purchasers because creditors are preferred over debtors. Therefore Bank being the creditor of the developer may dispossess of the prior purchasers of individual lots. b. Yes. The bank has the option of either disposing the prior purchasers of individual lots because banks are imbued with public interest. c. No. The bank may not dispossess the prior purchasers of the individual lots, much less require them to pay for the said

lots. The bank has to respect the rights of the prior purchasers of the individual lots. The purchasers have the option to pay the installments of the mortgagee. d. No. The Bank can only require the prior purchasers to continue the installments because the Bank is subrogated to the right of the developer being the highest bidder.

(b) What are the rights of the bank vis--vis those buyers with remaining unpaid balance? Discuss. (Understanding) a. The bank has to respect the rights of the buyers with remaining unpaid installments. The purchaser has the option to pay the installments to the mortgagee who should apply the payments to the mortgage indebtedness. b. The Bank being the highest bidder can compel the remaining buyers with unpaid balance to pay the whole amount of their contract and apply the same to the mortgage indebtedness.

c. The Bank cannot collect anymore those remaining unpaid balance of prior purchasers because the bank has no privity against prior purchasers. d. The bank, as a remedy, may hold the release of the titles of the subdivision until the full payment of the mortgage. XIII Borrower obtained a loan from a money lending enterprise for which he issued a promissory note undertaking to pay at the end of a period of 30 days the principal plus interest at the rate of 5.5% per month plus 2% per annum as service charge. On maturity of the loan, borrower failed to pay the principal debt as well as the stipulated interest and service charge. Hence he was sued. How would you dispose of the issues raised by the borrower? [Usury Law (199)] Question:

(a) That the stipulated interest rate is excessive and unconscionable? (Understanding)

a. No. It is within the acceptable limit. b. No. The borrower consented to the rate therefore question of excessiveness of unconscionableness should be disregarded. c. The rate of interest of 5.5% per month is excessive and unconscionable. d. The rate should only be 1%. (b) Is the interest rate usurious? (Knowledge) a. No. Because we do not have a law on usury. b. The interest cannot be considered usurious. The Usury Law has been suspended in its application, and the interest rates are made floating. c. The interest rate should only be 1% per month or 12% per annum d. The agreement of the party in a contract on how much the rate of interest should govern.

XIV Thinking that the impending typhoon was still 24 hours away, MV Pioneer left port to sail for Leyte. That was a miscalculation of the typhoon signals by both the ship-owner and the captain as the typhoon came earlier and overtook the vessel. The vessel sank and a number of passengers disappeared with it. Relatives of the missing passengers claimed damages against the shipowner. The ship-owner set up the defense that under the doctrine of limited liability, his liability was co-extensive with his interest in the vessel. As the vessel was totally lost, his liability had also been extinguished. [Limited Liability Rule (1999)] Question: (a) How will you advice the claimants? Discuss the doctrine of limited liability in maritime law. (Analysis and Solution) a. Under the doctrine of limited liability in maritime law, the liability of the shipowner arising from the operation of a

ship is confined to the vessel, equipment, and freight, or insurance, if any, so that if the shipowner abandoned the ship, equipment, and freight, his liability is extinguished. However, the doctrine of limited liability does not apply when the shipowner or captain is guilty of negligence. b. Under the Doctrine of Limited Liabitlity, shipowners liability is not extinguished if ship is proven sea worthy

c. Doctrine of Limited Liability limits the liability of shipowner to 500USD under COGSA d. Under the doctrine of Limited Liability regardless of presence of Bad Faith, ship owners liability is limited to stipulated liability under the carriage agreement. (b) Assuming that the vessel was insured, may the claimants go after the insurance proceeds? (Analysis and Solution) a. Yes. In case of a lost vessel, the claimants may go after the proceeds of the insurance covering the vessel. b. No. Because the Ship-owner and the captain was negligent. Despite warning of the impending typhoon, they still continued to sail for Leyte.

c. No. In case of a lost vessel, the ship-owner must renounce first his claim over the vessel to reduce the liability. d. Yes. COGSA limits the liabity of owner.