Question No. 1:
Briefly describe the following types of banks: 1. Universal bank
Answer:
A universal bank is a commercial bank with 2 additional powers, namely: a. The power of an investment house; and
b. The power to invest in non-allied enterprises.
2. Commercial bank Answer:
A commercial bank is a bank that can: a. Accept drafts;
b. Issue letters of credit;
c. Discount and negotiate promissory note, bills of exchange, and other evidence of debt; d. Accept or create demand deposits;
e. Receive other types of deposits, as well as deposit substitutes; f. Buy and sell foreign exchange, as well as gold or silver bullion; g. Acquire marketable bonds and other debts securities; and
h. Extend credit, subject to such rules promulgated by the Monetary Board.
3. Thrift bank Answer:
A thrift bank is one established as a savings and mortgage bank, a stock savings and loan association, or a private development bank, for the purpose of:
a. Accumulating the savings of depositors and investing them in outlets determined by the Monetary Board as necessary in the furtherance of national economic objectives;
b. Providing short-term working capital, medium and long-term financing, to business engaged in agriculture, services, industry and housing; and
c. Providing diversified financial and allied services for its chosen market and constituencies especially for small and medium enterprises and individuals.
4. Rural bank Answer:
A rural bank is one established to provide credit facilities to farmers and merchants or their cooperatives and, in general, to the people of the rural communities.
5. Cooperative bank
A cooperative bank is organized under the Cooperative Code to provide financial and credit services to cooperatives. It may perform any or all the services offered by a rural bank, including the operation of a Foreign Currency Deposit Unit subject to certain conditions.
Question No. 2:
1. How do you characterize the legal relationship between a commercial bank and its safety deposit box client?
Answer:
The relationship between a commercial bank and its safety deposit box client is that of a bailee and bailor, the bailment being for hire and mutual benefit.
Alternative Answer:
The legal relationship of the bank and its safety deposit box client is that of a lessor and lessee.
2. Is a stipulation in the contract for the use of a safety deposit box relieving the bank of liability in connection with the use thereof valid?
Answer:
The stipulation relieving the bank of liability in connection with the use of the safety deposit box is void as it is against law and public policy.
3. Differentiate “bank deposits” from bank substitutes”. Answer:
Bank deposits are funds obtained by a bank from the public which are relent by such bank to its own borrowers. Deposit substitutes are alternative forms of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the own account of the borrower, for the purpose of relending or purchasing of receivables and other obligations. These instruments may include, but need not be limited to, bankers acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements.
4. Why are banks required to maintain reserves against their deposits and deposit substitutes? State one of three purposes for these reserves.
Answer:
Any one of the following 4 purposes for requiring banks to maintain reserves against their deposits and deposit substitutes will suffice:
a. One of the purposes of the requirement to maintain bank reserves is to control the volume of money created by the credit operations of the banking system;
b. It is to enable the banks to answer any withdrawal; c. To help Government to finance its operation; d. To help Government control money supply.
Question No. 3:
Ozamis Paper Corporation secured loans from ABC Universal Bank in the aggregate principal amount of P100 M, evidenced by several promissory notes, and secured by a continuing guaranty of its principal stockholder Menandro Marquez; a pledge of Marquez’s shares in the corporation valued at P45 M; and a real estate mortgage over certain parcels of land owned by Marquez.
The corporation defaulted and the bank etra-judicially foreclosed on the real estate mortgage. The bank, which was the sole bidder for P75 M, won the award.
1. Can the bank sue Marquez for the deficiency of P25 M? Explain. Answer:
Yes, the bank can sue Marquez for the deficiency of P25 M. in extrajudicial foreclosure of a real estate mortgage, if the proceeds of the sale are insufficient to pay the debt, the mortgagee has the right to sue for the deficiency.
2. If the bank opts to file an action for collection against the corporation, can it afterwards institute a real action to foreclose the mortgage? Explain.
Answer:
No, the bank can no longer file an action to foreclose the real estate mortgage. When it filed a collection case, it was deemed to have abandoned the real estate mortgage.
3. Can the bank foreclose on the pledged shares of Marquez and recover the deficiency from the corporation?
Answer:
If the bank forecloses the pledge, it cannot recover the deficiency because the foreclosure extinguishes the principal obligation, whether or not the proceeds from the foreclosure are equal to the amount of the principal obligation.
Question No. 4:
Andante Realty, a marketing company that promotes and facilitates sales of real property through leverage marketing, solicits investors who are required to be a Business Center Owner (BCO) by paying an enrollment fee of $250. The BCO is then entitled to recruit two other investors who pay $250 each. The BCO receives $90 from the $250 paid by each of his recruits and is credited a certain amount for payments made by investors through the initial efforts of his Business Center. Once the accumulated amount reaches $5,000, the same is used as down payment for the real property chosen by BCO.
1. Does the multi-level marketing scheme constitute an “investment contract” under the SRC? Define an “investment contract”.
Answer:
Yes. The multi-level marketing scheme constitutes an “investment contract” under the SRC. An “investment contract” is a contract, transaction or scheme:
a. Involving an investment of money, b. In a common enterprise,
c. With expectation of profits,
d. Primarily from the efforts of others.
2. What procedure must be followed under the SRC to authorize the sale or offer for sale or distribution of an investment contract?
Answer:
Before the investment contract is sold or offered for sale or distribution to the public in the Philippines, it should be registered with the SEC in accordance with Section 8 of the SRC.
3. What are the legal consequences of failure to follow this procedure? Answer:
The failure to follow this procedure has criminal consequences (i.e., upon conviction, a fine P50,000 to P5 M and/or imprisonment of 7-12 years). It carries also civil liabilities in that the purchaser can recover from the seller (i) the consideration paid with interest thereon, less the amount of any income received on the purchased securities, upon the tender of such securities, or (ii) damages if the purchaser no longer owns such securities. Furthermore, the SEC may issue a cease and desist order.
Question No. 5:
Venezia is a famous international fashion chain outlets in Makati, Ortigas, and Manila. It has complied with the minimum capitalization required under the Retail Trade Nationalization Act and carries on retail business worth more than $3 M for each outlets. As its Manila outlet is not doing very well, it decides to sell all of its business there consisting of remaining inventory, furniture and fixtures and other assets to its competitor.
1. Venezia’s Manila outlet constitutes 1/3 of its total business. Should it comply with the requirements of the Bulk Sales Law? Why or why not?
Answer:
Venezia need not comply with the requirements of the Bulk Sales Law as its Manila outlet constitutes only 1/3 of its total business and, therefore, it would not be a sale of all or substantially all of the business conducted by Venezia. Moreover, the requirements of the Bulk Sales Law reflected in Sections 3, 4, 5, and 9, by the express language of said provisions, apply only to the first type of bulk sales, i.e., to any sale, transfer, mortgage or assignment of a stock of goods, wares, merchandise, provisions or materials otherwise than in the ordinary course of trade and the regular prosecution of business of the vendor, mortgagor, transferor, or assignor, and not to the second type (as in the sale described in the problem) or the third type (i.e., sale, etc. Of all or substantially all of the fixtures and equipment used in and about the business). As the Bulk Sales Law is penal in nature, it should be interpreted strictly against the State.
2. If instead of selling its Manila outlet, Venezia merely mortgages its assets there, would it need to comply with the requirements of the Bulk Sales Law?
Answer:
For the same reasons stated in the answer to (1) above, Venezia need not comply with the requirements of the Bulk Sales Law. The second type of bulk sales also includes the mortgage of all or substantially all of the business of the mortgagor.
3. What are the legal consequences of a failure to comply with the requirements of a Bulk Sales Law?
Answer:
Failure to comply with the requirements of a Bulk Sales Law renders the sale, transfer, mortgage, or assignment fraudulent and void, and makes any person found guilty of violating any provision of the Bulk Sales Law punishable by imprisonment for not less than 6 months nor more than 5 years, or a fine in an amount not exceeding P5,000, or both such imprisonment and fine in the discretion of the court.
Question No. 6:
1. What contractual stipulations are required in all technology transfer agreements? Answer:
The following stipulations are required in all technology transfer agreements:
a. The laws of the Philippines shall govern its interpretation and in the event of litigation, the venue shall be the proper court in the place where the licensee has its principal place of business;
b. Continued access to improvements in techniques and processes related to the technology shall be made available during the period of the technology transfer arrangement;
c. In case it shall provide for arbitration, the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the Philippines or any neutral country;
d. The Philippine taxes on all payments relating to the technology transfer agreement shall be borne by the licensor.
2. Enumerate 3 stipulations that are prohibited in technology transfer agreements. Answer:
The following stipulations are prohibited in technology transfer agreements: a. Those that contain restrictions regarding the volume and structure of production;
b. Those that prohibit the use of competitive technologies in no-exclusive agreement; and c. Those that establish a full or partial purchase option in favor of the licensor.
3. Can an article of commerce serve as a trademark and at the same time enjoy patent and copyright protection? Explain and give an example.
Answer:
A stamped or marked container of goods can be registered as a trademark. An original ornamental design or model for articles of manufacturer can be copyrighted. An ornamental design cannot be patented, because aesthetic creations cannot be patented. However, it can be registered as an industrial design. Thus, a container of goods which has an original ornamental design can be registered as a trademark, can be copyrighted, and can be registered as an industrial design.
Question No. 7:
Union Mines, Inc. has a total asset of P60 M with 210 stockholders holding at least 100 shares each.
The company has two principal stockholders, ABC which owns 60% of the shares of stock, and XYZ which owns 17%.
ABC in turn is owned to the extent of 21.31% by Acme, Inc.; 29.69% by Golden Boy, Inc; 9%by XYZ; and the rest by individual stockholders.
None of the parties is a publicly-listed company.
XYZ now proposes to buy Acme’s and Golden Boy’s shares in ABC, which would give it direct control of ABC and indirect control of Union Mines.
Is the proposed acquisition by XYZ subject to the mandatory tender offer and when is it mandatory?
Answer:
Yes, the proposed acquisition is subject to mandatory tender offer rule. A tender offer is a publicly announced intention by a person (acting alone or in concert with other persons) to acquire shares of a public company. A tender offer is meant to protect minor stockholders against any scheme that dilutes the share value of their investments. It gives them the chance to exit the company under the same terms offered to the majority stockholders.
Under the SRC and its implementing rules, a mandatory tender offer is required:
a. When at least 35% of the outstanding shares of a public company is to be acquired in one transaction or a series of transaction during a 12-month period, or
b. Even if any acquisition is less than 35% threshold but the result thereof is the ownership of more than 51% of the total outstanding shares of a public company. The mandatory offer rule also applies to share acquisition meeting the threshold, which is done at the level of the holding or parent corporation controlling a public company
In this case, Union Mines is clearly a public company, since it has a total asset of P60 M with 210 stockholders holding at least 100 shares each. A public company is defined as a
corporation listed on the stock exchange, or a corporation with assets exceeding P50 M and with 200 or more stockholders at least 200 of them holding not less than 100 share of such corporation.
XYZ’s acquisition of shares of Acme, Inc. and Golden Boy, Inc., taken separately, does not reach 35% threshold. If taken collectively, the two acquisitions total only 50%. However, when the acquisitions are added to XYZ’s existing shares in Union Mines, they meet the more-than-51% threshold for mandatory tender offer.
Question No. 8:
Marlon deposited with LYRIC bank a money market placement of P1 M for a term of 31 days. On maturity date, one claiming to be Marlon called up the LYRIC Bank account officer and instructed him to give the manager’s check representing the proceeds of the money market placement to Marlon’s girlfriend, Ingrid.
The check, which bore the forged signature of Marlon, was deposited in Ingrid’s account with YAMAHA Bank. YAMAHA Bank stamped a guaranty on the check reading: “All prior endorsements and/or lack of endorsement guaranteed.”
Upon presentment of the check, LYRIC Bank funds the check. Days later, Marlon goes to LYRIC Bank to collect his money market placement and discovers the foregoing transactions.
Marlon thereupon sues LYRIC Bank which in turn files a third-party complaint against YAMAHA Bank. Discuss the respective rights and liabilities of the two banks.
Answer:
Since the money market placement of Marlon is in the nature of a loan to Lyric Bank, and since he did not authorize the release of the money market placement to Ingrid, the obligation of Lyric Bank to him has not been paid. Lyric Bank still has the obligation to pay him.
Since Yamaha Bank indorsed the check bearing the forged endorsement of Marlon and guaranteed all endorsements, including the forged endorsement, when it presented the check to Lyric Bank, it should be held liable to it.
However, since the issuance of the check was attended with the negligence of Lyric Bank, it should share the loss with Yamaha Bank on a 50% basis.
Question No. 9:
Your client Dianne approaches you for legal advice on putting up a medium-sized restaurant business that will specialize in a novel type of cuisine. As Dianne feels that the business is a little risky, she wonders whether she should use a corporation as the business vehicle, or just run it as a single proprietorship. She already has an existing corporation that is producing meat products profitably and is also considering the alternative of simply setting up the restaurant as a branch office of the existing corporation.
1. Briefly explain to your client what you see as the legal advantages and disadvantages of using a separate corporation, a single proprietorship, or a branch of an existing corporation for the proposed restaurant business.
Answer:
If Dianne will set up a separate corporation, her liability for its obligations and losses will be limited to the amount of her subscription in the absence of showing that there is a ground to disregard its separate juridical personality. If she were to operate a single proprietorship, her liability for its debts and losses will be unlimited.
The formation and the operation of a corporation require a great deal of paper work and record-keeping. This is not the situation in the case of a single proprietorship.
If she were to set-up the restaurant as a branch office an existing corporation, the corporation will have more funds as capital than if she were to form a separate corporation. However, all the assets of the existing corporation will be liable for the debts and losses of the restaurant business.
2. If you advise your client to use a corporation, what officer position must the corporation at least have?
Answer:
The corporation must have at least 4 directors. It must also have a president, treasurer, and a secretary.
3. What particular qualifications, if any, are these officers legally required to possess under the Corporation Code?
Answer:
Every director must own at least 1 share of the capital stock of the corporation, which must be recorded in his name on the books of the corporation, and a majority of the directors must be residents of the Philippines.
The president must also be a director. The secretary must be a resident and citizen of the Philippines.
Question No. 10:
To secure a loan of P10 M, Mario mortgaged his building to Armando. In accordance with the loan arrangements, Mario had the building insured with First Insurance Company for P10 M, designating Armando as the beneficiary.
Armando also took an insurance on the building upon his own interest with Second Insurance Company for P5 M.
The building was totally destroyed by fire, a peril insured against under both insurance policies. It was subsequently determined that the fire had been intentionally started by Mario and that in violation of the loan agreement, he had been storing inflammable materials in the building.
Answer:
Armando can receive P5 M from Second Insurance Company. As mortgagee, he had an insurable interest in the building. Armando cannot collect anything from First Insurance Company. First Insurance Company is not liable for the loss of the building. First, it was due to a willful act of Mario, who committed arson. Second, fire insurance policies contain a warranty that the insured will not store hazardous materials within the insured’s premises. Mario breached this warranty when he stored inflammable materials in the building. These two factors exonerate First Insurance Company from liability to Armando as mortgagee even though it was Mario who committed them.
2. What happens to the P10 M debt of Mario to Armando? Explain. Answer:
Since Armando would have collected P5 M from Second Insurance Company, this amount should be considered as partial payment of the loan. Armando can only collect the