Republic of the Philippines

Supreme Court
Manila

THIRDDIVISION

PHILIPPINENATIONALBANK,G.R.No.170325
Petitioner,
Present:
YNARESSANTIAGO,J.,
Chairperson,
versusAUSTRIAMARTINEZ,
CHICONAZARIO,
NACHURA,and
REYES,JJ.

ERLANDOT.RODRIGUEZPromulgated:
andNORMARODRIGUEZ,
Respondents.September26,2008
xx

DECISION

REYES,R.T.,J.:

WHENthepayeeofthecheckisnotintendedtobethetruerecipientofitsproceeds,isitpayable
to order or bearer? What is the fictitiouspayee rule and who is liable under it? Is there any
exception?

These questions seek answers in this petition for review on certiorari of the Amended
[1]
Decision oftheCourtofAppeals(CA)whichaffirmedwithmodificationthatoftheRegional
[2]
TrialCourt(RTC).

TheFacts

Thefactsasbornebytherecordsareasfollows:

RespondentsSpouses Erlando and Norma Rodriguez were clients of petitioner Philippine

National Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained savings and
demand/checking accounts, namely, PNBig Demand Deposits (Checking/Current Account No.
8106246 under the account name Erlando and/or Norma Rodriguez), and PNBig Demand
Deposit (Checking/Current Account No. 8104804 under the account name Erlando T.
Rodriguez).

The spouses were engaged in the informal lending business. In line with their business,
[3]
they had a discounting arrangement with the Philnabank Employees Savings and Loan
Association(PEMSLA),anassociationofPNB employees. Naturally, PEMSLA was likewise a
clientofPNBAmeliaAvenueBranch.Theassociationmaintainedcurrentandsavingsaccounts
withpetitionerbank.

PEMSLAregularlygrantedloanstoitsmembers.SpousesRodriguezwouldrediscountthe
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
nameofthemembers.

ItwasPEMSLAspolicynottoapproveapplicationsforloansofmemberswithoutstanding
debts.Tosubvertthispolicy,somePEMSLAofficersdevisedaschemetoobtainadditionalloans
despitetheiroutstandingloanaccounts.Theytookoutloansinthenamesofunknowingmembers,
withouttheknowledgeorconsentofthelatter.ThePEMSLAchecksissuedfortheseloanswere
then given to the spouses for rediscounting. The officers carried this out by forging the
indorsementofthenamedpayeesinthechecks.

Inreturn,thespousesissuedtheirpersonalchecks(Rodriguezchecks)inthenameofthe
membersanddeliveredthecheckstoanofficerofPEMSLA.ThePEMSLAchecks,ontheother
hand,weredepositedbythespousestotheiraccount.

Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings
accountwithoutanyindorsementfromthenamedpayees.Thiswasanirregularproceduremade
possiblethroughthefacilitationofEdmundoPalermo,Jr.,treasurerofPEMSLAandbankteller
inthePNBBranch.Itappearsthatthisbecametheusualpracticefortheparties.


FortheperiodNovember1998toFebruary1999,thespousesissuedsixtynine(69)checks,
inthetotalamountofP2,345,804.00.These were payable to forty seven (47) individual payees
[4]
whowereallmembersofPEMSLA.

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this
scheme,PNBclosedthecurrentaccountofPEMSLA.Asaresult,thePEMSLAchecksdeposited
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.

RTCDisposition

Alarmedovertheunexpectedturnofevents,thespousesRodriguezfiledacivilcomplaint
for damages against PEMSLA, the MultiPurpose Cooperative of Philnabankers (MCP), and
petitioner PNB. They sought to recover the value of their checks that were deposited to the
PEMSLAsavingsaccountamountingtoP2,345,804.00.ThespousescontendedthatbecausePNB
credited the checks to the PEMSLA account even without indorsements, PNB violated its
contractualobligationtothemasdepositors.PNBpaidthewrongpayees,hence,itshouldbearthe
loss.

PNBmovedtodismissthecomplaintonthegroundoflackofcauseofaction.PNBarguedthat
the claim for damages should come from the payees of the checks, and not from spouses
Rodriguez.Sincetherewasnodemandfromthesaidpayees,theobligationshouldbeconsidered
asdischarged.

InanOrderdatedJanuary12,2000,theRTCdeniedPNBsmotiontodismiss.

[5]
InitsAnswer, PNBclaimeditisnotliableforthecheckswhichitpaidtothePEMSLA
accountwithoutanyindorsementfromthepayees.ThebankcontendedthatspousesRodriguez,
the makers, actually did not intend for the named payees to receive the proceeds of the
checks. Consequently, the payees were considered as fictitious payees as defined under the

Negotiable Instruments Law (NIL). Being checks made to fictitious payees which are bearer
instruments,thecheckswerenegotiablebymeredelivery.PNBsAnswerincludeditscrossclaim
against its codefendants PEMSLA and the MCP, praying that in the event that judgment is
renderedagainstthebank,thecrossdefendantsshouldbeorderedtoreimbursePNBtheamountit
shallpay.

Aftertrial,theRTCrenderedjudgmentinfavorofspousesRodriguez(plaintiffs).It ruled
that PNB (defendant) is liable to return the value of the checks. All counterclaims and cross
claimsweredismissed.ThedispositiveportionoftheRTCdecisionreads:

WHEREFORE,inviewoftheforegoing,theCourtherebyrendersjudgment,asfollows:

1.DefendantisherebyorderedtopaytheplaintiffsthetotalamountofP2,345,804.00orreinstate
or restore the amount of P775,337.00 in the PNBig Demand Deposit Checking/Current
Account No. 8104804 of Erlando T. Rodriguez, and the amount of P1,570,467.00inthe
PNBigDemandDeposit,Checking/CurrentAccountNo.8106246ofErlandoT.Rodriguez
and/orNormaRodriguez,pluslegalrateofinterestthereontobecomputedfromthefiling
ofthiscomplaintuntilfullypaid

2.ThedefendantPNBisherebyorderedtopaytheplaintiffsthefollowingreasonableamountof
damages suffered by them taking into consideration the standing of the plaintiffs being
sugarcaneplanters,realtors,residentialsubdivisionowners,andotherbusinesses:

(a)Consequentialdamages,unearnedincomeintheamountofP4,000,000.00,asa
resultoftheirhavingincurredgreatdificulty(sic)especiallyintheresidential
subdivision business, which was not pushed through and the contractor even
threatenedtofileacaseagainsttheplaintiffs

(b)MoraldamagesintheamountofP1,000,000.00

(c)ExemplarydamagesintheamountofP500,000.00

(d)AttorneysfeesintheamountofP150,000.00consideringthatthiscasedoesnot
involveverycomplicatedissuesandforthe

(e)Costsofsuit.

[6]
3.Otherclaimsandcounterclaimsareherebydismissed.

CADisposition

PNB appealed the decision of the trial court to the CA on the principal ground that the
disputedchecksshouldbeconsideredaspayabletobearerandnottoorder.

[7]
InaDecision datedJuly22,2004,theCAreversedandsetasidetheRTC disposition.
The CA concluded that the checks were obviously meant by the spouses to be really paid to
PEMSLA.Thecourtaquodeclared:

We are not swayed by the contention of the plaintiffsappellees (Spouses Rodriguez) that
their cause of action arose from the alleged breach of contract by the defendantappellant (PNB)
whenitpaidthevalueofthecheckstoPEMSLAdespitethechecksbeingpayabletoorder.Rather,
wearemoreconvincedbythestrongandcredibleevidenceforthedefendantappellantwithregard
totheplaintiffsappelleesandPEMSLAsbusinessarrangementthatthevalueoftherediscounted
checksoftheplaintiffsappelleeswouldbedepositedinPEMSLAsaccountforpaymentoftheloans
ithasapprovedinexchangeforPEMSLAscheckswiththefullvalueofthesaidloans.Thisisthe
onlyobviousexplanationastowhyallthedisputedsixtynine(69)checkswereinthepossession
of PEMSLAs errand boy for presentment to the defendantappellant that led to this present
controversy.ItalsoappearsthatthetellerwhoacceptedthesaidcheckswasPEMSLAsofficer,and
thatsuchwasaregularpracticebythepartiesuntilthedefendantappellantdiscoveredthescam.
The logical conclusion, therefore, is that the checks were never meant to be paid to order, but
instead,toPEMSLA.Wethusfindnobreachofcontractonthepartofthedefendantappellant.

According to plaintiffappellee Erlando Rodriguez testimony, PEMSLA allegedly issued

postdated checks to its qualified members who had applied for loans. However, because of
PEMSLAs insufficiency of funds, PEMSLA approached the plaintiffsappellees for the latter to
issue rediscounted checks in favor of said applicant members. Based on the investigation of the
defendantappellant,meanwhile,thisarrangementallowedtheplaintiffsappelleestomakeaprofit
byissuingrediscountedchecks,whiletheofficersofPEMSLAandothermemberswouldbeable
to claim their loans, despite the fact that they were disqualified for one reason or another. They
were able to achieve this conspiracy by using other members who had loaned lesser amounts of
[8]
moneyorhadnotappliedatall.xxx. (Emphasisadded)

TheCAfoundthatthecheckswerebearerinstruments,thustheydonotrequireindorsementfor
negotiationandthatspousesRodriguezandPEMSLAconspiredwitheachothertoaccomplish
thismoneymakingscheme. The payees in the checks were fictitious payees because they were
nottheintendedpayeesatall.

ThespousesRodriguezmovedforreconsideration.Theyargued,interalia,thatthechecks
ontheirfaceswereunquestionablypayabletoorderandthatPNBcommittedabreachofcontract
whenitpaidthevalueofthecheckstoPEMSLAwithoutindorsementfromthepayees.Theyalso
arguedthattheircauseofactionisnotonlyagainstPEMSLAbutalsoagainstPNBtorecoverthe
valueofthechecks.

OnOctober11,2005,theCAreverseditselfviaanAmendedDecision,thelastparagraph
andfalloofwhichread:


Insum,werulethatthedefendantappellantPNB is liable to the plaintiffsappellees Sps.
Rodriguezforthefollowing:

1. ActualdamagesintheamountofP2,345,804withinterestat6%perannum
from14May1999untilfullypaid

2.MoraldamagesintheamountofP200,000

3.AttorneysfeesintheamountofP100,000and

4.Costsofsuit.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us

AFFIRMINGWITHMODIFICATIONtheassaileddecisionrenderedinCivilCaseNo.9910892,
as set forth in the immediately next preceding paragraph hereof, and SETTING ASIDE Our
originaldecisionpromulgatedinthiscaseon22July2004.

[9]
SOORDERED.

TheCAruledthatthecheckswerepayabletoorder.Accordingtotheappellatecourt,PNB
failed to present sufficient proof to defeat the claim of the spouses Rodriguez that they really
intendedthecheckstobereceivedbythespecifiedpayees.Thus,PNBisliableforthevalueof
thecheckswhichitpaidtoPEMSLAwithoutindorsementsfromthenamedpayees.The award
for damages was deemed appropriate in view of the failure of PNB to treat the Rodriguez
account with the highest degree of care considering the fiduciary nature of their
relationship,whichconstrainedrespondentstoseeklegalaction.

Hence,thepresentrecourseunderRule45.

Issues

The issues may be compressed to whether the subject checks are payable to order or to
bearerandwhobearstheloss?

PNBarguesanewthatwhenthespousesRodriguezissuedthedisputedchecks,theydidnot
intendforthenamedpayeestoreceivetheproceeds.Thus,theyarebearerinstrumentsthatcould
be validly negotiated by mere delivery. Further, testimonial and documentary evidence
presented during trial amply proved that spouses Rodriguez and the officers of PEMSLA
conspiredwitheachothertodefraudthebank.

OurRuling

Prefatorily, amendment of decisions is more acceptable than an erroneous judgment

attainingfinalitytotheprejudiceofinnocentparties.Acourtdiscoveringanerroneousjudgment
beforeitbecomesfinalmay,motupropriooruponmotionoftheparties,correctitsjudgmentwith
[10]
thesingularobjectiveofachievingjusticeforthelitigants.

However,awordofcautiontolowercourts,theCAinCebuinthisparticularcase,isin
order.TheCourtdoesnotsanctioncarelessdispositionofcasesbycourtsofjustice.The highest
degree of diligence must go into the study of every controversy submitted for decision by
litigants. Every issue and factual detail must be closely scrutinized and analyzed, and all the
applicablelawsjudiciouslystudied,beforethepromulgationofeveryjudgmentbythecourt.Only
inthismannerwillerrorsinjudgmentsbeavoided.

Nowtothecoreofthepetition.

Asarule,whenthepayeeisfictitiousornotintendedtobethetruerecipientofthe
proceeds,thecheckisconsideredasabearerinstrument.Acheckisabillofexchangedrawn
[11]
onabankpayableondemand.
Itiseitheranorderorabearerinstrument.Sections8and9of
theNILstates:

SEC. 8. When payable to order. The instrument is payable to order where it is drawn
payabletotheorderofaspecifiedpersonortohimorhisorder.Itmaybedrawnpayabletothe
orderof

(a)Apayeewhoisnotmaker,drawer,ordraweeor
(b)Thedrawerormakeror
(c)Thedraweeor
(d)Twoormorepayeesjointlyor
(e)Oneorsomeofseveralpayeesor
(f)Theholderofanofficeforthetimebeing.

Wheretheinstrumentispayabletoorder,thepayeemustbenamedorotherwiseindicated
thereinwithreasonablecertainty.

SEC.9.Whenpayabletobearer.Theinstrumentispayabletobearer

(a)Whenitisexpressedtobesopayableor
(b)Whenitispayabletoapersonnamedthereinorbeareror
(c) Whenitispayabletotheorderofafictitiousornonexistingperson,andsuchfactis
knowntothepersonmakingitsopayableor
(d)Whenthenameofthepayeedoesnotpurporttobethenameofanypersonor

(e) Where the only or last indorsement is an indorsement in blank.

supplied)

[12]

(Underscoring

Thedistinctionbetweenbearerandorderinstrumentsliesintheirmannerofnegotiation.
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 instrument, on the other hand, does not
requireanindorsementtobevalidlynegotiated.Itisnegotiablebymeredelivery.The provision
reads:

SEC.30.Whatconstitutesnegotiation. An instrument is negotiated when it is 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 negotiated by the
indorsementoftheholdercompletedbydelivery.

Acheckthatispayabletoaspecifiedpayeeisanorderinstrument.However,underSection
9(c)oftheNIL,acheckpayabletoaspecifiedpayeemayneverthelessbeconsideredasabearer
instrument if it is payable to the order of a fictitious or nonexisting person, and such fact is
knowntothepersonmakingitsopayable.Thus,checksissuedtoPrinsipeAbanteorSiMalakas
at si Maganda, who are wellknown characters in Philippine mythology, are bearer instruments
becausethenamedpayeesarefictitiousandnonexistent.

WehaveyettodiscussabroadermeaningofthetermfictitiousasusedintheNIL.Itisfor
thisreasonthatWelookelsewhereforguidance.CourtrulingsintheUnitedStatesarealogical
starting point since our law on negotiable instruments was directly lifted from the Uniform
[13]
NegotiableInstrumentsLawoftheUnitedStates.

AreviewofUSjurisprudenceyieldsthatanactual,existing,andlivingpayeemayalsobe
fictitiousifthemakerofthecheckdidnotintendforthepayeetoinfactreceivetheproceedsof
thecheck.Thisusuallyoccurswhenthemakerplacesanameofanexistingpayeeonthecheck
[14]
forconvenienceortocoverupanillegalactivity.
Thus,acheckmadeexpresslypayabletoa
nonfictitiousandexistingpersonisnotnecessarilyanorderinstrument.Ifthepayeeisnotthe
intendedrecipientoftheproceedsofthecheck,thepayeeisconsideredafictitiouspayeeand
thecheckisabearerinstrument.

Inafictitiouspayeesituation,thedraweebankisabsolvedfromliabilityandthedrawer
bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer

instrumentthatcanbenegotiatedbydelivery.Theunderlyingtheoryisthatonecannotexpecta
fictitiouspayeetonegotiatethecheckbyplacinghisindorsementthereon.Andsincethemaker
knewthislimitation,hemusthaveintendedfortheinstrumenttobenegotiatedbymeredelivery.
Thus,incaseofcontroversy,thedrawerofthecheckwillbeartheloss.Thisruleisjustifiedfor
otherwise,itwillbemostconvenientforthemakerwhodesirestoescapepaymentofthecheckto
always deny the validity of the indorsement. This despite the fact that the fictitious payee was
purposelynamedwithoutanyintentionthatthepayeeshouldreceivetheproceedsofthecheck.
[15]

ThefictitiouspayeeruleisbestillustratedinMueller&Martinv.LibertyInsuranceBank.
[16]
Inthesaidcase,thecorporationMueller&MartinwasdefraudedbyGeorgeL.Martin,one
of its authorized signatories. Martin drew seven checks payable to the German Savings Fund
Company Building Association (GSFCBA) amounting to $2,972.50 against the account of the
corporationwithoutauthorityfromthelatter.MartinwasalsoanofficeroftheGSFCBAbutdid
not have signing authority. At the back of the checks, Martin placed the rubber stamp of the
GSFCBA and signed his own name as indorsement. He then successfully drew the funds from
LibertyInsuranceBankforhisownpersonalprofit.Whenthecorporationfiledanactionagainst
thebanktorecovertheamountofthechecks,theclaimwasdenied.

TheUSSupremeCourtheldinMuellerthatwhenthepersonmakingthechecksopayable
didnotintendforthespecifiedpayeetohaveanypartinthetransactions,thepayeeisconsidered
asafictitiouspayee.Thecheckisthenconsideredasabearerinstrumenttobevalidlynegotiated
bymeredelivery.Thus,theUSSupremeCourtheldthatLibertyInsuranceBank,asdrawee,was
authorizedtomakepaymenttothebearerofthecheck,regardlessofwhetherpriorindorsements
[17]
weregenuineornot.

The more recent Getty Petroleum Corp. v. American Express Travel Related Services
[18]
Company, Inc.
upheld the fictitiouspayee rule. The rule protects the depositary bank and
assignsthelosstothedrawerofthecheckwhowasinabetterpositiontopreventthelossinthe
first place. Due care is not even required from the drawee or depositary bank in accepting and
payingthechecks.Theeffectisthatashowingofnegligenceonthepartofthedepositarybank
willnotdefeattheprotectionthatisderivedfromthisrule.

However, there is a commercial bad faith exception to the fictitiouspayee rule. A

showingofcommercialbadfaithonthepartofthedraweebank,oranytransfereeofthecheck
forthatmatter,willworktostripitofthisdefense.Theexceptionwillcauseittobeartheloss.
Commercialbadfaithispresentifthetransfereeofthecheckactsdishonestly,andisapartytothe
fraudulentscheme.SaidtheUSSupremeCourtinGetty:

Consequently,atransfereeslapseofwaryvigilance,disregardofsuspiciouscircumstances
which might have well induced a prudent banker to investigate and other permutations of
negligencearenotrelevantconsiderationsunderSection3405xxx.Rather,thereisacommercial
bad faith exception to UCC 3405, applicable when the transferee acts dishonestly where it has
actual knowledge of facts and circumstances that amount to bad faith, thus itself becoming a
participantinafraudulentscheme.xxxSuchatestfindssupportinthetextoftheCode,which
omitsastandardofcarerequirementfromUCC3405butimposesonallpartiesanobligationto
[19]
actwithhonestyinfact.xxx
(Emphasisadded)

Getty also laid the principle that the fictitiouspayee rule extends protection even to nonbank
transfereesofthechecks.

In the case under review, the Rodriguez checks were payable to specified payees. It is
unrefutedthatthe69checkswerepayabletospecificpersons.Likewise,itisuncontrovertedthat
thepayeeswereactual,existing,andlivingpersonswhoweremembersofPEMSLAthathada
rediscountingarrangementwithspousesRodriguez.

Whatremainstobedeterminedisifthepayees,thoughexistingpersons,werefictitiousin
itsbroadercontext.

Forthefictitiouspayeeruletobeavailableasadefense,PNBmustshowthatthemakers
didnotintendforthenamedpayeestobepartofthetransactioninvolvingthechecks.At most,
the banks thesis shows that the payees did not have knowledge of the existence of the checks.
Thislackofknowledgeonthepartofthepayees,however,wasnottantamounttoalackof
intention on the part of respondentsspouses that the payees would not receive the checks
proceeds. Considering that respondentsspouses were transacting with PEMSLA and not the
individualpayees,itisunderstandablethattheyreliedontheinformationgivenbytheofficersof
PEMSLAthatthepayeeswouldbereceivingthechecks.

Verily, the subject checks are presumed order instruments. This is because, as found by
bothlowercourts,PNBfailedtopresentsufficientevidencetodefeattheclaimofrespondents
spouses that the named payees were the intended recipients of the checks proceeds. The bank
failed to satisfy a requisite condition of a fictitiouspayee situation that the maker of the check
intendedforthepayeetohavenointerestinthetransaction.

Because of a failure to show that the payees were fictitious in its broader sense, the
fictitiouspayee rule does not apply. Thus, the checks are to be deemed payable to order.
[20]
Consequently,thedraweebankbearstheloss.

PNBwasremissinitsdutyasthedraweebank.Itdoesnotdisputethefactthatitsteller
or tellers accepted the 69 checks for deposit to the PEMSLA account even without any
indorsement from the named payees. It bears stressing that order instruments can only be
negotiatedwithavalidindorsement.

A bank that regularly processes checks that are neither payable to the customer nor duly
[21]
indorsed by the payee is apparently grossly negligent in its operations.
This Court has
recognized the unique public interest possessed by the banking industry and the need for the
[22]
peopletohavefulltrustandconfidenceintheirbanks.
Forthisreason,banksaremindedto
[23]
treattheircustomersaccountswithutmostcare,confidence,andhonesty.

In a checking transaction, the drawee bank has the duty to verify the genuineness of the
signatureofthedrawerandtopaythecheckstrictlyin
accordancewiththedrawersinstructions,i.e.,tothenamedpayeeinthecheck.Itshouldchargeto
the drawers accounts only the payables authorized by the latter. Otherwise, the drawee will be
violating the instructions of the drawer and it shall be liable for the amount charged to the
[24]
drawersaccount.

Inthecaseatbar,respondentsspouseswerethebanksdepositors.Thechecksweredrawn
against respondentsspouses accounts. PNB, as the drawee bank, had the responsibility to
ascertaintheregularityoftheindorsements,andthegenuinenessofthesignaturesonthechecks
before accepting them for deposit. Lastly, PNB was obligated to pay the checks in strict

accordance with the instructions of the drawers. Petitioner miserably failed to discharge this
burden.

ThecheckswerepresentedtoPNBfordepositbyarepresentativeofPEMSLAabsentany
type of indorsement, forged or otherwise. The facts clearly show that the bank did not pay the
checksinstrictaccordancewiththeinstructionsofthedrawers,respondentsspouses.Instead, it
paidthevaluesofthechecksnottothenamedpayeesortheirorder,buttoPEMSLA,athirdparty
tothetransactionbetweenthedrawersandthepayees.

Moreover, PNB was negligent in the selection and supervision of its employees. The
trustworthiness of bank employees is indispensable to maintain the stability of the banking
industry.Thus,banksareenjoinedtobeextravigilantinthemanagementandsupervisionoftheir
[25]
employees.InBankofthePhilippineIslandsv.CourtofAppeals,
thisCourtcautionedthus:

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
officialsisfargreater
than those of ordinary clerks and employees. For obvious reasons, the banks are expected to
[26]
exercisethehighestdegreeofdiligenceintheselectionandsupervisionoftheiremployees.

PNBstellersandofficers,inviolationofbankingrulesofprocedure,permittedtheinvalid
depositsofcheckstothePEMSLAaccount.Indeed,whenitisthegrossnegligenceofthebank
[27]
employeesthatcausedtheloss,thebankshouldbeheldliable.

PNBsargumentthatthereisnolosstocompensatesincenodemandforpaymenthasbeen
made by the payees must also fail. Damage was caused to respondentsspouses when the
PEMSLAcheckstheydepositedwerereturnedforthereasonAccountClosed. These PEMSLA
checks were the corresponding payments to the Rodriguez checks. Since they could not encash
thePEMSLAchecks,respondentsspouseswereunabletocollectpaymentsfortheamountsthey
hadadvanced.

A bank that has been remiss in its duty must suffer the consequences of its negligence.
Beingissuedtonamedpayees,PNBwasdutyboundbylawandbybankingrulesandprocedure
torequirethatthechecksbeproperlyindorsedbeforeacceptingthemfordepositandpayment.In
fine,PNBshouldbeheldliablefortheamountsofthechecks.


OneLastNote

We note that the RTC failed to thresh out the merits of PNBs crossclaim against its co
defendants PEMSLA and MPC. The records are bereft of any pleading filed by these two
defendantsinanswertothecomplaintofrespondentsspousesandcrossclaimofPNB.TheRules
expresslyprovidethatfailuretofileananswerisagroundforadeclarationthatdefendant
[28]
is in default.
Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file
responsive pleadings. Verily, the RTC dismissal of PNBs crossclaim has no basis. Thus, this
judgment shall be without prejudice to whatever action the bank might take against its co
defendantsinthetrialcourt.

ToPNBscredit,itbecameinvolvedinthecontroversialtransactionnotofitsownvolitionbutdue
totheactionsofsomeofitsemployees.Consideringthatmoraldamagesmustbeunderstoodtobe
inconceptofgrants,notpunitiveorcorrectiveinnature,Weresolvetoreducetheawardofmoral
[29]
damagestoP50,000.00.

WHEREFORE, the appealed Amended Decision is AFFIRMED with the

MODIFICATIONthat 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,andtheemployeesinvolved.

SOORDERED.

RUBENT.REYES
AssociateJustice

WECONCUR:

CONSUELOYNARESSANTIAGO
AssociateJustice
Chairperson

MA.ALICIAAUSTRIAMARTINEZMINITAV.CHICONAZARIO
AssociateJusticeAssociateJustice

ANTONIOEDUARDOB.NACHURA
AssociateJustice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the
casewasassignedtothewriteroftheopinionoftheCourtsDivision.

CONSUELOYNARESSANTIAGO
AssociateJustice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons
Attestation,IcertifythattheconclusionsintheaboveDecisionhadbeenreachedinconsultation
beforethecasewasassignedtothewriteroftheopinionoftheCourtsDivision.

REYNATOS.PUNO
ChiefJustice
[1]
CAG.R.CVNo.76645datedOctober11,2005.PennedbyAssociateJusticeIsaiasP.Dicdican,withAssociateJusticesPampioA.
AbarintosandRamonM.Bato,Jr.,concurringrollo,pp.2942.

[2]
CivilCaseNo.9910892,RegionalTrialCourtinNegrosOccidental,Branch51,BacolodCity,datedMay10,2002CArollo,pp.
6372.
[3]
Afinancingschemewhereapostdatedcheckisexchangedforacurrentcheckwithadiscountedfacevalue.
[4]
CurrentAccountNo.8104804inthenameofErlandoT.Rodriguez
NameofPayees
CheckNo.
DateIssued
Amount
01.SimonCarmeloB.Liboon
0001110
11.27.98
40,934.00
02.SimonCarmeloLiboon
0000011589
02.01.99
29,877.00
03.SimonLiboon
0000011567
01.25.99
50,350.00
04.PacificoCastillo
0000011565
01.22.99
39,995.00
05.JoseBagood
0000011587
02.01.99
38,000.00
06.DioletoDelcano
0000011594
02.02.99
28,500.00
07.AntonioMaravilla
0000011593
02.02.99
37,715.00
08.JoselJuguan
0000011595
02.02.99
45,002.00
09.DomingoRoa,Jr.
0000011591
02.01.99
35,373.00
10.AntonioMaravilla
0001657
02.05.99
39,900.00
11.ChristyMaeBerden
0001655
02.05.99
28,595.00
12.NelsonGuadalupe
0000011588
02.01.99
34,819.00
13.AntonioLondres
0000011596
02.05.99
32,851.00
14.ArnelNavarosa
0000011597
02.05.99
28,785.00
15.EstrellaAlunan
0000011600
02.05.99
32,509.00
16.DennisMontemayor
0000011598
02.05.99
43,691.00
17.MickleArgusar
0000011599
02.05.99
31,498.00
18.PerlitaGallego
0000011564
01.21.99
38,000.00
19.SheilaArcobillas
0000011563
01.19.99
38,000.00
20.DaniloVillarosa
0001656
02.05.99
32,006.00
21.AlmieBorce
0000011583
02.01.99
20,093.00
22.RonieAragon
0000011566
01.20.99
28,844.00

Total:
775,337.00

CurrentAccountNo.8106246inthenameofErlandoand/orNormaRodriguez
NameofPayees
CheckNo.
DateIssued
01.ElmaBacarro
0001944
01.15.99
02.DelfinRecarder
0001927
01.14.99
03.ElmaBacarro
0001926
01.14.99
04.PerlitaGallego
0001924
01.14.99
05.JoseWeber
0001932
01.14.99
06.RogelioAlfonso
0001922
01.14.99
07.GianniAmantillo
0001928
01.14.99
08.EddieBagood
0001929
01.14.99
09.ManuelLongero
0001933
01.14.99
10.AnavicLorenzo
0001923
01.14.99
11.CorazonSalva
0001945
01.15.99
12.ArleneDiamante
0001951
01.18.99
13.JoselinLaurilla
0001955
01.18.99
14.AndyJavellana
0001960
01.22.99
15.ErdelindaPorras
0001958
01.22.99
16.NelsonGuadalupe
0001956
01.18.99
17.BarnardEscano
0001969
01/22/99
18.BuenaCoscolluela
0001968
01/22/99
19.ErdelindaPorras
0002021
02/01/99
20.NedaAlgara
0002023
02/01/99
21.EddieBagood
0002030
02/02/99
22.GianniAmantillo
0002032
02/02/99
23.AlfredoLlena
0002020
02/01/99
24.EmmanuelFermo
0001972
01/22/99
25.YvonneAnoos
0001967
01/22/99
26.JoelAbibuag
0002022
02/01/99
27.Ma.CorazonSalva
0002029
02/02/99
28.JoseBagood
0001957
01/18/99

Amount
37,449.00
30,020.00
34,884.00
35,502.00
38,323.00
43,852.00
32,414.00
38,361.00
38,285.00
29,982.00
37,449.00
39,995.00
37,221.00
30,923.00
40,679.00
24,700.00
38,304.00
37,706.00
36,727.00
38,000.00
26,600.00
19,000.00
32,282.00
36,376.00
36,566.00
37,981.00
25,270.00
34,656.00

NameofPayees
29.AvelinoBrion
30.MickleAlgusar
31.JoseWeber
32.JoelVelasco
33.ElmaBacarro
34.GraceTambis
35.ProcesoMailim
36.RonnieAragon
37.DaniloVillarosa
38.JoelAbibuag
39.DaniloVillarosa
40.ReynardGuia
41.EstrellaAlunan
42.EddieBagood
43.JoseBagood
44.NicandroAguilar
45.GuandenciaBanaston
46.DennisMontemayor
47.EduardoBuglosa

CheckNo.
0001965
0001962
0001959
0002028
0002031
0001952
0001980
0001983
0001931
0001954
0001984
0001985
0001925
0001982
0001982
0001964
0001963
0001961
0002027

DateIssued
01/22/99
01/22/99
01/22/99
02/02/99
02/02/99
01/18/99
01/21/99
01/22/99
01/14/99
01/18/99
01/22/99
01/22/99
01/14/99
01/22/99
01/22/99
01/22/99
01/22/99
01/22/99
01/02/99

Amount
31,882.00
25,004.00
37,001.00
9,500.00
23,750.00
39,995.00
37,193.00
30,324.00
31,008.00
26,600.00
26,790.00
42,959.00
39,596.00
31,018.00
37,240.00
52,250.00
38,000.00
26,600.00
14,250.00

Total1,570,467.00
GrandTotal.2,345,804.00

[5]
Rollo,pp.6469.
[6]
CArollo,pp.7172.
[7]
Rollo,pp.4449.PennedbyAssociateJusticeIsaiasP.Dicdican,withAssociateJusticesElviJohnS.AsuncionandRamonM.Bato,
Jr.,concurring.
[8]
Id.at47.
[9]
Id.at41.
[10]
Veluzv.JusticeofthePeaceofSariaga,42Phil.557(1921).
[11]
NegotiableInstrumentsLaw,Sec.185.Checkdefined.Acheckisabillofexchangedrawnonabankpayableondemand.Exceptas
hereinotherwiseprovided,theprovisionsofthisActapplicabletoabillofexchangepayableondemandapplytoacheck.
Section126.Billofexchangedefined.Abillofexchangeisanunconditionalorderinwritingaddressedbyonepersontoanother,signed
bythepersongivingit,requiringthepersontowhomitisaddressedtopayondemandoratafixedordeterminablefuturetimeasum
certaininmoneytoorderortobearer.
[12]
Id.
[13]
Campos,J.C.,Jr.andLopezCampos,M.C.,NotesandSelectedCasesonNegotiableInstrumentsLaw(1994),5thed.,pp.89.
[14]
Bournev.MarylandCasualty,192SE605(1937)Nortonv.CityBank&TrustCo.,294F.839(1923)UnitedStatesv.ChaseNat.
Bank,250F.105(1918).
[15]
Mueller&Martinv.LibertyInsuranceBank,187Ky.44,218SW465(1920).
[16]
Id.
[17]
Mueller&Martinv.LibertyInsuranceBank,id.
[18]
90NY2d322(1997),citingtheUniformCommercialCode,Sec.3405.
[19]
GettyPetroleumCorp.v.AmericanExpressTravelRelatedServicesCompany,Inc.,id.,citingPeckv.ChaseManhattanBank,190
AD2d547,548549(1993)TouroColl.v.BankLeumiTrustCo.,186AD2d425,427(1992)PrudentialBacheSec.v.Citibank,N.A.,
73NY2d276(1989)MerrillLynch,Pierce,Fenner&Smithv.ChemicalBank,57NY2d447(1982).
[20]
SeeTradersRoyalBankv.RadioPhilippinesNetwork,Inc.,G.R.No.138510,October10,2002,390SCRA608.
[21]
Id.
[22]
MetropolitanBankandTrustCompanyv.Cabilzo,G.R.No.154469,December6,2006,510SCRA259.

[23]
Citytrust Banking Corporation v. Intermediate Appellate Court, G.R. No. 84281, May 27, 1994, 232 SCRA 559 Bank of the
PhilippineIslandsv.IntermediateAppellateCourt,G.R.No.69162,February21,1992,206SCRA408.
[24]
AssociatedBankv.CourtofAppeals,G.R.Nos.107382&107612,January31,1996,252SCRA620,631.
[25]
G.R.No.102383,November26,1992,216SCRA51.
[26]
BankofthePhilippineIslandsv.CourtofAppeals,id.at71.
[27]
Id.at77.
[28]
Rules of Civil Procedure, Rule 9, Sec. 3.Default: declaration of.If the defending party fails to answer within the time allowed
therefor, the court shall, upon motion of the claiming party with notice to the defending party, and proof of such failure, declare the
defendingpartyindefault.Thereupon,thecourtshallproceedtorenderjudgmentgrantingtheclaimantsuchreliefashispleadingmay
warrant,unlessthecourtinitsdiscretionrequirestheclaimanttosubmitevidence.Suchreceptionofevidencemaybedelegatedtothe
clerkofcourt.
[29]
Moralesv.CourtofAppeals,G.R.No.117228,June19,1997,274SCRA282.