PNB vs Rodriguez

Facts:
1) The spouses Erlando and Norma Rodriguez are holders of savings and current account in
PNB.
2) They are also engaged in an informal lending business with PEMSLA, an association of
PNB employees.
3) PEMSLA regularly granted loans to its members. There are times when the assoc does
with the Rodriguez.
4) But PEMSLA started creating transactions wherein it places the name of an unknowing
member, without knowledge and consent of the latter in checks and exchange it with
rediscounted checks from the Rodriguez.
5) When PNB noticed the scheme, it closed the account of PEMSLA. The checks that the
Rodriguez deposited into their account were dishonored.
6) A total of 69 checks were issued with the amount of P2,345,804.
7) Rodriguez filed a case for damages against PNB, alleging that when PNB encashed the
checks without proper endorsement, PNB violated their contractual obligation with the
spouse.
8) RTC ruled in favor of the spouses.
9) PNB appealed, arguing that the checks were clearly bearer instruments because the
spouses did not intend to pay the payees. The fictitious payee rule should apply.
10) The CA first ruled in favor of PNB. But upon reconsideration, it reversed its decision and
ruled in favor of Rodriguez.


ISSUE:
Were the checks payable to order or bearer?

HELD:
The checks were payable to order.

1) Under the fictitious payee rule, an instrument is payable to bearer when the payee
there in is fictitious or the payee is not the intended recipient of the proceeds of the
check.
2) Generally, in fictitious payee situation, the bank is absolved from liability, the drawer
bears the loss.
3) However, if there is a commercial bad faith, the drawee bank becomes liable. There is
bad faith when the transferee of the check acts dishonestly and party to a fraudulent
scheme.
4) In the case, the fictitious payee rule does not apply because absent is the intention from
the part of the Rodriguez not to address the checks to the payee.
5) It was PNB who was at fault when it allowed the encashment of checks without proper
endorsement.