2016 (Mercantile Law) Bar Exam Questions: Question 17

[Answer/discuss the question below, or see 2016 bar exam Mercantile Law Instructions; 2016 Mercantile Law Questions: 123456789101112131415161819 and 20; See also 2016 Bar Exam: Information, Discussions, Tips, Questions and Results]

-XVII-

PJ Corporation (PJ) obtained a loan from ABC Bank (ABC) in the amount of Pl 0 million for the purchase of 100 pieces of ecodoors. Thereafter, a Letter of Credit was obtained by PJ against such loan. The beneficiary of the Letter of Credit is Scrap Metal Corp. (Scrap Metal) in Beijing, China. Upon arrival of 100 pieces of ecodoors, PJ executed a Trust Receipt in favor of ABC to cover for the value of the ecodoors for its release to PJ. The terms of the Trust Receipt is that any proceeds from the sale of the ecodoors will be delivered to ABC as payment. After the ecodoors were sold, PJ, instead of paying ABC, used the proceeds of the sale to order from Scrap Metal another I00 pieces of ecodoors but using another bank to issue a new Letter of Credit fully covered by such proceeds.

PJ refused to pay the proceeds of the sale of the first set of ecodoors to ABC, claiming that the ecodoors that were delivered were defective. It then instructed ABC not to negotiate the Letter of Credit that was issued in favor of Scrap Metal.

[a] Explain what is a “Letter of Credit” as a financial device and a “Trust Receipt” as a security to the Letter of Credit. (2.5%)

[b] As counsel of ABC, you are asked for advice on whether or not to grant the instruction ofPJ. What will be your advice? (2.5%)

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