PNB vs.

Erlando Rodriguez and Norma Rodriguez

Facts:
(NOTE: Rediscounting is like extending loans to borrowers who execute credit instruments)
● Sps Rodriguez were clients of PNB. They maintained savings and demand/checking
accounts
● Sps were engaged in informal lending business.
○ They had a discounting arrangement with PEMSLA (association of PNB
employees)
○ PEMSLA was also a client of PNB
● PEMSLA & Rodriguez
○ PEMSLA regularly granted loans to its members
○ Whenever the association was short of funds, Sps would rediscount the postdated
checks issued to members
○ Sps would replace postdated checks with their own checks issued in the name of
members
● PEMSLA Policy and fraudulent acts
○ Policy is not to approve loan for those with outstanding debts
○ To subvert such policy, some officers devised a scheme to obtain additional loans
despite their outstanding loans
■ SCHEME: took out loans in the names of unknowing members w/o
knowledge or consent of such members
○ PEMSLA checks issued for these loans were given to the sps for rediscounting
○ Officers carried this out by forging the indorsement of the names payees in the
checks
○ Sps issued their personal checks in the name of members and delivered checks to
PEMSLA officers; PEMSLA checks were deposited by sps to their account
○ Checks of Rodriguez (the one they issued) were deposited directly by PEMSLA to
their saving account w/o indorsement from the names payees.
● Fr Nov 1998 to Feb 1999: 69 checks were issued; total amounts to 2M; checks were payable
to 47 individual payees
● PNB found out the scheme. PNB closed account of PEMSLA hence, the PEMSLA checks
deposited by sps were dishonored; Checks issued by Rodriguez in favor of PEMSLA
members were deposited to the PEMSLA account hence, the amounts were debited from
the savings of Rodriguez
● Sps filed a complaint for damages; sought to recover value of checks deposited to
PEMSLA
○ Contention: bc PNB credited the checks to PEMSLA account even w/o
endorsements, PNB violated its contractual obligation to them as depositors
● PNB moved to dismiss but RTC denied
 ○ Contends they’re not liable as the sps did not really intend for the names payees to
receive the proceeds of checks hence the payees were considered fictitious payees.
Checks should be considered payable to bearer and not to order
RTC: Rodriguez
CA: reversed RTC
> checks were obviously meant by sps to be paid to PEMSLA
> The CA found that the checks were bearer instruments, thus they do not require
indorsement for negotiation; and that spouses 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 the intended payees at all.

● Sps moved for reconsideration; CA reversed earlier decision

○ Checks were payable to order; PNB failed to present proof to defeat claim of sps
that they intended checks to be received by specified payees
Issue: Whether the checks are payable to order or to bearer
Held:
The checks are payable to order. 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 that is
payable to a specific payee is an order instrument. However, under Section 9(c) of NIL, a check
payable to order may 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.
● BUT, 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.
● 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
● Check payable to fictitious payee is treated as bearer instrument that can be negotiated by
delivery because:
○ THEORY: one cannot expect a fictitious payee to negotiate the check by placing
his indorsement and since the maker knew this limitation, he must have intended
for the instrument to be negotiated by mere delivery.
● IN THIS CASE, it is unrefuted that the Rodriguez checks were payable to specified payees.
Hence, it must be determined if these payees are fictitious. 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. The lack of knowledge on the
part of payees does not amount to the lack of intention of Rodriguez for them to receive
the proceeds of the checks. The sps were transacting with PEMSLA and not the individual
 payees hence, it is understandable if they relied on the info given by the officers of
PEMSLA. Clearly, as they payees were not fictitious, 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, hence, PNB must bear the loss.
Dispositive: Affirmed

Note: pls ask me if u dont get it :(( its really confusing. Also, sorry if it’s long :((