PNB v.

Rodriguez (2008)
Topic: When payable to order or to bearer; Fictitious-Payee Rule

Petitioner: PNB
Respondent: Erlando T. Rodriguez and Norma Rodriguez

FACTS:
 Sps. Erlando and Norma Rodriguez were clients of PNB-Cebu Branch. They maintained
savings and demand/checking accounts. The spouses were engaged in the informal lending
business. In line with their business, they had a discounting arrangement with the
Philnabank Employees Savings and Loan Association (PEMSLA), an association of PNB
employees.
 PEMSLA was likewise a client of PNB. The association maintained current and savings
account with PNB. PEMSLA regularly granted loans to its members. The Spouses petitioners
would rediscount the postdated checks issued to members whenever the association was
short of funds. As was customary, the spouses would replace the postdated checks with
their own checks issued in the name of the members. It was PEMSLA’s policy not to approve
applications for loans of members with outstanding debts. To subvert this policy, 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 indorsement of the named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez 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. It appears that this became the usual
practice for the parties.
 PNB eventually found out about the fraudulent acts. PNB closed the current account of
PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or
dishonored for the reason “Account Closed.” The corresponding Rodriguez checks, however,
were deposited as usual to the PEMSLA savings account. The amounts were duly debited
from the Rodriguez account. Thus, because the PEMSLA checks given as payment were
returned, the spouses Rodriguez incurred losses from the rediscounting transactions.
 The spouses filed a civil complaint for damages against PEMSLA, MCP and PNB. They sought
to recover the value of their checks that were deposited to the PEMSLA savings account
amounting to P2.3M. 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 argued that the claim for damages should come from the payees of the checks, and not
from the spouses Rodriguez. Since there was no demand from the said payees, the
obligation should be considered as discharged.
 PNB claims it is not liable for the checks which it paid to the PEMSLA account without any
indorsement from the payees. The bank contended that the spouses Rodriguez, makers,
actually did not intend for the named payees to receive the proceeds of the checks.
Consequently, the payees were considered “fictitious payees” as defined under the NIL.
Being checks made to fictitious payees which are bearer instruments, the checks were
negotiable by mere delivery.
 The RTC ruled in favor of the Sps. Rodriguez, ordering PNB to pay them a total of P2.3M or
reinstate or restore the amount of P77K in their deposit checking/current account.
  PNB appealed the decision to the CA on the principal ground that the disputed checks
should be considered as payable to bearer and not to order. The CA ruled that the checks
were obviously meant by the Spouses Rodriguez to be really paid to PEMSLA. The CA found
that the checks were bearer instruments, thus they do not require indorsement for
negotiation; and that the Sps. 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 intended payees at all.
 The Sps. Rodriguez moved for reconsideration. They argued that the checks on their faces
were unquestionably payable to order; and that PNB committed a breach of contract when it
paid the value of the checks to PEMSLA without indorsement from the payees. They also
argued that their course of action is not only against PEMSLA but also against PNB to recover
the value of the checks.
 The CA reversed itself and found that the checks were payable to order. According to the CA,
the PNB failed to present insufficient proof to defeat the claim of the Sps. Rodriguez that
they really intended the checks to be received by the specified payees. Thus, PNB is liable for
the value of the checks which it paid to PEMSLA without indorsements from the named
payees.

ISSUE: W/N the subject checks are payable to order or to bearer, and who bears the loss.
 The checks are order instruments. The drawee bank bears the loss.
 As a rule, when the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a bearer instrument.
 A check is “a bill of exchange drawn on a bank payable on demand.” It is either an order or a
bearer instrument. (See: Secs. 8 and 9 of the NIL).
 The distinction between bearer and order instrument lies in the manner of negotiation.
Under Sec. 30 of the NIL, an order instrument requires an indorsement from the payee or
holder before it may be validly negotiated. A bearer instrument does not require and
indorsement to be validly negotiated.
 A check that is payable to a specified payee is an order instrument. However, Sec. 9(c) of the
NIL provides that 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.
 “Fictitious” – A review of 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. This usually occurs when the maker places a name of an existing
payee on the check for convenience or to cover up an illegal activity.
 Thus, a check made expressly payable to a non-fictious 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. The underlying theory is that one cannot expect a fictitious payee to
negotiate the check by placing his indorsement thereon. And since the maker knew this
limitation, he must have intended for the instrument to be negotiated by mere delivery.
Thus, in case of controversy, the drawer of the check will bear the loss. Otherwise, it would
be convenient for the maker who desires to escape payment of the check to always deny the
validity of the indorsement. This despite the fact that the fictitious payee was purposely
named without any intention that the payee should receive the proceeds of the check.
 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. The exception will cause it to bear the loss.
 Commercial bad faith is present if the transferee of the check acts dishonestly and is a party
to the fraudulent scheme.
 In this case, 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. PNB’s argument shows that the payees did not have knowledge of the existence of
the check. This lack of knowledge on the part of the payees, however, was not tantamount
to a lack of intention on the part of the respondent-spouses that the payees would not
receive the checks proceeds.
 Considering that the 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.
 The subject checks are presumed order instruments . This is because, as found by both lower
courts, PNB failed to present sufficient evidence to defeat the claim of the spouses that the
named payees were the intended recipients of the check’s proceeds.
 PNB failed to satisfy a requisite condition of a fictitious-payee situation—that the maker of
the check intended for the payee to have no interest in the transaction.
 Due to the failure of PNB to show that the payees were “fictitious” in its broader sense, the
fictitious-payee rule does not apply. Thus, the checks are to be deemed payable to order.
Consequently, 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
enforcement from the payees. It bears stressing that order instruments can only be
negotiated with a valid indorsement.
 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, i.e., to the named payee in the check. It should charge to the drawer’s accounts
only the payables authorized by the latter. Otherwise, the drawee will be violating the
instructions of the drawer and it shall be liable for the amount charged to the drawer’s
account.
 "Although a bank is entitled to pay the amount of a bearer check without further inquiry, it
is entirely reasonable for the bank to insist that the holder give satisfactory proof of his
identity. to the drawer’s accounts only the payables authorized by the latter.
 In the case at bar, respondents-spouses were the bank’s depositors. The checks were drawn
against respondents-spouses’ accounts. PNB, as the drawee bank, had the responsibility to
ascertain the regularity of the indorsements, 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 checks were presented to
PNB for deposit by a representative of PEMSLA absent any type of indorsement, forged or
otherwise. 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.

DOCTRINE:
 As a rule, when the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a bearer instrument.
 An order instrument requires an indorsement from the payee or holder before it may be
validly negotiated while a bearer instrument is negotiable by mere delivery.

JUDGMENT: Petition is DENIED. Decision of the CA is affirmed.