PNB V Erlando and Norma Rodriguez NEGO

Philippine National Bank Vs Erlando and Norma
Facts
Respondents-Spouses Rodriguez maintained savings and demand/checking accounts with petitioner.
In line with their informal lending business, they had a discounting arrangement with PEMSLA, an
association of PNB employees, which regularly granted loans to its members. Spouses Rodriguez would
rediscount the postdated checks issued to members whenever the association was short of funds, and
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. PNB later on found out that some PEMSLA officers took out loans in the
names of other members, without their knowledge or consent by forging the indorsement of the named
payees in the checks.
PNB found out about the scam and close the current account of PEMSLA. The checks deposited to
PEMSLA however, were debited from the Rodriguez account. Thus, spouses Rodriguez incurred losses.
The spouses Rodriguez filed a civil complaint for damages against PEMSLA and PNB. They sought to
recover the value of their checks that were deposited to the PEMSLA savings account amounting to
P2,345,804.00. The spouses contended that PNB paid the wrong payees, hence, it should bear the loss for
the breach of the contract by the defendant-appellant (PNB) when it paid the value of the checks to
PEMSLA despite the checks being payable to order.
ISSUE: won the instrument is payable to a bearer because it was payable in order to a fictitious name
HELD: no, the instrument is payable to an order.
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.
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 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. And since the maker
knew this limitation, he must have intended for the instrument to be negotiated by mere
delivery.
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.
At case at bar, In the case under review, 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.
What remains to be determined is if the payees, though existing persons, were "fictitious" in its
broader context.
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. This is because, as found by both
lower courts, 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 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.

PNB V Erlando and Norma Rodriguez NEGO

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Philippine National Bank Vs Erlando and Norma

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

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