2016 MERCANTILE LAW

INSTRUCTIONS

1. This Questionnaire contains nine (9) pages. Check the number of pages and make
sure it has the correct number of pages and their proper numbers.

All the items have to be answered within four (4) hours. Since there are twenty (20)
questions, you have 12 minutes to answer each question, and 6 minutes to answer each
sub-question. You may write on the Questionnaire for notes relating to the questions.

Read each question very carefully and write your answers in your Bar Examination
Notebook in the same order the questions are posed. Write your answers only on the
front of every sheet in your Notebook. If not sufficient, then start with the back page of
the first sheet and thereafter. Note well the allocated percentage points for each number,
question, or sub-question. In your answers, use the numbering system in the
questionnaire.

2. Answer the Essay questions legibly, clearly, and concisely. Start each number on a
separate page. An answer to a sub-question under the same number may be written
continuously on the same page and the immediately succeeding pages until completed.

Your answer should demonstrate your ability to analyze the facts, apply the pertinent
laws and jurisprudence, and arrive at a sound or logical conclusion. Always support
your answer with the pertinent laws, rules, jurisprudence, and the facts.

A mere "Yes" or "No" answer without any corresponding explanation or discussion will
not be given full credit. Thus, always briefly but fully explain your answers although the
question does not expressly ask for an explanation. Do not re-write or repeat the
question in your Notebook.

3. Make sure you do not write your name or any extraneous note/s or distinctive
markingls on your Notebook that can serve as an identifying mark/s (such as names
that are not in the given questions, prayers, or private notes to the Examiner). Writing,
leaving, or making any distinguishing or identifying mark in the exam Notebook is
considered cheating and can disqualify you.

YOU CAN BRING HOME THE QUESTIONNAIRE.

JUSTICE PRESBITERO J. VELASCO, JR.

Chairman
2016 Bar Examinations

What does "doing business in the Philippines" under the Foreign Investments Act of
1991 mean? (5%)

Doing business under the Foreign Investment Act occurs when the foreign
corporation undertakes the following: soliciting orders, service contracts, or
establishes an office in the Philippines; employs a representative, or a distributor
domiciled in the Philippines or stays in the Philippines for a period of 180 days or
more; manages, supervises or controls a domestic corporation; and such other
acts that manifest a continuity of commercial dealings or arrangements in the
Philippines.

II

Jason is the proud owner of a newly-built house worth P5 million. As a protection

against any possible loss or damage to his house, Jason applied for a fire insurance
policy thereon with Shure Insurance Corporation (Shure) on October 11, 2016 and paid
the premium in cash. It took the company a week to approve Jason's application. On
October 18, 2016, Shure mailed the approved policy to Jason which the latter received
five (5) days later. However, Jason's house had been razed by fire which transpired a
day before his receipt of the approved policy. Jason filed a written claim with Shure
under the insurance policy. Shure prays for the denial of the claim on the ground that
the theory of cognition applies to contracts of insurance.

Decide Jason's claim with reasons. (5%)

Jason’s claim is without merit.

Insurance contracts follow the cognition theory under the Civil Code. This
provides that the policy is deemed perfected upon knowledge of the insured of the
acceptance of his application. From such moment, there is already meeting of the
minds between the cause and the consideration.

As such, since Jason has not received the approval of his application before the
loss occurred, the insurance contract is not deemed perfected. Shure Company is
therefore not liable thereon.

III

ABC Appliances Corporation (ABC) is a domestic corporation engaged in the production

and sale of televisions and other appliances. YYY Engineers, a Taiwanese company, is
the manufacturer of televisions and other appliances from whom ABC actually
purchases appliances. From 2000, when ABC started doing business with YYY, it has
been using the mark "TTubes" in the Philippines for the television units that were bought
from YYY. In 2015, YYY filed a trademark application for "TTubes." Later, ABC also filed
its application. Both claim the right over the trademark "TTubes" for television products.
YYY relies on the principle of "first to file" while ABC involves the "doctrine of prior use."

[a] Does the fact that YYY filed its application ahead of ABC mean that YYY has the prior
right over the trademark? Explain briefly. (2.5%)

Yes. Under the Intellectual Property code, prior use is not a condition precedent
for registration of trademark. What is material is the use of the trademark after
its registration.

As such, since YYY first filed the registration of trademark ahead of ABC, then
YYY has the prior right over the trademark.
[b] Does the prior registration also mean a conclusive assumption that YYY Engineers
is in fact the owner of the trademark "TTubes?" Briefly explain your answer. (2.5%)

No. Registration of trademark only provides a prima facie presumption of

ownership. Such presumption is rebuttable by any person who has a claim over
the trademark.

There is therefore no conclusive presumption that YYY is the owner of the

trademark by virtue of its registration.

IV

X's "MINI-ME" burgers are bestsellers in the country. Its "MINI-ME" logo, which bears
the color blue, is a registered mark and has been so since the year 2010. Y, a competitor
of X, has her own burger which she named "ME-TOO" and her logo thereon is printed
in bluish-green. When X sued Y for trademark infringement, the trial court ruled in favor
of the plaintiff by applying the Holistic Test. The court held that Y infringed on X's mark
since the dissimilarities between the two marks are too trifling and frivolous such that
Y's "ME-TOO," when compared to X's "MINI-ME," will likely cause confusion among
consumers.

Is the application of the Holistic Test correct? (5%)

The application of the Holistic Test is not correct.

The Dominancy Test, specifically enshrined under the Intellectual Property Code,
is the prevailing rule. Under the test, the prevalent features of the competing
marks shall be considered in determining whether it causes confusion or deceit
among purchasers.

Applying the test, there is no similarity of the prevalent features between the
marks, ME-TOO and MINI-ME since the marks are totally different and
distinguishable. No prudent purchaser would likely confuse one mark with that of
the other.

MS Brewery Corporation (MS) is a manufacturer and distributor of the popular beer "MS
Lite." It faces stiff competition from BA Brewery Corporation (BA) whose sales of its own
beer product, "BA Lighter," has soared to new heights. Meanwhile, sales of the "MS Lite"
decreased considerably. The distribution and marketing personnel of MS later
discovered that BA has stored thousands of empty bottles of "MS Lite" manufactured by
MS in one of its warehouses. MS filed a suit for unfair competition against BA before
the Regional Trial Court (RTC). Finding a connection between the dwindling sales of MS
and the increased sales of BA, the RTC ruled that BA resorted to acts of unfair
competition to the detriment of MS. Is the RTC correct? Explain. (5%)

RTC is not correct.

Unfair competition has the following elements: a. passing off one’s goods or
services as that of the other who has an established good will; and b. intent to
defraud or deceive purchasers and competing market.

Herein, there is no specific evidence that indeed BA has passed off the goods of
MS as its own. The mere presence of MS bottle in its warehouse does not prove
any intent to engage in unfair competition.

VI

Nautica Shipping Lines (Nautica) bought a second hand passenger ship from Japan. It
modified the design of the bulkhead of the deck of the ship to accommodate more
passengers. The ship sunk with its passengers in Tablas Strait due to heavy rains
brought by the monsoon. The heirs of the passengers sued Nautica for its liability as a
common carrier based on the reconfiguration of the bulkhead which may have
compromised the stability of the ship. Nautica raised the defense that the monsoon is a
fortuitous event and, at most, its liability is prescribed by the Limited Liability Rule.
Decide with reasons. (5%)

Nautica’s defenses are untenable.

To alleviate itself from liability, the common carrier must prove that the
fortuitous event is the proximate cause and only cause of the loss. Herein, the
proximate cause of the sinking of the ship was not due to the monsoon but the
reconfiguration of the bulkhead. The sinking of the ship could have been
prevented if the ship owner did not reconfigure the bulkhead.

Consequently, the limited liability rule is not also applicable. One of the
exceptions of the application of the limited liability rule is the negligence of the
ship owner. Nautica’s ship owner is therefore negligent in reconfiguring the ship
thereby affecting the stability of the ship. As such, he cannot hide under the cloak
of the limited liability rule.

VII

A railroad track of the Philippine National Railway (PNR) is located near a busy
intersection of Puyat Avenue and Osmefia Highway. One afternoon, the intersection was
heavily congested, as usual. Juan, the driver of a public utility jeepney (PUJ), drove onto
the railroad tracks but could go no farther because of the heavy traffic at the
intersection. After the jeepney stopped right on the railroad track, it was hit and
overturned by a PNR train, resulting in the death of Kim, a passenger of the PUJ, and
injuries to Juan and his other passengers. Juan, the injured passengers and Kim's
family sued the PNR for damages for its negligence. It was established that the steel pole
barrier before the track was broken, and that the PNR had the last clear chance of
avoiding the accident. On the other hand, the PNR raised the defense that the track is
for the exclusive use of the train and that motorists are aware that it is negligence per
se to stop their vehicles on the tracks. Decide the case and explain. (5%)

PNR’s defenses should be given scant consideration.

Under the last clear chance doctrine, the party who has the last clear chance of
avoiding the peril but failed to do so shall be deemed to be liable. Moreover, under
Article 2176 of the Civil Code on quasi delict, when the act or omission of one
causes damage or injury to another, he shall be liable for damages thereon.

Although no contract of carriage exists between Juan, Kim and other passengers
with that of the PNR train, they can still be held liable under quasi delict because
of its failure to prevent the accident having the chance to do so.

VIII

In 2015, Total Bank (Total) proposed to sell to Royal Bank (Royal) its banking business
for P 10 billion consisting of specified assets and liabilities. The parties reached an
eventual agreement, which they termed as "Purchase and Assumption (P & A)
Agreement," in which Royal would acquire Total's specified assets and liabilities,
excluding contingent claims, with the further stipulation that it should be approved by
the Bangko Sentral ng Pilipinas (BSP). BSP imposed the condition that Total should
place in escrow Pl billion to cover for contingent claims against it. Total complied. After
securing the approval of the BSP, the two banks signed the agreement. BSP thereafter
issued a circular advising all bank and non-bank intermediaries that effective January
1, 2016, "the banking activities of Total Bank and Royal Bank have been consolidated
and the latter has carried out their operations since then."

[a] Was there a merger and consolidation of the two banks in point of the Corporation
Code? Explain. (2.5%)

There is merger between the two banks.

Merger happens when one corporation absorbs the other and such corporation
remains in existence while the others are dissolved. Consolidation, on the other
hand, occurs when a new corporation is established and the consolidating
corporations are extinguished. Mergers and consolidation must always be with the
approval of the SEC.

Herein, merger transpired since Royal has bought all the assets and liabilities of
Total and Total shall seize in operation. Thereafter, Royal as the surviving
corporation shall assume the operations of Total.

[b] What is meant by a de facto merger? Discuss. (2.5%)

De facto merger is one where a corporation buys all or substantially all of the
properties of another corporation in exchange of its shares of stock of the
acquiring corporation. This is not the merger contemplated under the Corporation
Code.

IX

X insured his life for P20 million. X, plays golf and regularly exercises everyday, hence
is considered in good health. He did not know, however, that his frequent headache is
really caused by his being hypertensive. In his application form for a life insurance for
himself, he did not put a check to the question if he is suffering from hypertension,
believing that because of his active lifestyle, being hypertensive is a remote possibility.
While playing golf one day, X collapsed at the fairway and was declared dead on arrival
at the hospital. His death certificate stated that X suffered a massive heart attack.

[a] Will the beneficiary of X be entitled to the proceeds of the life insurance under the
circumstances, despite the non-disclosure that he is hypertensive at the time of
application? (2.5%)

The beneficiaries of X will not be entitled to the proceeds.

Concealment is the neglect to communicate that which a person knows or ought

to communicate. Concealment is present regardless of whether or not the same
was made intentionally or unintentionally.

Indeed, X concealed the fact of his frequent head ache. The same is considered as
a material fact that should have been disclosed to the insurer since it would have
a probable and reasonable effect in his estimates. For being guilty of concealment,
the insurer has the right to rescind the contract.

[b] If X died in an accident instead of a heart attack, would the fact of X's failure to
disclose that he is hypertensive be considered as material information? (2.5%)

Yes. Concealment of a material information or that which would have a probable

and reasonable influence on the part of the insurer in making his estimates must
be disclosed. This is true despite the fact that the insured died not by reason of
such concealment.

Even if X died by reason of accident, the concealment of his frequent headaches

is considered material and must have been disclosed to the insurer, otherwise, the
insurer shall have the right to rescind the contract.

After securing a Pl million loan from B, A drew in B's favor a bill of exchange with C as
drawee. The bill reads: "October 1, 2016. Pay to the order of B the sum of P1 million.
To: C (drawee). Signed, A." A then delivered the bill to B who, however, lost it. It turned
out that it was stolen by D, B's brother. D lost no time in forging B's signature and
negotiated it to E who acquired it for value and in good faith.

May E recover on the bill from C, the drawee? Explain. (5%)

E may not recover from the bill.

A forge signature is wholly inoperative; no right to retain the instrument; no right

to discharge; and no right to enforce payment. Forgery is a real defense that can
be set up against any holder.

As such, the drawee may raise the defense of forgery against E, a holder in due
course, to alleviate itself from liability thereof.
XI

Royal Links Golf Club obtained a loan from a bank which is secured by a mortgage on
a titled lot where holes 1, 2, 3 and 4 are located. The bank informed the Board of
Directors (Board) that if the arrearages are not paid within thirty (30) days, it will extra-
judicially foreclose the mortgage. The Board decided to offer to the members 200
proprietary membership shares, which are treasury shares, at the price of P175,000.00
per share even when the current market value is P200,000.00.

In behalf and for the benefit of the corporation, Peter, a stockholder, filed a derivative
suit against the members of the Board for breach of trust for selling the shares at
P25,000.00, lower than its market value, and asked for the nullification of the sales and
the removal of the board members. Peter claims the Club incurred a loss of P5 million.
The Board presented the defense that in its honest belief any delay in the payment of
the arrearages will be prejudicial to the Club as the mortgage on its assets will be
foreclosed and the sale at a lower price is the best solution to the problem. Decide the
suit and explain. (5%)

The suit will not prosper.

A derivative suit must have the following elements: a. it must have been filed by
a party who is a stockholder or member during the approval of the contested act
and at the time of filing; he must allege in the complaint the exhaustion of all
available remedies; it must not be for harassment or for nuisance; no appraisal
right is available for the acts complained of; and the corporation must be
impleaded as a party.

Herein, there is no allegation in the suit that is has exhausted all available
remedies, or that the suit was not for mere harassment. Furthermore, there was
no showing that the corporation was impleaded.

XII

X owns 10,000 shares in Z Telecoms Corp. As he is in immediate need of money, he

offered to sell all his shares to his friend, Y, at a bargain price. Upon receipt of the
purchase price from Y, X proceeded to indorse in blank the certificates of shares and
delivered these to Y. The latter then went to the corporate secretary of Z Telecoms Corp.
and requested the transfer of the shares in his name. The corporate secretary refused
since X merely indorsed the certificates in blank to Y. According to the corporate
secretary, the certificates should have been specifically indorsed to the purchaser, Y.
Was the corporate secretary justified in declining Y's request? Discuss. (5%)

The corporate secretary was not justified in declining Y’s request.

The certificate of stock may be transferred by the indorsement of the owner or his
agent. The Code does not provide that the indorsement should have been
specifically made. It is sufficient that indorsement was made by X.

XIII
C Corp. is the direct holder of 10% of the shareholdings in U Corp., a nonlisted (not
public) firm, which in turn owns 62% of the shareholdings in H Corp., a publicly listed
company. The other principal stockholder in H Corp. is C Corp. which owns 18% of its
shares. Meanwhile, the majority stocks in U Corp. are owned by B Corp. and V Corp. at
22% and 30%, respectively. B Corp. and V Corp. later sold their respective shares in U
Corp. to C Corp., thereby resulting in the increase of C Corp.'s interest in U Corp.,
whether direct or indirect, to more than 50%.

[a] Explain the Tender Offer Rule under the Securities Regulation Code. (2.5%)

The Tender Offer rule requires a publicly announce intention of a person alone or
in concert with other to acquire the equity shares in a public company. The party
is required to make his announcement in a newspaper of general circulation before
the offer is made.

[b] Does the Tender Offer Rule apply in this case where there has been an indirect
acquisition of the shareholdings in H Corp. by C Corp.? Discuss. (2.5%)

Yes, the tender offer rule applies.

The tender offer rules applies even if the acquisition of equity securities or
ownership in the public company is direct or indirect. The decisive factor is
control over the public company.

As such, since the acquisition would result to control over H Corp, a public
company, the tender offer rule applies.

XIV

X, a government official, has a number of bank accounts in T Bank containing millions

of pesos. He also opened several trust accounts in the same bank which specifically
covered the placement and/or investment of funds. X was later charged with graft and
corruption before the Sandiganbayan (SB) by the Ombudsman. The Special Prosecutor
filed a motion praying for a court order authorizing it to look into the savings and trust
accounts of X in T Bank. X opposed the motion arguing that the trust accounts are not
"deposits" under the Law on Secrecy of Bank Deposits (Rep. Act No. 1405). Is the
contention of X correct? Explain. (5%)

The contention of X is not correct.

Under the Bank Secrecy Law, deposits in banks are absolutely confidential and
cannot be examined, inquired, or looked into by any government official or private
individual. It has been settled in jurisprudence, that deposit under the aforesaid
law includes trust accounts.

Therefore, the trust account of X is contemplated as a deposit under the Bank

Secrecy Law.

XV
ABC Corp. is engaged in the pawnshop business involving cellphones, laptops and other
gadgets of value. In order to expand its business and attract investors, it offered to any
person who invests at least Pl 00,000.00 a "Promissory Note" where it obligated itself to
pay the holder a 50% return on investment within one month. Due to the attractive
offer, many individuals invested in the company but not one of them was able to realize
any profit after one month.

Has ABC Corp. violated any law with its scheme? Explain. (5%)

It has violated the Securities and Regulation Code (SRC).

An investment contract exists when: there in an investment in money; in a

common enterprise; for profit; and primarily from the efforts of others. It is rule
under the SRC that securities such as investment contracts must be registered
before its sale, offer to sell, or advertisement thereof.

As such, the investment contract offered by ABC Corporation should have been
registered before the Securities and Exchange Commission before its sale thereof.

XVI

Henry is a board director in XYZ Corporation. For being the "fiscalizer" in the Board, the
majority of the board directors want him removed and his shares sold at auction, so he
can no longer participate even in the stockholders' meetings. Henry approaches you for
advice on whether he can be removed as board director and stockholder even without
cause. What is your advice? Explain "amotion" and the procedure in removing a director.
(5%)

As a rule, a member of the board of director may be removed with or without cause.
However, a director voted by the minority may not be removed without cause. As
such, Henry removal is possible even without cause unless he has been elected by
the minority.

The procedure for the removal of a director includes: there must be a meeting,
whether a regular or special; there must be notice to all stockholders and
members; and there must be at least 2/3 votes of the stockholders or members
therein.

XVII

PJ Corporation (PJ) obtained a loan from ABC Bank (ABC) in the amount of P10 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 100 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%)

A letter of credit is an engagement by a bank or other person made at the request

of a customer that the issuer will honor the drafts or other demands for payment
upon compliance with conditions set forth therein.

On the other hand, a trust receipt is a security transaction that aids in financing
importers or dealers in merchandise to obtain delivery of goods under certain
covenants.

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

The instruction of PJ should not be granted.

Under the independence principle, the contracts involved in a letter of credit

should be treated in a state of perpetual separation. The banks only deal with the
documents and not with the goods or services to which they relate.

As such, the liability of PJ to honor its undertaking to remit the proceeds to the
bank should be upheld despite the fact the eco doors delivered were defective. The
bank has no obligation to assure the quality of the goods not being a party to such
contract. Its right to demand the proceeds accrues from the date of the sale of the
eco doors.

XVIII

B Bank, a large universal bank, regularly extends revolving credit lines to business
establishments under what it terms as socially responsible banking and private
business partnership relations. All loans that are extended to clients have a common
"Escalation Clause," to wit: "B Bank hereby reserves its right to make successive
increases in interest rates in accordance with the bank's adopted policies as approved
by the Monetary Board; Provided that each successive increase shall be with the written
assent of the depositor."

[a] X, a regular client of the bank, contends that the "Escalation Clause" is unfair,
unconscionable and contrary to law, morals, public policy and customs. Rule on the
issue and explain. (2.5%)

The contention of X is not correct.

An imposition of escalation clause must always comply with the rule on mutuality
of contracts. Under such rule, both parties must mutually consent. Since the
escalation clause is with the written assent of the depositor, it is not violative of
the mutuality of contracts and therefore can be validly enforced.

[b] Suppose that the "Escalation Clause" instead reads: "B Bank hereby reserves the
right to make reasonable increases in interest rates in accordance with bank policies as
approved by the Monetary Board; Provided, there shall be corresponding reasonable
decreases in interest rates as approved by the Monetary Board." Would this be valid?
Explain. (2.5%)

Yes the same would be valid. Herein, the escalation clause is already coupled with
a de-escalation clause. Another important requirement thereof is that there must
be an approval or consent coming from the depositor before any increase in the
interest rate.
XIX

In 2015, R Corp., a domestic company that is wholly owned by Filipinos, filed its
opposition to the applications for Mineral Production Sharing Agreements (MPSA) of O
Corp., P Corp., and Q Corp. which were pending before the Panel of Arbitrators (POA) of
the Department of Environment and Natural Resources (DENR). The three corporations
wanted to undertake exploration and mining activities in the province of Isabela. The
oppositor alleged that at least 60% of the capital shareholdings of the applicants are
owned by B Corp., a 100% Chinese corporation, in violation of Sec. 2, Art. XII of the
Constitution. The applicants countered that they are qualified corporations as defined
under the Philippine Mining Act of 1995 and the Foreign Investments Act of 1991 since
B Corp. holds only 40% of the capital stocks in each of them and not 60% as alleged by
R Corp.

The Summary of Significant Accounting Policies statement of B Corp. reveals that the
joint venture agreements of B Corp. with Sigma Corp. and Delta Corp. involve the 0
Corp., P Corp., and Q Corp. The ownership of the layered corporations and joint venture
agreements show that B Corp. practically exercises control over the 0, P and Q
corporations. 0, P and Q corporations contend that the control test should be applied
and its MPSA applications granted. On the other hand, R Corp. argues that the
"grandfather rule" should be applied. Decide with reasons. (5%)

The grandfather rule should be applied.

The rule is applied when there is a doubt as to the Filipino composition of a

corporation and such is involved in a nationalized or partly nationalized activity.
As such, the rule provides a method of attributing the shareholdings of a given
corporate holder to the second or even subsequent tier of ownership to determine
the ultimate ownership of the corporation.

In which case, since the exploration of natural resources is a partly nationalized

activity, the grandfather rule shall be used.

XX
Company X issued a Bank A Check No. 12345 in the amount of P500,000.00 payable
to the Bureau of Internal Revenue (BIR) for the company's taxes for the third quarter of
1997. The check was deposited with Bank B, the collecting bank with which the BIR
has an account. The check was subsequently cleared and the amount of P500,000.00
was deducted from the company's balance. Thereafter, Company X was notified by the
BIR of its non-payment of its unpaid taxes despite the P500,000.00 debit from its
account. This prompted the company to seek assistance from the proper authorities to
investigate on the matter.

The results of the investigation disclosed that unknown then to Company X, its chief
accountant Bonifacio Santos is part of a syndicate that devised a scheme to syphon its
funds. It was discovered that though deposited, the check was never paid to the BIR but
was passed on by Santos to Winston Reyes, Bank B's branch manager and Santos' co-
conspirator. Instead of bringing the check to the clearing house, Reyes replaced Check
No. 12345 with a worthless check bearing the same amount, and tampered documents
to cover his tracks. No amount was then credited to the BIR. Meanwhile, Check No.
12345 was subsequently cleared and the amount therein credited into the accounts of
fictitious persons, to be later withdrawn by Santos and Reyes.

Company X then sued Bank B for the amount of P500,000.00 representing the amount
deducted from its account. Bank B interposed the defense that Company X was guilty
of contributory negligence since its confidential employee Santos was an integral part of
the scheme to divert the proceeds of Check No. 12345. Is Company X entitled to
reimbursement from Bank B, the collecting bank? Explain. (5%)

Yes Company X is entitled to reimbursement from the Bank B.

The collecting bank should contribute to the loss since its manager conspired
therein.