G.R. No.

170325 September 26, 2008 In its Answer, PNB claimed it is not liable for the checks which it paid to the PEMSLA
account without any indorsement from the payees. The bank contended that spouses
PHILIPPINE NATIONAL BANK, Petitioner, Rodriguez, the makers, actually did not intend for the named payees to receive the
vs. proceeds of the checks. Consequently, the payees were considered as "fictitious payees" as
ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents. defined under the Negotiable Instruments Law (NIL). Being checks made to fictitious
payees which are bearer instruments, the checks were negotiable by mere delivery.
FACTS:
ISSUES:
Spouses Erlando and Norma Rodriguez were clients of PNB and were engaged in the 1. What is the fictitious payee rule?
informal lending business. They had a discounting3arrangement with the Philnabank 2. WON the payees named in the checks are fictitious.
Employees Savings and Loan Association (PEMSLA), an association of PNB employees. 3. WON the subject checks are payable to bearer.
4. What is the exception to the fictitious payee rule?
PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the 5. Who bears the loss?
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 HELD:
the name of the members.
1. Fictitious Payee Rule states that one who, though named as payee in the
It was PEMSLA’s policy not to approve applications for loans of members with instrument, has no right to it because the maker so intended and it matters not,
outstanding debts. To subvert this policy, some PEMSLA officers devised a scheme to whether the name of the payee used by him be that one living or dead, or onw
obtain additional loans despite their outstanding loan accounts. They took out loans in the who never existed. Thus, a check made expressly payable to a non-fictitious and
names of unknowing members, without the knowledge or consent of the latter. The existing person is not necessarily an order instrument. If the payee is not the
PEMSLA checks issued for these loans were then given to the spouses for rediscounting. intended recipient of the proceeds of the check, the payee is considered a
The officers carried this out by forging the indorsement of the named payees in the checks. "fictitious" payee and the check is a bearer instrument.

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 2. NO.
checks were deposited directly by PEMSLA to its savings account without any
indorsement from the named payees. The Rodriguez checks were payable to specified payees. It is unrefuted that the
checks were payable to specific persons. Likewise, it is uncontroverted that the
PNB eventually found out about these fraudulent acts, hence, closed the current account of payees were actual, existing, and living persons who were members of PEMSLA
PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or that had a rediscounting arrangement with spouses Rodriguez.
dishonored for the reason "Account Closed." The corresponding Rodriguez checks,
however, were deposited as usual to the PEMSLA savings account. The amounts were For the fictitious-payee rule to be available as a defense, PNB must show that the
duly debited from the Rodriguez account. Thus, because the PEMSLA checks given as makers did not intend for the named payees to be part of the transaction involving
payment were returned, spouses Rodriguez incurred losses from the rediscounting the checks. At most, the bank’s thesis shows that the payees did not have
transactions. 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
Spouses Rodriguez filed a civil complaint for damages against PEMSLA, the Multi- Spouses that the payees would not receive the checks’ proceeds. Considering that
Purpose Cooperative of Philnabankers (MCP), and petitioner PNB. The spouses contended Spouses were transacting with PEMSLA and not the individual payees, it is
that because PNB credited the checks to the PEMSLA account even without indorsements, understandable that they relied on the information given by the officers of
PNB violated its contractual obligation to them as depositors. PNB paid the wrong payees, PEMSLA that the payees would be receiving the checks.
hence, it should bear the loss.
 3. NO. 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
SEC. 8.When payable to order. – The instrument is payable to order where it is ascertain the regularity of the indorsements, and the genuineness of the signatures on the
drawn payable to the order of a specified person or to him or his order. It may be checks before accepting them for deposit. Lastly, PNB was obligated to pay the checks in
drawn payable to the order of – strict accordance with the instructions of the drawers. PNB miserably failed to discharge
this burden.
(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 A bank that has been remiss in its duty must suffer the consequences of its negligence.
payees; or (f) The holder of an office for the time being. Being issued to named payees, PNB was duty-bound by law and by banking rules and
procedure to require that the checks be properly indorsed before accepting them for deposit
and payment. In fine, PNB should be held liable for the amounts of the checks.
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 –

x x x

(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; …

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.

4. A commercial bad faith is an exception to the fictitious-payee rule. A showing of

5. PNB bears the loss

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.