DIGEST PNB V Rodriguez

G.R. No.
170325
September 26, 2008
PHILIPPINE NATIONAL BANK, PETITIONER, VS.
ERLANDO T. RODRIGUEZ AND NORMA RODRIGUEZ, RESPONDENTS.
FACTS:
Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner PNB. They maintained savings and demand/checking accounts.
In line with their business, they had a discounting arrangement with PEMSLA, an association of PNB employees. Naturally, PEMSLA was likewise a client
of the same PNB branch.
PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated checks issued to members whenever the
association was short of funds. The spouses would replace the postdated checks with their own checks issued in the name of the members.
Some PEMSLA officers devised a scheme to obtain additional loans despite their outstanding loan accounts. They took out loans in the names of
unknowing members, without the knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the spouses for
rediscounting. The officers carried this out by forging the endorsement of the named payees in the checks.
In return, the spouses issued their personal checks in the name of the members and delivered the checks to an officer of PEMSLA. The PEMSLA checks,
on the other hand, were deposited by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any indorsement from the named payees. This was
an irregular procedure made possible through the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch.
For the period November 1998 to February 1999, the spouses issued 69 checks, worth P2,345,804.00 in total. These were payable to 47 individual
payees who were all members of PEMSLA.
Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB closed the current account of PEMSLA. As a result,
the PEMSLA checks deposited by the spouses were returned or dishonoured. The corresponding Rodriguez checks, however, were deposited as usual to
the PEMSLA savings account. The amounts were duly debited from the Rodriguez account.
The spouses Rodriguez filed a civil complaint for damages against PEMSLA, MCP, and petitioner PNB, seeking to recover the value of their checks worth
P2,345,804.00. The spouses contended that because PNB credited the checks to the PEMSLA account even without indorsements, PNB violated its
contractual obligation to them as depositors. PNB paid the wrong payees, hence, it should bear the loss.
PNB moved to dismiss the complaint. The RTC denied PNB's motion. to dismiss.
The bank contended that spouses Rodriguez, the makers, actually did not intend for the named payees to receive the proceeds of the checks.
Consequently, the payees were considered as "fictitious payees.". Being checks made to fictitious payees which are bearer instruments, the checks were
negotiable by mere delivery.
The RTC rendered judgment in favor of spouses Rodriguez.
The CA reversed and set aside the RTC disposition.
The CA found that the checks were bearer instruments, thus they do not require indorsement for negotiation; and that spouses Rodriguez and PEMSLA
conspired with each other to accomplish this money-making scheme. The payees in the checks were "fictitious payees" because they were not the
intended payees at all.
Subsequently, the CA reversed itself. The CA ruled that the checks were payable to order. PNB is liable for the value of the checks which it paid to
PEMSLA without indorsements from the named payees.
ISSUES
I. Whether the subject checks are payable to order or to bearer

II. Who bears the loss?
RULING
When the payee is fictitious or not intended to be the true recipient of the proceeds, the check is considered as a bearer instrument.
The distinction between bearer and order instruments lies in their manner of negotiation. Under Section 30 of the NIL, an order instrument requires an
indorsement from the payee or holder before it may be validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be
validly negotiated. It is negotiable by mere delivery.
A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the NIL, a check payable to a specified payee may
nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious or non-existing person, and such fact is known to the person
making it so payable.
US jurisprudence yields that an actual, existing, and living payee may also be "fictitious" if the maker of the check did not intend for the payee to in fact
receive the proceeds of the check. A check made expressly payable to a non-fictitious and existing person is not necessarily an order instrument. If the
payee is not the intended recipient of the proceeds of the check, the payee is considered a "fictitious" payee and the check is a bearer instrument.
In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss. When faced with a check payable to a fictitious
payee, it is treated as a bearer instrument that can be negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate
the check by placing his indorsement thereon.
However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial bad faith on the part of the drawee bank, or any
transferee of the check for that matter, will work to strip it of this defense. Commercial bad faith is present if the transferee of the check acts dishonestly,
and is a party to the fraudulent scheme.
In the case at bar, the Rodriguez checks were payable to specified payees. It is unrefuted that the 69 checks were payable to specific persons. Likewise,
it is uncontroverted that the payees were actual, existing, and living persons who were members of PEMSLA that had a rediscounting arrangement with
spouses Rodriguez.
For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the named payees to be part of the transaction
involving the checks. At most, the bank's thesis shows that the payees did not have knowledge of the existence of the checks. This lack of knowledge on
the part of the payees, however, was not tantamount to a lack of intention on the part of respondents-spouses that the payees would not receive the
checks' proceeds. Considering that respondents-spouses were transacting with PEMSLA and not the individual payees, it is understandable that they
relied on the information given by the officers of PEMSLA that the payees would be receiving the checks.
Verily, the subject checks are presumed order instruments because PNB failed to present sufficient evidence to defeat the claim of respondents-spouses
that the named payees were the intended recipients of the checks' proceeds. The fictitious-payee rule does not apply. The drawee bank bears the loss.
PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers accepted the 69 checks for deposit to the PEMSLA
account even without any indorsement from the named payees. It bears stressing that order instruments can only be negotiated with a valid indorsement.
A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the payee is apparently grossly negligent in its
operations. In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the drawer and to pay the check strictly in
accordance with the drawer's instructions.
PNB had the responsibility to ascertain the regularity of the endorsements, and the genuineness of the signatures on the checks before accepting them for
deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructions of the drawers. Petitioner miserably failed to discharge this
burden. The facts clearly show that the bank did not pay the checks in strict accordance with the instructions of the drawers, respondents-spouses.
Instead, it paid the values of the checks not to the named payees or their order, but to PEMSLA, a third party to the transaction between the drawers and
the payees.
Moreover, PNB was negligent in the selection and supervision of its employees. PNB's tellers and officers, in violation of banking rules of procedure,
permitted the invalid deposits of checks to the PEMSLA account. When it is the gross negligence of the bank employees that caused the loss, the bank
should be held liable.
PNB should be held liable for the amounts of the checks.

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DIGEST PNB V Rodriguez

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G.R. No.

The RTC rendered judgment in favor of spouses Rodriguez.

The CA reversed and set aside the RTC disposition.

I. Whether the subject checks are payable to order or to bearer

PNB should be held liable for the amounts of the checks.

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