underlying theory being that one cannot expect a fictitious payee to negotiate the check by

G.R. No. 170325. September 26, 2008.*

placing his indorsement thereon.—We have yet to discuss a broader meaning of the term
PHILIPPINE NATIONAL BANK, petitioner, vs. ERLANDO T. RODRIGUEZ and “fictitious” as used in the NIL. It is for this reason that We look elsewhere for guidance. Court
NORMA RODRIGUEZ, respondents. rulings in the United States are a logical starting point since our law on negotiable
Courts; Judgments; Amendment of decisions is more acceptable than an erroneous instruments was directly lifted from the Uniform Negotiable Instruments Law of the United
judgment attaining finality to the prejudice of innocent parties; The Court does not sanction States. A review of US jurisprudence yields that an actual, existing, and living payee may
careless disposition of cases by courts of justice—the highest degree of diligence must go into also be “fictitious” if the maker of the check did not intend for the payee to in fact receive the
the study of every controversy submitted for decision by litigants.— proceeds of the check. This usually occurs when the maker places a name of an existing payee
Prefatorily, amendment of decisions is more acceptable than an erroneous judgment on the check for convenience or to cover up an illegal activity. Thus, a check made expressly
attaining finality to the prejudice of innocent parties. A court discovering an erroneous payable to a non-fictitious and existing person is not necessarily an order instrument. If the
judgment before it becomes final may, motu proprio or upon motion of the parties, correct its payee is not the intended recipient of the proceeds of the check, the payee is
judgment with the singular objective of achieving justice for the litigants. However, a word of considered a “fictitious” payee and the check is a bearer instrument. In a fictitious-
caution to lower courts, the CA in Cebu in this particular case, is in order. The Court does not payee situation, the drawee bank is absolved from liability and the drawer bears the
sanction careless disposition of cases by courts of justice. The highest degree of diligence must loss. When faced with a check payable to a fictitious payee, it is treated as a bearer
go into the study of every controversy submitted for decision by litigants. Every issue and instrument that can be negotiated by delivery. The underlying theory is that one cannot
factual detail must be closely scrutinized and analyzed, and all the applicable laws judiciously expect a fictitious payee to negotiate the check by placing his indorsement thereon. And since
studied, before the promulgation of every judgment by the court. Only in this manner will the maker knew this limitation, he must have intended for the instrument to be negotiated
errors in judgments be avoided. by mere delivery. Thus, in case of controversy, the drawer of the check will bear the loss. This
Negotiable Instruments Law; Checks; Fictitious Payee Rule; As a rule, when the payee rule is justified for otherwise, it will be most convenient for the maker who desires to escape
is fictitious or not intended to be the true recipient of the proceeds, the check is considered as a payment of the check to always deny the validity of the indorsement. This despite the fact
bearer instrument.—As a rule, when the payee is fictitious or not intended to be the that the fictitious payee was purposely named without any intention that the payee should
true recipient of the proceeds, the check is considered as a bearer instrument. A receive the proceeds of the check.
check is “a bill of exchange drawn on a bank payable on demand.” It is either an order or a Same; Same; Same; Under the commercial bad faith exception to the fictitious-payee
bearer instrument. rule, a showing of commercial bad faith on the part of the drawee bank, or any transferee of
Same; Same; Same; “Bearer” and “Order” Instruments; Words and Phrases; An order the check for that matter, will work to strip it of this defense.—There is a commercial bad
instrument requires an indorsement from the payee or holder before it may be validly faith exception to the fictitious-payee rule. A showing of commercial bad faith on the
negotiated while a bearer instrument is negotiable by mere delivery.— part of the drawee bank, or any transferee of the check for that matter, will work to
The distinction between bearer and order instruments lies in their manner of negotiation. strip it of this defense. The exception will cause it to bear the loss. Commercial bad faith is
Under Section 30 of the NIL, an order instrument requires an indorsement from the payee or present if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme.
holder before it may be validly negotiated. A bearer instrument, on the other hand, does not Said the US Supreme Court in Getty: Consequently, a transferee’s lapse of wary vigilance,
require an indorsement to be validly negotiated. It is negotiable by mere delivery. The disregard of suspicious circumstances which might have well induced a prudent banker to
provision reads: SEC. 30. What constitutes negotiation.—An instrument is negotiated when it investigate and other permutations of negligence are not relevant considerations under
is transferred from one person to another in such manner as to constitute the transferee the Section 3-405 x x x. Rather, there is a “commercial bad faith” exception to UCC 3-405,
holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is applicable when the transferee “acts dishonestly—where it has actual knowledge of facts and
negotiated by the indorsement of the holder completed by delivery. circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent
Same; Same; Same; Same; Under Section 9(c) of the Negotiable Instruments Law (NIL), scheme. x x x Such a test finds support in the text of the Code, which omits a standard of care
a check payable to a specified payee may nevertheless be considered as a bearer instrument if requirement from UCC 3-405 but imposes on all parties an obligation to act with “honesty in
it is payable to the order of a fictitious or non-existing person, and such fact is known to the fact.” x x x
person making it so payable.—A check that is payable to a specified payee is an order Same; Same; Same; For the fictitious-payee rule to be available as a defense, the bank
instrument. However, under Section 9(c) of the NIL, a check payable to a specified payee may must show that the maker did not intend for the named payees to be part of the transaction
nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious involving the checks—mere lack of knowledge on the part of the payees of the existence of the
or non-existing person, and such fact is known to the person making it so payable. Thus, checks is not tantamount to a lack of intention on the part of maker that the payees would not
checks issued to “Prinsipe Abante” or “Si Malakas at si Maganda,” who are well-known receive the checks’ proceeds; It is a requisite condition of a fictitious-payee situation that
characters in Philippine mythology, are bearer instruments because the named payees are the maker of the check intended for the payee to have no interest in the transaction.—For the
fictitious and non-existent. fictitious-payee rule to be available as a defense, PNB must show that the makers did not
Same; Same; Same; Same; Words and Phrases; Legal Research; In discussing the intend for the named payees to be part of the transaction involving the checks. At most, the
broader meaning of the term “fictitious” as used in the Negotiable Instruments Law (NIL), bank’s thesis shows that the payees did not have knowledge of the existence of the
court rulings in the United States are a logical starting point since our law on negotiable checks. This lack of knowledge on the part of the payees, however, was not
instruments was directly lifted from the Uniform Negotiable Instruments Law of the United tantamount to a lack of intention on the part of respondents-spouses that the
States; A review of US jurisprudence yields that an actual, existing, and living payee may also payees would not receive the checks’ proceeds. Considering that respondents-spouses
be “fictitious” if the maker of the check did not intend for the payee to in fact receive the proceeds were transacting with PEMSLA and not the individual payees, it is understandable that they
of the check—if the payee is not the intended recipient of the proceeds of the check, the payee is relied on the information given by the officers of PEMSLA that the payees would be receiving
considered a “fictitious” payee and the check is a bearer instrument; In a fictitious-payee the checks. Verily, the subject checks are presumed order instruments. This is because, as
situation, the drawee bank is absolved from liability and the drawer bears the loss, the found by both lower courts, PNB failed to present sufficient evidence to defeat the claim of

1
respondents-spouses that the named payees were the intended recipients of the checks’ WHEN the payee of the check is not intended to be the true recipient of its
proceeds. The bank failed to satisfy a requisite condition of a fictitious-payee situation—that proceeds, is it payable to order or bearer? What is the fictitious-payee rule and who
the maker of the check intended for the payee to have no interest in the transaction. Because is liable under it? Is there any exception?
of a failure to show that the payees were “fictitious” in its broader sense, the fictitious-payee
These questions seek answers in this petition for review on certiorari of the
rule does not apply. Thus, the checks are to be deemed payable to order. Consequently, the
drawee bank bears the loss. Amended Decision of the Court of Appeals (CA) which affirmed with modification
1

Same; Same; Same; Banks and Banking; A bank that regularly processes checks that that of the Regional Trial Court (RTC). 2

are neither payable to the customer nor duly indorsed by the payee is apparently grossly The Facts
negligent in its operations.—PNB was remiss in its duty as the drawee bank. It does not The facts as borne by the records are as follows:
dispute the fact that its teller or tellers accepted the 69 checks for deposit to the PEMSLA Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner
account even without any indorsement from the named payees. It bears stressing that order Philippine National Bank (PNB), Amelia Avenue Branch, Cebu City. They
instruments can only be negotiated with a valid indorsement. A bank that regularly processes maintained savings and demand/checking accounts, namely, PNBig Demand
checks that are neither payable to the customer nor duly indorsed by the payee is apparently
Deposits (Checking/Current Account No. 810624-6 under the account name
grossly negligent in its operations. This Court has recognized the unique public interest
possessed by the banking industry and the need for the people to have full trust and Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current
confidence in their banks. For this reason, banks are minded to treat their customer’s Account No. 810480-4 under the account name Erlando T. Rodriguez).
accounts with utmost care, confidence, and honesty. The spouses were engaged in the informal lending business. In line with their
Same; Same; Same; Same; In a checking transaction, the drawee bank has the duty to business, they had a discounting 3

verify the genuineness of the signature of the drawer and to pay the check strictly in accordance arrangement with the Philnabank Employees Savings and Loan Association
with the drawer’s instructions, i.e., to the named payee in the check.—In a checking (PEMSLA), an association of PNB employees. Naturally, PEMSLA was likewise a
transaction, the drawee bank has the duty to verify the genuineness of the signature of the client of PNB Amelia Avenue Branch. The association maintained current and
drawer and to pay the check strictly in accordance with the drawer’s instructions, i.e., to the
savings accounts with petitioner bank.
named payee in the check. It should charge to the drawer’s accounts only the payables
authorized by the latter. Otherwise, the drawee will be violating the instructions of the PEMSLA regularly granted loans to its members. Spouses Rodriguez would
drawer and it shall be liable for the amount charged to the drawer’s account. rediscount the postdated checks issued to members whenever the association was
Banks and Banking; The trustworthiness of bank employees is indispensable to short of funds. As was customary, the spouses would replace the postdated checks
maintain the stability of the banking industry—banks are enjoined to be extra vigilant in the with their own checks issued in the name of the members.
management and supervision of their employees.—PNB was negligent in the selection and It was PEMSLA’s policy not to approve applications for loans of members with
supervision of its employees. The trustworthiness of bank employees is indispensable to outstanding debts. To subvert this policy, some PEMSLA officers devised a scheme
maintain the stability of the banking industry. Thus, banks are enjoined to be extra vigilant to obtain additional loans despite their outstanding loan accounts. They took out
in the management and supervision of their employees. In Bank of the Philippine Islands v.
loans in the names of unknowing members, without the knowledge or consent of
Court of Appeals, 216 SCRA 51 (1992), this Court cautioned thus: Banks handle daily
transactions involving millions of pesos. By the very nature of their work the degree of the latter. The PEMSLA checks issued for these loans were then given to the
responsibility, care and trustworthiness expected of their employees and officials is far spouses for rediscounting. The officers carried this out by forging the indorsement
greater than those of ordinary clerks and employees. For obvious reasons, the banks are of the named payees in the checks.
expected to exercise the highest degree of diligence in the selection and supervision of their In return, the spouses issued their personal checks (Rodriguez checks) in the
employees. name of the members and delivered the checks to an officer of PEMSLA. The
Actions; Default; Failure to file an answer is a ground for a declaration that defendant PEMSLA checks, on the other hand, were deposited by the spouses to their account.
is in default.—We note that the RTC failed to thresh out the merits of PNB’s cross-claim Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its
against its co-defendants PEMSLA and MPC. The records are bereft of any pleading filed by
savings account without any indorsement from the named payees. This was an
these two defendants in answer to the complaint of respondents-spouses and cross-claim of
PNB. The Rules expressly provide that failure to file an answer is a ground for a declaration irregular procedure made possible through the facilitation of Edmundo Palermo,
that defendant is in default. Yet, the RTC failed to sanction the failure of both PEMSLA and Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears that this
MPC to file responsive pleadings. Verily, the RTC dismissal of PNB’s cross-claim has no basis. became the usual practice for the parties.
Thus, this judgment shall be without prejudice to whatever action the bank might take For the period November 1998 to February 1999, the spouses issued sixty-nine (69)
against its co-defendants in the trial court. checks, in the total amount of P2,345,804.00. These were payable to forty-seven
PETITION for review on certiorari of an amended decision of the Court of Appeals. (47) individual payees who were all members of PEMSLA. 4

The facts are stated in the opinion of the Court. Petitioner PNB eventually found out about these fraudulent acts. To put a stop
Kenneth A. Alovera for petitioner. to this scheme, PNB closed the current account of PEMSLA. As a result, the
Joel G. Dojillo for respondents. PEMSLA checks deposited by the spouses were returned or dishonored for the
REYES, R.T., J.: 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

2
were returned, spouses Rodriguez incurred losses from the rediscounting 3. Other claims and counterclaims are hereby dismissed.” 6

transactions.
CA Disposition
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil PNB appealed the decision of the trial court to the CA on the principal ground
complaint for damages against PEMSLA, the Multi-Purpose Cooperative of that the disputed checks should be considered as payable to bearer and not to order.
Philnabankers (MCP), and petitioner PNB. They sought to recover the value of In a Decision dated July 22, 2004, the CA reversed and set aside the RTC
7

their checks that were deposited to the PEMSLA savings account amounting to disposition. The CA concluded that the checks were obviously meant by the spouses
P2,345,804.00. The spouses contended that because PNB credited the checks to to be really paid to PEMSLA. The court a quo declared:
the PEMSLA account even without indorsements, PNB violated its “We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that
contractual obligation to them as depositors. PNB paid the wrong payees, hence, it their cause of action arose from the alleged breach of contract by the defendant-appellant
should bear the loss. (PNB) when it paid the value of the checks to PEMSLA despite the checks being payable to
PNB moved to dismiss the complaint on the ground of lack of cause of action. order. Rather, we are more convinced by the strong and credible evidence for the defendant-
appellant with regard to the plaintiffs-appellees’ and PEMSLA’s business arrangement—that
PNB argued that the claim for damages should come from the payees of the checks,
the value of the rediscounted checks of the plaintiffs-appellees would be deposited in PEMSLA’s
and not from spouses Rodriguez. Since there was no demand from the said payees, account for payment of the loans it has approved in exchange for PEMSLA’s checks with the
the obligation should be considered as discharged. full value of the said loans. This is the only obvious explanation as to why all the disputed
In an Order dated January 12, 2000, the RTC denied PNB’s motion to dismiss. sixty-nine (69) checks were in the possession of PEMSLA’s errand boy for presentment to the
In its Answer, PNB claimed it is not liable for the checks which it paid to the
5
defendant-appellant that led to this present controversy. It also appears that the teller who
PEMSLA account without any indorsement from the payees. The bank contended accepted the said checks was PEMSLA’s officer, and that such was a regular practice by the
that spouses Rodriguez, the makers, actually did not intend for the named parties until the defendant-appellant discovered the scam. The logical conclusion, therefore,
payees to receive the proceeds of the checks. Consequently, the payees were is that the checks were never meant to be paid to order, but instead, to PEMSLA. We thus find
no breach of contract on the part of the defendant-appellant.
considered as “fictitious payees” as defined under the Negotiable Instruments
According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA allegedly issued
Law (NIL). Being checks made to fictitious payees which are bearer instruments, post-dated checks to its qualified members who had applied for loans. However, because of
the checks were negotiable by mere delivery. PNB’s Answer included its cross-claim PEMSLA’s insufficiency of funds, PEMSLA approached the plaintiffs-appellees for the latter
against its co-defendants PEMSLA and the MCP, praying that in the event that to issue rediscounted checks in favor of said applicant members. Based on the investigation
judgment is rendered against the bank, the cross-defendants should be ordered to of the defendant-appellant, meanwhile, this arrangement allowed the plaintiffs-appellees to
reimburse PNB the amount it shall pay. make a profit by issuing rediscounted checks, while the officers of PEMSLA and other
After trial, the RTC rendered judgment in favor of spouses Rodriguez members would be able to claim their loans, despite the fact that they were disqualified for
(plaintiffs). It ruled that PNB (defendant) is liable to return the value of the checks. one reason or another. They were able to achieve this conspiracy by using other members who
had loaned lesser amounts of money or had not applied at all. x x x.” (Emphasis added)
All counterclaims and cross-claims were dismissed. The dispositive portion of the
8

The CA found that the checks were bearer instruments, thus they do not require
RTC decision reads:
“WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows: indorsement for negotiation; and that spouses Rodriguez and PEMSLA conspired
1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 with each other to accomplish this money-making scheme. The payees in the checks
or reinstate or restore the amount of P775,337.00 in the PNBig Demand Deposit were “fictitious payees” because they were not the intended payees at all.
Checking/Current Account No. 810480-4 of Erlando T. Rodriguez, and the amount of The spouses Rodriguez moved for reconsideration. They argued, inter alia, that
P1,570,467.00 in the PNBig Demand Deposit, Checking/Current Account No. 810624-6 of the checks on their faces were unquestionably payable to order; and that PNB
Erlando T. Rodriguez and/or Norma Rodriguez, plus legal rate of interest thereon to be committed a breach of contract when it paid the value of the checks to PEMSLA
computed from the filing of this complaint until fully paid; without indorsement from the payees. They also argued that their cause of action
2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable
is not only against PEMSLA but also against PNB to recover the value of the
amount of damages suffered by them taking into consideration the standing of the plaintiffs
being sugarcane planters, realtors, residential subdivision owners, and other businesses: checks.
(a) Consequential damages, unearned income in the amount of P4,000,000.00, On October 11, 2005, the CA reversed itself via an Amended Decision, the last
as a result of their having incurred great dificulty (sic) especially in the residential paragraph and fallo of which read:
subdivision business, which was not pushed through and the contractor even “In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees
threatened to file a case against the plaintiffs; Sps. Rodriguez for the following:
(b) Moral damages in the amount of P1,000,000.00; 1. Actual damages in the amount of P2,345,804 with interest at 6% per annum
(c) Exemplary damages in the amount of P500,000.00; from 14 May 1999 until fully paid;
(d) Attorney’s fees in the amount of P150,000.00 considering that this case does 2. Moral damages in the amount of P200,000;
not involve very complicated issues; and for the 3. Attorney’s fees in the amount of P100,000; and
(e) Costs of suit. 4. Costs of suit.

3
 WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us (c) The drawee; or
AFFIRMING WITH MODIFICATION the assailed decision rendered in Civil Case No. 99- (d) Two or more payees jointly; or
10892, as set forth in the immediately next preceding paragraph hereof, and SETTING (e) One or some of several payees; or
ASIDE Our original decision promulgated in this case on 22 July 2004. (f) The holder of an office for the time being.
SO ORDERED.” 9 Where the instrument is payable to order, the payee must be named or otherwise
The CA ruled that the checks were payable to order. According to the appellate indicated therein with reasonable certainty.
court, PNB failed to present sufficient proof to defeat the claim of the spouses SEC. 9. When payable to bearer.—The instrument is payable to bearer—
Rodriguez that they really intended the checks to be received by the specified (a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
payees. Thus, PNB is liable for the value of the checks which it paid to PEMSLA
(c) When it is payable to the order of a fictitious or non-existing person, and such fact is
without indorsements from the named payees. The award for damages was deemed known to the person making it so payable; or
appropriate in view of the failure of PNB to treat the Rodriguez account with (d) When the name of the payee does not purport to be the name of any person; or
the highest degree of care considering the fiduciary nature of their (e) Where the only or last indorsement is an indorsement in blank.” (Italics supplied)
12

relationship, which constrained respondents to seek legal action. The distinction between bearer and order instruments lies in their manner of
Hence, the present recourse under Rule 45. 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
Issues instrument, on the other hand, does not require an indorsement to be validly
negotiated. It is negotiable by mere delivery. The provision reads:
The issues may be compressed to whether the subject checks are payable to “SEC. 30. What constitutes negotiation.—An instrument is negotiated when it is
order or to bearer and who bears the loss? transferred from one person to another in such manner as to constitute the transferee the
holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is
PNB argues anew that when the spouses Rodriguez issued the disputed checks,
negotiated by the indorsement of the holder completed by delivery.”
they did not intend for the named payees to receive the proceeds. Thus, they are
A check that is payable to a specified payee is an order instrument. However,
bearer instruments that could be validly negotiated by mere delivery. Further,
under Section 9(c) of the NIL, a check payable to a specified payee may nevertheless
testimonial and documentary evidence presented during trial amply proved that
be considered as a bearer instrument if it is payable to the order of a fictitious or
spouses Rodriguez and the officers of PEMSLA conspired with each other to
non-existing person, and such fact is known to the person making it so payable.
defraud the bank.
Thus, checks issued to “Prinsipe Abante” or “Si Malakas at si Maganda,” who are
Our Ruling
well-known characters in Philippine mythology, are bearer instruments because
Prefatorily, amendment of decisions is more acceptable than an erroneous
the named payees are fictitious and non-existent.
judgment attaining finality to the prejudice of innocent parties. A court discovering
We have yet to discuss a broader meaning of the term “fictitious” as used in the
an erroneous judgment before it becomes final may, motu proprio or upon motion
NIL. It is for this reason that We look elsewhere for guidance. Court rulings in the
of the parties, correct its judgment with the singular objective of achieving justice
United States are a logical starting point since our law on negotiable instruments
for the litigants.10
was directly lifted from the Uniform Negotiable Instruments Law of the United
However, a word of caution to lower courts, the CA in Cebu in this particular
States. 13

case, is in order. The Court does not sanction careless disposition of cases by courts
A review of US jurisprudence yields that an actual, existing, and living payee
of justice. The highest degree of diligence must go into the study of every
may also be “fictitious” if the maker of the check did not intend for the payee to in
controversy submitted for decision by litigants. Every issue and factual detail must
fact receive the proceeds of the check. This usually occurs when the maker places a
be closely scrutinized and analyzed, and all the applicable laws judiciously studied,
name of an existing payee on the check for convenience or to cover up an illegal
before the promulgation of every judgment by the court. Only in this manner will
activity. Thus, a check made expressly payable to a non-fictitious and existing
14

errors in judgments be avoided.

person is not necessarily an order instrument. If the payee is not the
Now to the core of the petition.
intended recipient of the proceeds of the check, the payee is considered a
As a rule, when the payee is fictitious or not intended to be the true
“fictitious” payee and the check is a bearer instrument.
recipient of the proceeds, the check is considered as a bearer
In a fictitious-payee situation, the drawee bank is absolved from liability
instrument. A check is “a bill of exchange drawn on a bank payable on
and the drawer bears the loss. When faced with a check payable to a fictitious
demand.” It is either an order or a bearer instrument. Sections 8 and 9 of the NIL
11
payee, it is treated as a bearer instrument that can be negotiated by delivery. The
states:
underlying theory is that one cannot expect a fictitious payee to negotiate the check
“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 by placing his indorsement thereon. And since the maker knew this limitation, he
the order of— must have intended for the instrument to be negotiated by mere delivery. Thus, in
(a) A payee who is not maker, drawer, or drawee; or case of controversy, the drawer of the check will bear the loss. This rule is justified
(b) The drawer or maker; or for otherwise, it will be most convenient for the maker who desires to escape

4
payment of the check to always deny the validity of the indorsement. This despite What remains to be determined is if the payees, though existing persons, were
the fact that the fictitious payee was purposely named without any intention that “fictitious” in its broader context.
the payee should receive the proceeds of the check. 15 For the fictitious-payee rule to be available as a defense, PNB must show that
The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty the makers did not intend for the named payees to be part of the transaction
Insurance Bank. In the said case, the corporation Mueller & Martin was defrauded
16 involving the checks. At most, the bank’s thesis shows that the payees did not have
by George L. Martin, one of its authorized signatories. Martin drew seven checks knowledge of the existence of the checks. This lack of knowledge on the part of
payable to the German Savings Fund Company Building Association (GSFCBA) the payees, however, was not tantamount to a lack of intention on the part
amounting to $2,972.50 against the account of the corporation without authority of respondents-spouses that the payees would not receive the checks’
from the latter. Martin was also an officer of the GSFCBA but did not have signing proceeds. Considering that respondents-spouses were transacting with PEMSLA
authority. At the back of the checks, Martin placed the rubber stamp of the and not the individual payees, it is understandable that they relied on the
GSFCBA and signed his own name as indorsement. He then successfully drew the information given by the officers of PEMSLA that the payees would be receiving
funds from Liberty Insurance Bank for his own personal profit. When the the checks.
corporation filed an action against the bank to recover the amount of the checks, Verily, the subject checks are presumed order instruments. This is because, as
the claim was denied. found by both lower courts, PNB failed to present sufficient evidence to defeat the
The US Supreme Court held in Mueller that when the person making the check claim of respondents-spouses that the named payees were the intended recipients
so payable did not intend for the specified payee to have any part in the of the checks’ proceeds. The bank failed to satisfy a requisite condition of a
transactions, the payee is considered as a fictitious payee. The check is then fictitious-payee situation—that the maker of the check intended for the payee to
considered as a bearer instrument to be validly negotiated by mere delivery. Thus, have no interest in the transaction.
the US Supreme Court held that Liberty Insurance Bank, as drawee, was Because of a failure to show that the payees were “fictitious” in its broader
authorized to make payment to the bearer of the check, regardless of whether prior sense, the fictitious-payee rule does not apply. Thus, the checks are to be deemed
indorsements were genuine or not. 17 payable to order. Consequently, the drawee bank bears the loss. 20

The more recent Getty Petroleum Corp. v. American Express Travel Related PNB was remiss in its duty as the drawee bank. It does not dispute the
Services Company, Inc. upheld the fictitious-payee rule. The rule protects the
18 fact that its teller or tellers accepted the 69 checks for deposit to the PEMSLA
depositary bank and assigns the loss to the drawer of the check who was in a better account even without any indorsement from the named payees. It bears stressing
position to prevent the loss in the first place. Due care is not even required from that order instruments can only be negotiated with a valid indorsement.
the drawee or depositary bank in accepting and paying the checks. The effect is A bank that regularly processes checks that are neither payable to the customer
that a showing of negligence on the part of the depositary bank will not defeat the nor duly indorsed by the payee is apparently grossly negligent in its
protection that is derived from this rule. operations. This Court has recognized the unique public interest possessed by the
21

However, there is a commercial bad faith exception to the fictitious- banking industry and the need for the people to have full trust and confidence in
payee rule. A showing of commercial bad faith on the part of the drawee bank, their banks. For this reason, banks are minded to treat their customer’s accounts
22

or any transferee of the check for that matter, will work to strip it of this with utmost care, confidence, and honesty. 23

defense. The exception will cause it to bear the loss. Commercial bad faith is In a checking transaction, the drawee bank has the duty to verify the
present if the transferee of the check acts dishonestly, and is a party to the genuineness of the signature of the drawer and to pay the check strictly in
fraudulent scheme. Said the US Supreme Court in Getty: accordance with the drawer’s instructions, i.e., to the named payee in the check. It
“Consequently, a transferee’s lapse of wary vigilance, disregard of suspicious should charge to the drawer’s accounts only the payables authorized by the latter.
circumstances which might have well induced a prudent banker to investigate and other Otherwise, the drawee will be violating the instructions of the drawer and it shall
permutations of negligence are not relevant considerations under Section 3-405 x x x. Rather, be liable for the amount charged to the drawer’s account. 24

there is a “commercial bad faith” exception to UCC 3-405, applicable when the transferee “acts
In the case at bar, respondents-spouses were the bank’s depositors. The checks
dishonestly—where it has actual knowledge of facts and circumstances that amount to bad
faith, thus itself becoming a participant in a fraudulent scheme. x x x Such a test finds support were drawn against respondents-spouses’ accounts. PNB, as the drawee bank, had
in the text of the Code, which omits a standard of care requirement from UCC 3-405 but the responsibility to ascertain the regularity of the indorsements, and the
imposes on all parties an obligation to act with “honesty in fact.” x x x” (Emphasis added)
19 genuineness of the signatures on the checks before accepting them for deposit.
Getty also laid the principle that the fictitious-payee rule extends protection Lastly, PNB was obligated to pay the checks in strict accordance with the
even to non-bank transferees of the checks. instructions of the drawers. Petitioner miserably failed to discharge this burden.
In the case under review, the Rodriguez checks were payable to specified The checks were presented to PNB for deposit by a representative of PEMSLA
payees. It is unrefuted that the 69 checks were payable to specific persons. absent any type of indorsement, forged or otherwise. The facts clearly show that
Likewise, it is uncontroverted that the payees were actual, existing, and living the bank did not pay the checks in strict accordance with the instructions of the
persons who were members of PEMSLA that had a rediscounting arrangement drawers, respondents-spouses. Instead, it paid the values of the checks not to the
with spouses Rodriguez.

5
named payees or their order, but to PEMSLA, a third party to the transaction SO ORDERED.
between the drawers and the payees. Ynares-Santiago (Chairperson), Austria-Martinez, Chico-
Moreover, PNB was negligent in the selection and supervision of its employees. Nazario and Nachura, JJ., concur.
The trustworthiness of bank employees is indispensable to maintain the stability Amended decision affirmed with modification.
of the banking industry. Thus, banks are enjoined to be extra vigilant in the
management and supervision of their employees. In Bank of the Philippine Islands
v. Court of Appeals, this Court cautioned thus:
25

“Banks handle daily transactions involving millions of pesos. By the very nature of their
work the degree of responsibility, care and trustworthiness expected of their employees and
officials is far greater than those of ordinary clerks and employees. For obvious reasons, the
banks are expected to exercise the highest degree of diligence in the selection and supervision
of their employees.”26

PNB’s tellers and officers, in violation of banking rules of procedure, permitted

the invalid deposits of checks to the PEMSLA account. Indeed, when it is the gross
negligence of the bank employees that caused the loss, the bank should be held
liable.27

PNB’s argument that there is no loss to compensate since no demand for

payment has been made by the payees must also fail. Damage was caused to
respondents-spouses when the PEMSLA checks they deposited were returned for
the reason “Account Closed.” These PEMSLA checks were the corresponding
payments to the Rodriguez checks. Since they could not encash the PEMSLA
checks, respondents-spouses were unable to collect payments for the amounts they
had advanced.
A bank that has been remiss in its duty must suffer the consequences of its
negligence. 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.

One Last Note

We note that the RTC failed to thresh out the merits of PNB’s cross-claim
against its co-defendants PEMSLA and MPC. The records are bereft of any
pleading filed by these two defendants in answer to the complaint of respondents-
spouses and cross-claim of PNB. The Rules expressly provide that failure to file an
answer is a ground for a declaration that defendant is in default. Yet, the RTC
28

failed to sanction the failure of both PEMSLA and MPC to file responsive pleadings.
Verily, the RTC dismissal of PNB’s cross-claim has no basis. Thus, this judgment
shall be without prejudice to whatever action the bank might take against its co-
defendants in the trial court.
To PNB’s credit, it became involved in the controversial transaction not of its
own volition but due to the actions of some of its employees. Considering that moral
damages must be understood to be in concept of grants, not punitive or corrective
in nature, We resolve to reduce the award of moral damages to P50,000.00. 29

WHEREFORE, the appealed Amended Decision is AFFIRMED with the

MODIFICATION that the award for moral damages is reduced to P50,000.00, and
that this is without prejudice to whatever civil, criminal, or administrative action
PNB might take against PEMSLA, MPC, and the employees involved.