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 PNB. It was PEMSLAs 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. 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 ISSUE: Whether or not the 69 checks are payable to order for not being issued to fictitious persons thereby dismissing PNB from liability HELD: NO. The general rule is that when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is considered as a bearer instrument. 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. It is 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 delivery. 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 PNB did not obey the instructions of the drawers when it accepted absent indorsement, forged or otherwise. It was negligent in the selection and supervision of its employees.

Gonzales vs. RCBC

FACTS: Gonzales is the New Accounts Clerk in the Retail Banking Department at RCBC Head Office. Dr. Don Zapanta of the Ade Medical Group drew a foreign check of $7,500 against the drawee bank Wilshire Center Bank, LA, California payable to Eva Alviar (Alviar), Gonzales mother. Alviar then indorsed this check. Since RCBC gives special accommodations to its employees to receive the checks value without awaiting the clearing period, Gonzales presented the foreign check to Olivia Gomez, the RCBCs Head of Retail Banking. Gomez requested Gonzales to indorse it which she did. Gomez then acquiesced to the early encashment of the check and signed the check but indicated thereon her authority of "up to P17,500.00 only". The check was presented to Rolando Zornosa who authorized its encashment after scrutinizing the entries and signatures. Gonzales received its peso equivalent P155,270.85. RCBC tried to collect through its correspondent bank, the First Interstate Bank of California but it dishonored the check because of irregular indorsement and closed account. ISSUE: Whether or not Alviar and Gonzales are liable as general indorsers HELD: NO. Under Section 66, the warranties for which Alviar and Gonzales are liable as general indorsers in favor of subsequent endorsers extend only to the state of the instrument at the time of their indorsements. This provision cannot be used by the party which introduced a defect on the instrument (RCBC) which qualifiedly indorsed it. Had it not been for the qualified endorsement "up to P17,500.00 only" of Olivia Gomez, who is the employee of RCBC, there would have been no reason for the dishonor of the check. The holder or subsequent indorser who tries to claim under the instrument which had been dishonored for "irregular endorsement" must not be the irregular indorser himself who gave cause for the dishonor. Otherwise, a clear injustice results when any subsequent party to the instrument may simply make the instrument defective and later claim from prior endorsers who have no knowledge or participation in causing or introducing said defect to the instrument, which thereby caused its dishonor.

Far East bank v. Gold Palace Jewellery Co., 2008 Samuel Tagoe purchased from the respondent Gold Palace's store several pieces of jewelry. In payment of the same, he offered a Foreign Draft issued by the United Overseas Bank (Malaysia) BHD Medan Pasar, Kuala Lumpur Branch (UOB), addressed to the Land Bank of the Philippines, Manila (LBP), and payable to the respondent company. When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, the latter cleared the same. UOB's account with LBP was debited and Gold Palace's account with Far East was credited with the amount stated in the draft. After around 3 weeks, LBP informed Far East that the amount in Foreign Draft had been materially altered and that it was returning the same. After refunding the amount earlier paid by LBP, Far East demanded from Gold Palace the payment of the difference between the amount in the materially altered draft and the amount debited from the respondent company's account. Failure to heed Far East demand, Far East instituted the present action for recovery of sum of money with damages. Issue: Whether or not Far East could debit Gold Palaces account for the amount refunded to LBP. Held: No. The drawee bank LBP cleared and paid the subject foreign draft and forwarded the amount thereof to the collecting bank Far East. The latter then credited to Gold Palace's account the payment it received. Under the law, the drawee, by the said payment, recognized and complied with its obligation to pay in accordance with the tenor of his acceptance. The tenor of the acceptance is determined by the terms of the bill as it is when the drawee accepts. Stated simply, LBP was liable on its payment of the check according to the tenor of the check at the time of payment, which was the raised amount.