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May 1, 2009

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X corporation entered into a contract with PT Contruction Corp. for the latter to construct and build a sugar mill within six (6) months. They agreed that in case of delay, PT Construction Corp. will pay X Corporation P100,000 for every day of delay. To ensure payment of the agreed amount of damages, PT Construction Corp. secured from Atlantic Bank a confirmed and irrevocable letter of credit which was accepted by X Corporation in due time. One week before the expiration of the six (6) month period, PT Construction Corp. requested for an extension of time to deliver claiming that the delay was due to the fault of X Corporation. A controversy as to the cause of the delay which involved the workmanship of the building ensued. The controversy remained unresolved. Despite the controversy, X Corporation presented a claim against Atlantic Bank by executing a draft against the letter of credit.
  1. Can Atlantic Bank refuse payment due to the unresolved controversy? Explain. (3%)
  2. Can X Corporation claim directly from PT Construction Corp.? Explain. (3%)
1. No, Atlantic Bank cannot refuse payment.

Under the independence principle of letters of credit, the issuing bank is obliged to pay a draft drawn by the beneficiary upon tender of the required documents without need of examining the main contract, the letter of credit being an independent undertaking by the bank.

In the given case, the unresolved controversy as to the cause of the delay in the main contract does not in any way affect Atlantic Bank's obligation under the letter of credit. This is especially true since the letter of credit is designated as irrevocable, which, thus, makes definite the bank's undertaking to pay.

Hence, considering that all the required documents have been tendered by X Corporation, Atlantic Bank cannot validly refuse to pay.

2. Yes, X Corporation may directly claim from PT Construction Corp.

Under the Civil Code, which is suppletory to the Code of Commerce, a contract, once perfected binds the parties not only to the fulfillment of what has been stipulated but also to all the consequences which according to their nature may be in keeping with good faith, usage and law.

A careful perusal of the contract between X Corporationand PT Construction Corp. reveals the intention of the parties to make the letter of credit answerable for damages occasioned by the latter's delay. At the same time, there is no showing that this is the only remedy available to X Corporation.

Hence, a claim against the letter of credit is merely an alternative recourse and does not in any way prevent X Corporation from claiming directly against PT Construction Corp. (Transfield Phils. Inc. vs. Luzon Hydro Corporation, G.R. No. 146717, Nov. 22, 2004)

Tom Cruz obtained a loan of P 1 Million from XYZ Bank to finance his purchase of 5,000 bags of fertilizer. He executed a trust receipt in favor of XYZ Bank over the 5,000 bags of fertilizer. Tom Cruz withdrew the 5,000 bags from the warehouse to be transported to Lucena City where his store was located. On the way, armed robbers took from Tom Cruz the 5,000 bags of fertilizer. Tom Cruz now claims that his obligation to pay the loan to XYZ Bank is extinguished because the loss was not due to his fault. Is Tom Cruz correct? Explain. (4%)

No, Tom Cruz is not correct.

Under the Trust Receipts Law, the entrustee is liable for loss of the goods whether or not he is negligent. Moreover, in a trust receipt transaction where a loan feature is involved, the obligation for the loan is not extinguished until such loan is paid.

In the present case, the fact that the stealing of the goods was not Tom Cruz' fault does not exculpate him from liability. This is especially true since the goods subject of the trust receipt transaction serves only as security for the payment of the loan. The loss of the security did not impair XYZ Bank's title to the goods, which can only be extinguished once Tom Cruz pays the advancement made.

Hence, it is not correct for Tom Cruz to avoid liability under the trust receipt on the premise that the goods are lost without his fault.
  1. As a rule under the Negotiable Instruments Law, a subsequent party may hold a prior party liable but not vice-versa. Give two (2) instances where a prior party may hold a subsequent party liable. (2%)
  2. How does the "shelter principle" embodied in the Negotiable Instruments Law operate to give the rights of a holder-in-due course to a holder who does not have the status of a holder-in-due course? Briefly explain. (2%)
1. The following are two (2) instances where a prior party may hold a subsequent party liable:
  • When the subsequent party is guilty of fraud as in the case of the author of the forgery who is liable not only to the person whose signature he forged but also to all other parties prejudiced by his forgery
  • When the subsequent party is an accommodated party, the accommodating party, even though a prior party, may hold him liable
2. Under the "shelter principle," the holder-in-due course, by negotiating the instrument, to a party not a holder-in-due course, transfers all his rights as such holder to the latter, who thus acquires the right to enforce the instrument as if he was a holder-in-due course. However, this principle presupposes that the "sheltered" holder is not a party to any fraud or illegality impairing the validity of the instrument.

AB Corporation drew a check for payment to XY Bank. The check was given to an officer of AB Corporation who was instructed to deliver it to XY Bank. Instead, the officer, intending to defraud the Corporation, filled up the check by making himself as the payee and delivered it to XY Bank for deposit to his personal account. AB Corporation came to know of the officer's fraudulent act after he absconded. AB Corporation asked XY Bank to recredit its amount. XY Bank refused.
  1. If you were the judge, what issues would you consider relevant to resolve the case? Explain (3%)
  2. How would you decide the case? Explain. (2%)

1. If I were the judge, I would consider the following issues as relevant to the case:
  • Whether or not AB Corporation is negligent
  • If so, whether or not such negligence is the proximate cause
  • Whether or not there is contributory negligence on the part of XY Bank
2. AB Corporation must bear the loss.

The Negotiable Instruments Law provides that where an instrument is wanting in any material particular,the person in possession thereof has prima facie authority to complete it by filling up the blanks therein. This rule is founded upon the principle that where one of two persons must suffer by the bad faith of another, the loss must fall upon the one who first reposed confidence and made it possible for the loss to occur.

Applying said principle to the case at bar, although AB Corporation cannot necessarily be faulted for placing confidence on its own officer, the fact remains that such act is the proximate cause of the loss. Moreover, there is no showing that XY Bank is likewise negligent. By the very nature of negotiable instruments, one is not obligated to inquire beyond what appears on its face.

Hence, as between the drawer AB Corporation and drawee XY Bank, the former bears the loss.

Pancho drew a check to Bong and Gerard jointly. Bong indorsed the check and also forged Gerard's endorsement. The payor bank paid the check and charged Pancho's account for the amount of the check. Gerard received nothing from the payment.
  1. Pancho asked the payor bank to recredit his account. Should the bank comply? Explain fully. (3%)
  2. Based on the facts, was Pancho as drawer discharged on the instrument? Why?(2%)
1. Yes, the payor bank should comply.

Basic is the rule that if the payee's indorsement is forged, the drawee bank cannot debit the drawer's account and the drawee bank shall bear the loss.

In the case at bar, it was the indorsement of Gerard, one of the joint payees, which was forged. In the first place, the payor bank had no right to pay the check due to such forgery. In the second place, the fiduciary nature of their relationship requires the bank to treat the accounts of its depositors with meticulous care. By paying the check where the payee's signature is forged, the bank is obviously wanting in that degree of care required by the nature of its functions.

Hence, the payor bank is obliged to recredit Pancho's account.

2. Yes, Pancho was discharged.

Under the Negotiable Instruments Law, a person secondarily liable may be discharged by any act which discharges the instrument. One of the acts that discharges the instrument is payment made in due course by or in behalf of the principal debtor. The same law provides that payment in due course is one made at or after maturity to the holder in good faith and without notice that title is defective.

The facts of the case reveal that payment by payor bank to Bong is one made in due course, it being made at or after maturity to the holder (Bong) in good faith and without notice that his title is defective.

Such being the case, the negotiable instrument is discharged, which in turn discharges Pancho, as drawer, from his secondary liability.

On January 1, 2000, Antonio Rivera secured a life insurance from SOS Insurance Corp. for P1 Million with Gemma Rivera, his adopted daughter, as the beneficiary. Antonio Rivera died on March 4, 2005 and in the police investigation, it was ascertained that Gemma Rivera participated as an accessory in the killing of Antonio Rivera. Can SOS Insurance Corp. avoid liability by setting up as a defense the participation of Gemma Rivera in the killing of Antonio Rivera? Discuss with reasons. (4%)

No, SOS Insurance Corp. cannot avoid liability by setting up as defense the participation of Gemma Rivera in the killing of Antonio Rivera.

Although the Insurance Code provides that the interest of the beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured, the same law also provides that in such an event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified.

The facts of the case reveal that Gemma Rivera's participation as accessory is only based on the findings of a police investigation. In other words, there is yet no final judgment of conviction. But assuming arguendo that a mere police investigation is enough to disqualify Gemma, the fact remains that the law itself provides that the insurance proceeds shall pertain to the nearest relatives of the insured.

Hence, all premises considered, the insurer cannot therefore escape liability by simply raising the defense of Gemma's participation as an accessory to the crime.

Terrazas de Patio Verde, a condominium building, has a value of P50 Million. The owner insured the building against fire with three (3) insurance companies for the following amounts: Northern Insurance Corp. - P20 Million Southern Insurance Corp. - P30 Million Eastern Insurance Corp. - P50 Million
  1. Is the owner's taking of insurance for the building with three (3) insurers valid? Discuss. (3%)
  2. The building was totally razed by fire. If the owner decides to claim from Eastern Insurance Corp. only P50 Million, will the claim prosper? Explain. (2%)
1. Yes, as a general rule, the owner's taking of insurance for the building with three (3) insurers is valid. This is a case of double insurance where the same person is insured by several insurers separately in respect to the same subject and interest.

Under the Insurance Code, such an arrangement is not prohibited per se, although parties may agree upon an "other insurance" clause, in which case the insured may be prohibited from taking additional insurance without the insurer's consent.

In the present case, it does not appear that the parties agreed on an other insurance clause. Hence, in the absence of any showing that such a restriction exists, there is nothing to prevent the insured from taking another insurance over the same property, subject only to the caveat that he cannot recover more than the value of his interest in the thing insured.

2. Yes, the claim will prosper.

In case double insurance, the insured has the option to go after any one of the insurers unless the policy itself provides that insurers contribute ratably to the loss. In either case, he cannot recover more than the value of his insurable interest.

In the case at bar, the insured, as owner, has an insurable interest up to P50 Million, the value of the building. That being the case, he can therefore claim the entire P50 Million from Eastern Insurance Corp. In turn, by the principle of contribution which applies in case of over-insurance due to double insurance, Eastern Insurance Corp. may require the other insurers to contribute ratably to the loss, considering that they separately insure the same interest against the same peril.

City Railways, Inc. (CRI) provides train services, for a fee, to commuters from Manila to Calamba, Laguna. Commuters are required to purchase tickets and then proceed to designated loading ang unloading facilities to board the train. Ricardo Santos purchased a ticket for Calamba and entered the station. While waiting, he had an altercation with the security guard of CRI leading to a fistfight. Ricardo Santos fell on the railway just as a train was entering the station. Ricardo Santos was run over by the train. He died. In the action for damages filed by the heirs of Ricardo Santos, CRI interposed lack of cause of action, contending that the mishap occurred before Ricardo Santos boarded the train and that it was not guilty of negligence. Decide.(5%)

The contention of CRI is not tenable.

Under the law, the degree of care required of a common carrier is extraordinary diligence or the obligation to carry the passenger safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons with due regard to all the consequences. Thus, in case of death or injury to passengers, the common carrier is presumed negligent and upon him rests the burden of proof of exercise of extraordinary diligence. The duty to exercise extraordinary diligence attaches from the moment the person who purchases the ticket from the carrier presents himself at the proper place and in a proper manner to be transported.

In the given case, there is no doubt that CRI is a common carrier for the reason that it is engaged in the business of transporting passengers by land, for compensation, offering its services to the public. As such, it is required to exercise extraordinary diligence and this responsibility attached from the moment Ricardo Santos purchased the ticket and entered the station. When Ricardo died while he was within the premises of CRI, the latter is presumed to be at fault. This is true even if Ricardo has not yet boarded the train, so long as he has presented himself to the carrier at the proper place and in a proper manner.

Hence, CRI, as a common carrier, is liable to the heirs of Ricardo Santos.

On October 30, 2007, M/V Pacific, a Philippine registered vessel owned by Cebu Shipping Company (CSC), sank on her voyage from Hong Kong to Manila. Empire Assurance Company (Empire) is the insurer of the lost cargoes loaded on board the vessel which were consigned to Debenhams Company. After it indemnified Debenhams, Empire as subrogee filed an action for damages against CSC.
  1. Assume that the vessel was seaworthy. Before departing, the vessel was advised by the Japanese Meteorological Center that it was safe to travel to its destination. But while at sea, the vessel received a report of a typhoon moving within its general path. To avoid the typhoon, the vessel changed its course. However, it was still at the fringe of the typhoon when it was repeatedly hit by huge waves, foundered and eventually sank. The captain and the crew were saved except three (3) who perished. Is CSC liable to Empire? What principle of maritime law is applicable? Explain. (3%)
  2. Assume the vessel was not seaworthy as in fact its hull had leaked, causing flooding in the vessel. Will your answer be the same? Explain. (2%)
  3. Assume the facts in question (b). Can the heirs of the three (3) crew members who perished recover from CSC? Explain fully. (3%)
1. No, CSC is not liable to Empire.

The principle of maritime law applicable is the Doctrine of Limited Liability. Under this rule, the exclusively real and hypothecary nature of maritime law operates to limit the liability of the shipowner to the value of the vessel, earned freightage and proceeds of insurance if any. Hence, the phrase "NO VESSEL, NO LIABILITY." Total destruction or sinking of the vessel extinguishes the maritime lien as there is no longer any res to which it can attach.

This doctrine is applicable in the case because, as the facts reveal, the ship sank and was totally lost. The exception that the carrier failed to overcome the presumption of negligence is not obtaining as in fact CSC was able to prove that the ship was seaworthy. Moreover, the loss is due to a typhoon -- a fortuitous event, which is one of the exempting circumstances when the carrier can avoid liability.

Hence, CSC is not liable under the Doctrine of Limited Liability.

2. No, my answer will not be the same.

While as a rule, the shipowner's liability is limited only to the value of the vessel so that loss of the vessel operates to extinguish his liability, the same rule has no application when the carrier failed to overcome the presumption of negligence. Such presumption is only rebutted when the carrier establishes that the vessel is seaworthy.

According to the facts of the case, the vessel is not seaworthy. Absent this requirement of seaworthiness of the vessel, CSC has failed to overcome the presumption of negligence.

Hence, the Doctrine of Limited Liability is inapplicable and CSC is liable for the loss.

3. Yes, the heirs of the three (3) crewmembers who perished can recover from CSC.
This is because another exception to the applicability of the Limited Liability Rule is Workmen's Compensation Claims.

However, in this case, the heirs cannot go after CSC directly since their claim based on workmen's compensation would have be to be filed with the Social Security System (SSS). After paying said claims, the SSS is subrogated to their rights and is thus entitled to go after CSC. In either case, CSC cannot raise the defense that its liability is limited to the value of his vessel.

Nelson owned and controlled Sonnel Construction Company. Acting for the company, Nelson contracted the construction of a building. Without first installing a protective net atop the sidewalks adjoining the construction site, the company proceeded with the construction work. One day a heavy piece of lumber fell from the building. It smashed a taxicab which at that time had gone offroad and onto the sidewalk in order to avoid the traffic. The taxicab passenger died as a result.
  1. Assume that the company had no more account and property in its name. As counsel for the heirs of the victim, whom will you sue for damages, and what theory will you adopt? (3%)
  2. If you were the counsel for Sonnel Construction, how would you defend your client? What would be your theory? (2%)
  3. Could the heirs hold the taxicab owner and driver liable? Explain. (2%)

1. As counsel for the heirs of the victim, I will sue Nelson as owner of Sonnel Construction Company using the Doctrine of Piercing the Veil of Corporate Fiction.

As a general rule, the liability of a corporation is separate and distinct from that of the persons comprising it. However, as an exception to the rule, the veil of corporate fiction may be pierced when the separate personality of the corporation is used as a shield to avoid a clear legal obligation. In such an event, it is treated as a mere association of persons upon whom liability attaches.

In the given case, Sonnel Construction Company has a clear legal obligation to the heirs of the victim for its negligence in not installing a protective net atop the sidewalk before beginning construction. Nelson, as owner of the company, cannot use the separate entity rule in order to avoid liability. This is especially true when the company had no more account and property under its name.

2. If I were the counsel of Sonnel Construction, I would raise the defense of due diligence in the selection and supervision of its employees.

Under the doctrine of vicarious liability of employers, the employer may be relieved of responsibility for the negligent acts of their employees if they can show that they observed all the diligence of a good father of a family to prevent damage.

In the given case, Sonnel Construction, as employer, may prove due diligence in the selection and supervision of its employees by establishing that prior to hiring, it examined them as to their qualifications, experience and service records and during the course of employment, it formulated standard operating procedures, monitored their implementation and imposed disciplinary measures for breaches thereof.

3. Yes, the heirs may hold the taxicab owner and the driver liable.

As regards the taxicab owner, the heirs have two concurrent causes of action based on the vicarious liability of an employer and based on contractual breach. In the first, the negligence of the driver gives rise to the presumption of negligence of the taxicab owner as its employer. In the second, there is a contract of carriage between the taxicab owner and its passenger and the breach thereof by the former gives rise to the presumption that it failed to exercise extraordinary diligence.

In addition, the heirs also have two concurrent causes of action against the driver. First, they may hold the driver criminally liable for reckless imprudence resulting in homicide. In which case, the taxicab owner is also subsidiarily liable in case the driver becomes insolvent. Second, the heirs may likewise sue the driver for damages based on tort.

All four cases may be pursued separately and simultaneously for they are independent of each other. The only caveat is that the plaintiff may not recover twice for the same negligent act.
  1. Since February 8, 1935, the legislature has not passed even a single law creating a private corporation. What provision of the Constitution precludes the passage of such a law? (3%)
  2. May the composition of the board of directors of the National Power Corporation (NPC) be validly reduced to three (3)? Explain your answer fully. (2%)

1. Section 16, Article XII of the 1987 Constitution provides that Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.

2. Yes, the composition of the board of directors of the NPC may be validly reduced to three (3).

The NPC is a government-owned or controlled corporation (GOCC) governed by its own charter. The limitation under the Corporation Code that the number of directors be not less than five (5) but not more than fifteen (15) does not apply to a GOCCthat has its own charter.

Pedro owns 70% of the subscribed capital stock of a company which owns an office building. Paolo and Juan own the remaining stock equally between them. Paolo also owns a security agency, a janitorial company and a catering business. In behalf of the office building company, Paolo engaged his companies to render their services to the office building. Are the service contracts valid? Explain. (4%)

Yes, the service contracts are valid.

Under the Corporation Code, contracts entered into by interlocking directors are valid if the interest of the interlocking director in one corporation is nominal -- that is, less than 20% of the outstanding capital stock -- and provided that the following conditions are met:
  • the presence of such director in the board meeting approving the contract was not necessary to constitute a quorom
  • his vote was not necessary to approve the contract
  • the contract is fair and reasonable under the circumstances.
According to the facts of the case, Pedro owns 70% of the stocks, leaving 30% to be divided equally between Juan and Paolo. This shows that Paolo owns only a nominal interest of 15%.

Hence, provided that all the other conditions are met, Paolo's service contracts with the company are valid.

Grand Gas Corporation, a publicity listed company, discover after extensive drilling a rich deposit of natural gas along the coast of Antique. For five (5) months, the company did not disclose the discovery so that it could quietly and cheaply acquire neighboring land and secure mining information. Between the discovery and its disclosure of the information to the Securities and Exchange Commission, all the directors and key officer of the company bought shares in the company at very low prices. After the disclosure, the price of the shares went up. The directors and officers sold their shares at huge profits.
  1. What provision of the Securities Regulation Code (SRC) did they violate, if any? Explain. (4%)
  2. Assuming that the employees of the establishment handling the printing work of Grand Gas Corporation saw the exploration reports which were mistakenly sent to their establishment together with other materials to be printed. They too bought shares in the company at low prices and later sold them at huge profits. Will they be liable for violation of the SRC? Why? (3%)

1. The directors and key officers violated the provisions prohibiting insider trading.

Under the Securities Regulation Code, it shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public.

In the given case, the directors and key officers are such insiders, they being directors and officers of Grand Gas Corporation, the issuer. As such, their act of purchasing company shares while in possession of material non-public information.

Hence, the directors and key officers are guilty of insider trading in violation of the Securities Regulation Code.

2. Yes, they are liable.

Under the Securities Regulation Code, a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or security that is not generally available to the public is likewise an insider.

In the case at bar, it can be readily seen that the employees of the printing company received the material information through its relationship with Grand Gas Corporation as its printer. They are therefore insiders. When they purchased the shares while in possession of material non-public information, they committed insider trading.

Hence, they can be held liable for violation of the Securities Regulation Code.

Ace Cruz subscribed to 100,000 shares of stock of JP Development Corporation, which has a par value of P1 per share. He paid P25,000 and promised to pay the balance before December 31, 2008. JP Development Corporation declared a cash dividend on October 15, 2008, payable on December 1, 2008.
  1. For how many shares is Ace Cruz entitled to be paid cash dividends? Explain. (2%)
  2. On December 1, 2008, can Ace Cruz compel JP Development Corporation to issue to him the stock certificate corresponding to the P25,000 paid by him? (2%)

1. Ace Cruz is entitled to be paid cash dividends for his entire subscribed shares of 100,000.

Under the Corporation Code, holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. This includes the proprietary right of the stockholder to receive dividends based on his total subscription.

2. No, Ace Cruz cannot compel JP Development Corporation to issue to him the stock certificate.

The Corporation Code provides that no certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares) if any is due, has been paid.

Eloise, an accomplished writer, was hired by Petong to write a bimonthly newspaper column for Diario de Manila, a newly-established newspaper of which Petong was the editor-in-chief. Eloise was to be paid P1,000 for each column that was published. In the course of two months, Eloise submitted three columns which, after some slight editing, were printed in the newspaper. However, Diario de Manila proved unprofitable and closed only after two months. Due to the minimal amounts involved, Eloise chose not to pursue any claim for payment from the newspaper, which was owned by New Media Enterprises.

Three years later, Eloise was planning to publish an anthology of her works, and wanted to include the three columns that appeared in the Diario de Manila in her anthology. She asks for your legal advice:
  1. Does Eloise have to secure authorization from New Media Enterprises to be able to publish her Diario de Manila columns in her own anthology? Explain fully. (4%)
  2. Assume that New Media Enterprises plans to publish Eloise's columns in its own anthology entitled, "The Best of Diaro de Manila." Eloise wants to prevent the publication of her columns in that anthology since she was never paid by the newspaper. Name one irrefutable legal arguments Eloise could cite to enjoin New Media Enterprises from including her columns in its anthology. (2%)
1. Yes, Eloise has to secure authorization from New Media Enterprise.

In case of a work by an author during and in the course of his employment, the copyright shall belong to the employer, if the work is the result of his regular duties, even if the employee uses the time, facilities and materials of the employer.

The facts reveal that Eloise created the works in question during the course of her employment with New Media Enterprises. Anent the fact that she was specifically hired by Petong to write a bimonthly column, the said works are the result of her regular duties.

Hence, being a mere employee, Eloise is not the owner of the copyright and must therefore secure the authority of the real owner before she can publish the works in her own anthology.

2. Eloise can invoke her moral rights in her works.

Although copyright over the works belong to the employer, the author of the work shall, independently of the economic rights, have moral rights in her works. This includes the right to make alterations to her work prior to, or withhold it from publication.

In the given case, Eloise as the true author continues to hold moral rights in her works, regardless of the fact that New Media Enterprises owns the economic rights thereto.

Hence, she may enjoin New Media Enterprises from publishing her columns by invoking her moral rights as author.
In 1999, Mocha Warm, an American musician, had a hit rap single called Warm Warm Honey which he himself composed and performed. The single was produced by a California record company, Galactic Records. Many noticed that some passages from Warm Warm Honey sounded eerily similar to parts of Under Hassle, a 1978 hit song by the British rock band Majesty. A copyright infringement suit was filed in the United States against Mocha Warm by Majesty. It was later settled out of court, with Majesty receiving attribution as co-author of Warm Warm Honey as well as a share in the royalties. By 2002, Mocha Warm was nearing bankruptcy and he sold his economic rights over Warm Warm Honey to Galactic Records for $10,000 In 2008, Planet Films a Filipino movie producing company, commissioned DJ Chef Jean, a Filipino musician, to produce an original re-mix of Warm Warm Honey for use in one of its latest films, Astig!. DJ Chef Jean remixed Warm Warm Honey with salsa beat and interspersed as well a recital of a poetic stanza by John Blake, a 17th century Scottish poet. DJ Chef Jean died shortly after submitting the remixed Warm Warm Honey to Planet Films. Prior to the release of Astig!, Mocha Warm learns of the remixed Warm Warm Honey and demands that he be publicity identified as the author of the remixed song in all the CD covers and publicity releases of Planet Films.
  1. Who are the parties or entities entitled to be credited as author of the remixed Warm Warm Honey? Reason out your answer. (3%)
  2. Who are the particular parties or entities who exercise copyright over the remixed Warm Warm Honey? Explain. (3%)
1. The parties or entities entitled to be credited as author of the remixed Warm Warm Honey are the following:
  • Mocha Warm, because as author, he has the moral right of attribution, which exists independently of any grant of an assignment or license with respect to his economic rights
  • Majesty, because as co-author, it is one of the original owners of the copyright and as such has the right to be credited as author
  • DJ Chef Jean, because as an author commissioned to produce a derivative work, he enjoys all the rights of a copyright holder as though it were a new work, without prejudice to any subsisting copyright over the original works
2. The parties or entities who exercise copyright over the remixed Warm Warm Honey are the following:
  • DJ Chef Jean, as producer, for purposes of exhibition, and also as author commissioned to produce a derivative work, he also exercises copyright over the work for all other purposes.
  • Galactic Records, as owner of a subsisting copyright over the original work
  • Majesty, as author of the original work
On January 1, 2008, Al obtained a loan of P10,000 from Bob to be paid on January 30, 2008, secured by a chattel mortgage on a Toyota motor car. On February 1, 2008, Al obtained another loan of P10,000 from Bob to be paid on February 15, 2008. he secured this by executing a chattel mortgage on a Honda motorcycle. On the due date of the first loan Al failed to pay. Bob foreclosed the chattel mortgage but the car was bidded for P6,000 only. Al also failed to pay the second loan due on February 15, 2008. Bob filed an action for collection of sum of money. Al filed a motion to dismiss claiming that Bob should first foreclose the mortgage on the Honda motorcycle before he can file the action for sum of money. Decide with reasons. (4%)

The motion to dismiss must be denied. Under the Chattel Mortgage Law, the mortgagee has two remedies in case of default. He may file a collection suit or he may foreclose the chattel mortgage with right to recover any deficiency. These remedies are alternative and neither one is a condition sine qua non of the other. In the given case, Bob chose to file an action for collection of sum of money. The law itself provides for this remedy to the mortgagee and nothing in its language suggests that before such a remedy is availed of, there must first be foreclosure. Hence, all premises considered, the motion to dismiss is without merit because foreclosure is not necessary for an action for collection of sum of money.
  1. Can a distressed corporation file a petition for corporate rehabilitation after the dismissal of its earlier petition for insolvency? Why? (2%)
  2. Can the corporation file a petition for rehabilitation first, and after it is dismissed file a petition for insolvency? Why? (2%)
  3. Explain the key phrase "equality is equity" in corporate rehabilitation proceedings. (2%)
1. Yes, a distressed corporation can file a petition for corporate rehabilitation after the dismissal of its earlier petition for insolvency. This is because a petition for corporate rehabilitation is granted upon different grounds as a petition for insolvency. It is possible that the petition for insolvency was not granted because the ground relied upon is insufficient to warrant a declaration of a state of insolvency, but that the same ground may be obtaining in a petition for corporate rehabilitation.

2. Yes, the corporation can file a petition for corporate rehabilitation first and after it is dismissed, file a petition for insolvency, for the same reason as above. The grounds relied upon are different. For as long as the first petition is no longer pending but is already terminated, the second petition based on a ground incompatible with the first may still be filed.

3. "Equality is equity" means that whenever a distressed corporation asks the Securities and Exchange Commission for rehabilitation and suspension of payments, preferred creditors may no longer assert preference, but shall stand in equal footing with other creditors. It is for this reason that during corporate rehabilitation, all pending claims, whether secured or unsecured, are suspended. However, the preferred status of secured creditors still remain so that when the corporation is declared insolvent and its assets are distributed, the secured creditors continue to be preferred over the unsecured ones.

Industry Bank, which has a net worth of P1 Billion, extended a loan to Celestial Properties Inc. amounting to P270 Million. The loan was secured by a mortgage over a vast commercial lot in the Fort Bonifacio Global City, appraised at P350 Million. After audit, the Bangko Sentral ng Pilipinas gave notice that the loan to Celestial Properties exceeded the single borrower's limit of 25% of the bank's net worth under a recent BSP Circular. In light of other previous similar violations of the credit limit requirement, the BSP advised Industry Bank to reduce the amount of the loan to Celestial Properties under pain of severe sanctions. When Industry Bank informed Celestial Properties that it intended to reduce the loan by P50 Million, Celestial Properties countered that the bank should first release a part of the collateral worth P50 Million. Industry Bank rejected the counter-proposal, and referred the matter to you as counsel. How would you advise Industry Bank to proceed, with its best interest in mind? (5%)


I would advise Industry Bank to release a part of the collateral worth P50 Million.

While it is true that under the Civil Code a mortgage is one and indivisible as to the contracting parties so that every portion of the property mortgaged is answerable for the whole obligation as soon as it falls due, the Supreme Court has held that this rule is not applicable to a situation where only a portion of the loan was released. In such a case, the mortgage on the loan became unenforceable to the extent of the unreleased portion.

In the case at bar, the loan agreement is for P270 Million. By reducing the amount to P220 Million (or P270 Million less P50 Million), the real estate mortgage over the commercial lot became unenforceable to the extent of P50 Million and subsists as a security only for P220 Million debt. In other words, in case of default of Celestial Properties, the mortgage can be foreclosed only to the extent of the P220 Million. (Central Bank of the Philippines vs. CA, 139 SCRA 46[1985])

Hence, it would be in the best interest of the bank to comply with its client's request since retaining the entire collateral would not result in any benefit. On the contrary, it might damage its relationship with its client by refusing to accommodate its request.



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