Myline Cordial

Philippine National Bank vs. Erlando Rodriguez and Norma Rodriguez
G.R. No. 170325, September 26, 2008

FACTS:
Spouses Rodriguez  were engaged in informal lending business and had discounting arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an association of PNB employees. The association maintained current and savings account with Philippine National Bank (PNB).  PEMSLA regularly granted a loan to its members and Spouses Rodriguez would rediscount the post dated checks issued to members whenever the association was short of funds. As it was customary, the spouses would replace the post dated checks with their own checks issued in the name of the members.

PEMSLA has a policy that members with outstanding debts would not be granted loan. 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 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. Rodriguez checks were deposited directly by PEMSLA to its saving account without any endorsement from the named payees. This irregular procedure was made possible through the facilitation of Edmundo Palermo Jr., treasurer of PEMSLA and bank teller in the PNB branch. This became the usual practice for the parties. When PNB found out this fraudulent acts, it closed the current account of PEMSLA to put a stop to this scheme. As a result, the PEMSLA checks deposited by the spouses were returned or dishonored for the reason “account closed”. The amounts of the checks issued were duly debited from the Rodriguez account. Thus, the spouses incurred losses from the rediscounting transactions so they filed a civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and PNB.

ISSUE:
When the payee of the check is not intended to be the true recipient of its proceeds, is it payable to order or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception?

RULING:
When a person making the check so payable did not intend for the specified payee to have any part in the transaction, the payee is considered a fictitious payee.

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 person or a non existing person, and such fact is known to the person making it so payable.

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 bearer instrument that can be negotiated by delivery. The underlying theory is that one cannot expect fictitious payee to negotiate the check by placing his endorsement thereon. And since, the maker knew this limitation, he must have intended the instrument to be negotiated by mere delivery. thus, in case of controversy, the drawer of the check will bear the loss. This rule is justified for otherwise, it will be most 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 its defense. The exception will cause it to bear the loss. Commercial bad faith is present if the transferee of the checks acts dishonestly, and is a party to the fraudulent scheme.