NEGO : Sec.

9
PNB v Rodriguez and Rodriguez
17 [When payable to bearer]
Gr 170325 Sep 26 08 J Reyes Mark g
Petitioners: Respondents:
PNB Spouses Rodriguez
Recit Ready Summary

Pemsla would issue out loans to its members even if these members had outstanding debts. Spouses
Rodriguez and PEMSLA have an agreement wherein PEMSLA would issue these said loans through
checks and the spouses would discount these PEMSLA checks and the spouses rodriguez replace it with
their own checks. The RODRIGUEZ checks without any indorsement were deposited by PEMSLA in
Pemla’s account. These Rodriguez checks are payable to members of PEMSLA. The Pemsla checks
were put in Rodriguez’ account.

Now, Spouses Rodriguez contends that they incurred losses because PNB credited the checks to the
PEMSLA account even without indorsements, and PNB violated its contractual obligation to them as
depositors. PNB paid the wrong payees.

Issue before the court is whether or not the subject Rodriguez checks are payable to bearer or payable to
order?

Court says that the checks are payable to order because the general rule is that when the payee is
fictitious or not intended to be the true recipient of the proceeds, the check is considered as a
bearer instrument. In this case, spouses Rodriguez intended the checks be addressed to actual and
living members of PEMSLA. Since the payees are not fictitious, the checks are payable to order and the
bank is rat fault because an order instrument requires an indorsement from the payee before it is
negotiated.
Facts

1. Spouses Rodriguez and Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees are clients of PNB. Some of the officers of Pemsla would give out
loans to its members even if the members would still have outstanding debts. The officers carried
this out by forging the indorsement of the named payees in the checks.

2. The PEMSLA checks issued for these loans were then given to the spouses for rediscounting.
The spouses would replace the postdated checks with their own checks issued in the name of the
members and deliver the checks to an officer of PEMSLA. The PEMSLA checks, on the other
hand, were deposited by the spouses to their account.

3. The Rodriguez checks, amounting to P2,345,804.00 were deposited directly by PEMSLA to its
savings account without any indorsement from the named payees. These checks were payable
to forty seven (47) individual payees who were all members of PEMSLA.

4. 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, spouses Rodriguez incurred losses from the rediscounting
transactions.
Procedural History

1. Spouses filed a case against PNB to get their money back. RTC sided with spouses.CA sided with
spouses.
2. CA said: checks were payable to order. PNB failed to present proof to defeat the claim of the
spouses Rodriguez that they really intended the checks to be received by the specified

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 payees. Thus, PNB is liable for the value of the checks which it paid to PEMSLA without
indorsements from the named payees. Pnb failed to treat the Rodriguez account with the
highest degree of care considering the fiduciary nature of their relationship, which made
spouses to seek legal action.

Point/s of Contention
Spouses Contention: 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’s contention: PNB claimed it is not liable for the checks which it paid to the PEMSLA account without
any indorsement from the payees. 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 as defined under the (NIL). Being checks made to fictitious payees which are bearer
instruments, the checks were negotiable by mere delivery.

Issues Ruling
1. Whether the subject checks are payable to order or to bearer 1. Payable
2. Whether PNB is negligent? to order
2. Yes
Rationale
1. Whether the subject checks are payable to order or to bearer- ORDER

Gen 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.
Check
• bill of exchange drawn on a bank payable on demand.
• either an order or a bearer instrument.
Order instrument Bearer instrument

• requires an indorsement from the • does not require an indorsement to

payee or holder before it may be be validly negotiated.
validly negotiated • negotiable by mere delivery.
• Example. A check that is payable to a
specified payee is an order instrument

However, 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. 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.

US Jurisprudence: When the person making the check so payable did not intend for the specified payee
to have any part in the transactions, the payee is considered as a fictitious payee. The check is then
considered as a bearer instrument to be validly negotiated by mere delivery. Thus, the US Supreme Court
held that Liberty Insurance Bank, as drawee, was authorized to make payment to the bearer of the check,
regardless of whether prior indorsements were genuine or not.

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 under review, the Rodriguez checks were payable to specified, actual and living
payees who are members of PEMSLA.

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 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. The subject checks are presumed order instruments. The bank 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.

Because of a failure 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.

2. Whether PNB is negligent – YES [ not relevant to the topic ]

PNB was remiss in its duty as the drawee bank. Pnb’s 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 drawers instructions, i.e., to the named payee in the check. It should charge to the
drawers 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 drawers account.[24]

In the case at bar, respondents-spouses were the banks 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. PNB 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.

DISPOSITION
Pnb is liable for the money it gave to Pemsla.

NOTES
SEC. 8. When payable to order. The instrument is payable to order where it is drawn payable to the order of a
specified person or to him or his order. It may be drawn payable to the order of

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable
certainty.

SEC. 9. When payable to bearer. The instrument is payable to bearer

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or
(c) When 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; or
(d) When the name of the payee does not purport to be the name of any person; or
(e) Where the only or last indorsement is an indorsement in blank