PNB vs Rodriguez

Facts:
Respondent-spouses Rodriguez were clients of petitioner PNB. They maintained savings and
demand/checking accounts. They were engaged in the informal lending business. They had a
discounting arrangement with the Philnabank Employees Savings and Loan Association
(PEMSLA), an association of PNB employees.

PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the
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 the
name of the members.

It was PEMSLA’s policy not to approve applications for loans of members with outstanding
debts. 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 PEMSLA checks issued for these
loans were then given to the spouses for rediscounting. The officers carried this out by forging
the indorsement of the named payees in the checks.

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 checks were deposited directly by PEMSLA to its savings account
without any indorsement from the named payees. This was an irregular procedure made
possible through the facilitation of Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB
Branch.

For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in
the total amount of P2,300,000. These were payable to forty seven (47) individual payees who
were all members of PEMSLA.

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme,
PNB closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the
spouses were returned or dishonored for the 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 were returned, spouses Rodriguez incurred losses from the rediscounting
transactions.

Spouses Rodriguez filed a civil complaint for damages against PEMSLA and PNB. They sought
to recover the value of their checks that were deposited to the PEMSLA savings account. PNB
moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the
claim for damages should come from the payees of the checks, and not from spouses
Rodriguez.

RTC rendered judgment in favor of spouses Rodriguez and ruled PNB liable to return the value
of the checks. The CA reversed the RTC decision and concluded that the checks were meant
by spouses to be really paid to PEMSLA. However, CA reversed itself and ruled that PNB is
liable.

Judge:
May we ask first, the counsel of PNB, Mr./MS. ___, the issue on whether the subject checks
are payable to order or to bearer and who bears the loss.

Counsel for Petitioner-PNB:

As counsel for PNB, the subject checks are payable to bearer.

The Spouses Rodriguez and PEMSLA’s business arrangement shows that the checks were
bearer instruments and not payable to order. The value of the rediscounted checks of the
Spouses would be deposited in PEMSLA’s account for payment of the loans it has approved in
exchange for PEMSLA’s checks with the full value of the said loans. This is the only obvious
explanation as to why all the disputed sixty-nine (69) checks were in the possession of
PEMSLA’s errand boy for presentment. It also appears that the teller who accepted the said
checks was PEMSLA’s officer, and that such was a regular practice by the parties until the PNB
discovered the scam. The logical conclusion, therefore, is that the checks were never meant to
be paid to order, but instead, to PEMSLA.

It is thus clear that Spouses Rodriguez did not intend for the named payees to receive the
proceeds of the checks. It shows that the payees did not have knowledge of the existence of the
checks. Since the checks were made to fictitious payees, the subject checks are bearer
instruments. Being bearer instruments, the checks were negotiable by mere delivery and do not
require indorsement for negotiation.

Moreover, there is no loss to compensate since no demand for payment has been made by the
payees.

In conclusion, PNB shall not bear the loss. PNB is not liable for the checks which it paid to the
PEMSLA account since the checks were bearer instruments that could be validly negotiated by
mere delivery.

Judge:
May we now call the counsel of Spouses Rodriguez, Mr./Ms ___, please proceed with your
contentions on whether the subject checks are payable to order or to bearer and who bears the
loss.

Counsel for Respondent-Spouses Rodriguez:

As counsel for Spouses Rodriguez, the subject checks are payable to order.

The contention that the disputed checks were “fictitious”, making the instruments payable to
bearer, should fail. The checks on their faces were unquestionably payable to order. My clients,
Spouses Rodriguez, really intended the named payees were to receive checks’ proceeds.
Despite the fact that my clients were transacting with PEMSLA, they knew that the payees
would be the ones receiving the checks, relying on the information given by the officers of
PEMSLA.

Contrary to the contention that there is no loss to compensate since no demand for payment
has been made by the payees, damage was caused to my clients 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, Spouses Rodriguez were unable to collect payments for the amounts they
had advanced.

Lastly, PNB was remiss in its duty as drawee bank. PNB was obligated to pay the checks in
strict accordance with the instructions of the drawers. Instead, it paid the values of the checks
not to the named payees or their order, but to PEMSLA, a third party to the transaction between
the drawers and the payees. PNB violated its contractual obligation to my clients as bank-
depositors. Hence, it should bear the loss.

Judge Resolution:
In resolving the issue/s at hand, this Court rules in favor of Respondents-Spouses Rodriguez.
The subject checks are payable to order and PNB is liable for the loss.

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. This is pursuant to Section 9 (c) of the NIL.

In the case under review, the Rodriguez checks were payable to specified payees, since the 69
checks were payable to specific persons, members of PEMSLA who were actual, existing and
living persons.

What remains to be determined is if the payees, though existing persons, were “fictitious” in its
broader sense. The answer is on the negative. The 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.

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. At most, the
bank’s thesis shows that the payees did not have 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 respondents-spouses that the payees would not receive the checks’
proceeds. Considering that respondents-spouses were transacting with PEMSLA and not the
individual payees, it is understandable that they relied on the information given by the officers of
PEMSLA that the payees would be receiving the checks.

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.

Moreover, PNB was remiss in its duty as the drawee bank. PNB, as the drawee bank, had the
responsibility to ascertain the regularity of the indorsements, and the genuineness of the
signatures on the checks before accepting them for deposit. PNB was obligated to pay the
checks in strict accordance with the instructions of the drawers. However, PNB failed to do so.

Lastly, PNB was negligent in the selection and supervision of its employees. 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.
Firestone Tire and Rubber Company vs. CA and Luzon Dev. Bank
Facts:
Defendant, Luzon Development Bank, is a banking corporation that accepts savings and time
deposit. One of its client-depositors, Fojas-Arca who maintained a special savings account, was
authorized by LDB and allowed withdrawals of funds therefrom through the medium of special
withdrawal slips.

Firestone Tire and Rubber Company and Fojas-Arja entered into a “Franchised Dealership
Agreement” whereby Fojas-Arca has the privilege to purchase on credit and sell plaintiff’s
products.

Pursuant to the aforesaid Agreement, Fojas-Arca purchased on credit Firestone products with a
total amount of around P4.8M. Fojas-Arca delivered six (6) special withdrawal slips to Firestone
drawn upon LDB. In turn, these were deposited by Firestone with its current account with
Citibank. All of them were honored and paid by LDB. This made Firestone believe that the
succeeding special withdrawal slips drawn upon the LDB would be equally sufficiently funded.
Relying on such belief, Firestone then extended to Fojas-Arca other purchases on credit of its
products.

Fojas-Arca then purchased Firestone products on credit and delivered to Firestone the four (4)
corresponding withdrawal slips in payment thereof drawn upon LDB. These were deposited by
Firestone in its current account with Citibank and in turn, Citibank forwarded it to LDB for
payment and collection. However, out of the four (4) withdrawal slips, only one withdrawal slip,
the fourth one, was honored and paid by LDB.

Because of the fact the LDB honored and paid the 2nd withdrawal slip, Firestone believed that
the other withdrawal slips were likewise sufficiently funded, and that it had received full payment
of Fojas-Arca’s credit. Firestone continued to extend further purchase on credit of its products to
Fojas-Arca as per agreement.

However, Firestone was informed by Citibank that the 1st and 3rd special withdrawal slips were
dishonored and not paid for the reason ‘NO ARRANGEMENT’. As a consequence, Citibank
debited Firestone’s account for a sum of around P2M representing the aggregate amount of the
two special withdrawal slips. Firestone averred that the pecuniary losses it suffered is caused by
and directly attributable to defendant's gross negligence.

Counsel of Firestone served a written demand upon LDB for the satisfaction of the damages
suffered by it. Due to LDB’s refusal to pay Firestone’s claim, Firestone filed a complaint for sum
of money and damages with the RTC. The complaint was dismissed and Firestone appealed to
the CA. CA denied the appeal and affirmed the judgment of the trial court.

Judge:
May we ask first, the counsel of Petitioner-Firestone, Mr./MS. ___, the issues on whether the
special withdrawal slip is a negotiable instrument and whether the respondent bank should be
held liable.

Counsel for Petitioner-Firestone:

As counsel of Petitioner-Firestone, the withdrawal slips in question were non-negotiable
however they were given the appearance of checks.

The acceptance and payment of the special withdrawal slips by respondent bank without the
presentation of the depositor’s passbook gave the impression that the withdrawal slips are
instruments payable upon presentment.

Furthermore, respondent bank failed to seasonably warn my client that it would not honor two of
the four special withdrawal slips.

Based on the facts obtaining, respondent Luzon Development Bank is liable for damages
because it committed the aforementioned tortious acts, in violation of Article 2176.

Judge:
May we now call the counsel of Respondent-Luzon Development Bank, Mr./Ms ___, please
proceed with your contentions on whether the special withdrawal slip is a negotiable instrument
and whether your client respondent bank should be held liable.

Counsel for Respondent-LDB:

As counsel for respondent Luzon Development Bank, the special withdrawal slips are non-
negotiable. The withdrawal slips lacked the essence of negotiability as it cannot be used as a
substitute for money.

Contrary to counsel’s assertions,

Firstly, the special withdrawal slips were not purposely given the appearance of checks and
should not have been mistaken for checks. When the special withdrawal slips were received by
my client, it only verified whether or not the signatures therein were authentic, and whether or
not the deposit level in the passbook concurred with the savings ledger, and whether or not the
deposit is sufficient to cover the withdrawal. If Firestone treated the special withdrawal slips paid
by Fojas-Arca as checks then Firestone has to blame itself for being grossly negligent in treating
the withdrawal slips as checks when it is clearly stated therein that the withdrawal slips are non-
negotiable.

Secondly, respondent bank notified the depositor to present the passbook whenever it received
a collection note from another bank, belying petitioner's claim that respondent bank was
negligent in not requiring a passbook under the subject transaction.
Lastly, since the withdrawal slips are non-negotiable, the rules governing the giving immediate
notice of dishonor of negotiable instruments do not apply in this case. Thus, my client was under
no obligation to inform Firestone of the dishonor of the special withdrawal slips.

In light of the circumstances, my client, Luzon Development Bank, should not be held liable for
damages.

Judge Resolution:
In resolving the issue/s at hand, the Court rules in favor of Respondent Luzon Development
Bank. The special withdrawal slips are non-negotiable and respondent bank is not liable.

The essence of negotiability which characterizes a negotiable paper as a credit instrument lies
in its freedom to circulate freely as a substitute for money. The withdrawal slips in question
lacked this character.

Provided that the withdrawal slips in question were non-negotiable, the rules governing the
giving immediate notice of dishonor of negotiable instruments do not apply in this case. Thus,
respondent bank was under no obligation to give immediate notice that it would not make
payment on the subject withdrawal slips. Citibank should have known that withdrawal slips were
not negotiable instruments. It could not expect these slips to be treated as checks by other
entities.

The fact that the other withdrawal slips were honored and paid by respondent bank was no
license for Citibank to presume that subsequent slips would be honored and paid immediately.
By doing so, it failed in its fiduciary duty to treat the accounts of its clients with the highest
degree of care.

The withdrawal slips deposited with petitioner's current account with Citibank were not checks.
Citibank was not bound to accept the withdrawal slips as a valid mode of deposit. But having
erroneously accepted them as such, Citibank — and petitioner as account-holder — must bear
the risks attendant to the acceptance of these instruments. Petitioner and Citibank could not
now shift the risk and hold private respondent liable for their admitted mistake.