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G.R. No. 170325 September 26, 2008
Lessons Applicable: Fictitious Persons (Negotiable Instruments Law)

FACTS:
* Spouses Erlando and Norma Rodriguez were engaged in the informal lending business and had a discounting arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an association of PNB employees

* The association maintained current and savings accounts with Philippine National Bank (PNB)

* 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 officers carried this out by forging the indorsement of the named payees in the checks

* 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 Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. 

* this became the usual practice for the parties.

* November 1998-February 1999: spouses issued 69 checks totalling to P2,345,804.  These were payable to 47 individual payees who were all members of PEMSLA

* 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 amounts were duly debited from the Rodriguez account

* Spouses filed a civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and PNB.  

* PNB credited the checks to the PEMSLA account even without indorsements = PNB violated its contractual obligation to them as depositors - so PNB should bear the losses

* RTC: favored Rodriguez

* makers,  actually did not intend for the named payees to receive the proceeds of the checks = fictitious payees (under the Negotiable Instruments Law) = negotiable by mere delivery

* CA: Affirmed - checks were obviously meant by the spouses to be really paid to PEMSLA = payable to order

 ISSUE: W/N the 69 checks are payable to order for not being issued to fictitious persons thereby dismissing PNB from liability

HELD: NO.  CA Affirmed 
* GR: when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is considered as a bearer instrument (Sections 8 and 9 of the NIL)

* EX: 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 this defense.  The exception will cause it to bear the loss. 

* The distinction between bearer and order instruments lies in their manner of negotiation

* order instrument - requires an indorsement from the payee or holder before it may be validly negotiated

* bearer instrument - mere delivery

* US jurisprudence: “fictitious” if the maker of the check did not intend for the payee to in fact receive the proceeds of the check

* 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 a bearer instrument that can be negotiated by...
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