Rcbc v Odrada

RCBC v ODRADA FACTS:

Odrada sold a second-hand Mitsubishi Montero to Lim. Lim obtained an auto-loan in RCBC.  After initial payment, payment, Odrada executed executed a Deed of Absolute Absolute ale to Lim !hile Lim too" possession of the car. RCBC deli#ered Mana$er%s chec"s to Odrada ho!e#er prior to t hat, Lim informed Odrada about the road!orthinesss of the car. Lim re&uested Odrada to not deposit the mana$er%s chec"s. Odrada did not heed. 'e deposited said chec"s. (he chec"s !ere conse&uently dishonoured upon Lim%s instruction to RCBC. Because of the dishonour, Odrada filed a collection collection case a$ainst both Lim and RCBC. RCBC. Lim countered that the cancellation cancellatio n !as not done ex parte but thru a letter. RCBC contended that the dishonour !as due to Lim%s cancellation cancellation of the auto loan.

The RTC RTC ruled in favour of Odrada. It held that the proper party who can ask for the rescission in the case is Odrada, not Lim, since the former had already complied with his undertaking under the contract, while Lim failed to pay the payment. The defective condition of the Montero was not a supervening event that would ustify the dishonour of the checks, which is e!uivalent to cash, and may"e treated as a promissory note with the "ank as maker. The "ank "eing the party primarily lia"le for the check, the court ruled that RC#C was lia"le to Odrada for the value of the managers checks. #oth Lim and RC#C appealed appealed to the C$, which however denied their appeal. It ruled that the two manager%s checks, which were complete and regular, reached the hands of Lim who deposited the same in his "ank account with I"ank. RC#C knew that the amount reflected on the manager%s checks represented repres ented Lim%s payment for the remaining "alance of the Montero%s  purchase price. The appellate court held that when RC#C issued the manager%s checks in favor of Odrada, RC#C admitted the e&istence of the payee and his then capacity to endorse, and undertook that on due presentment the checks which were negotia"le instruments would  "e accepted or paid, or "oth according to its tenor. tenor. The The appellate court held that the effective delivery of the checks to Odrada made RC#C lia"le for the checks. It negated RC#C%s defense of want of consideration, finding Odrada a holder in due course of the managers checks. ISSUE:

)hether RCBC may refuse to pay said mana$er%s chec"s HELD:

*+.

'e address the legal !uestion of whether or not the drawee "ank of a manager%s check has the option of refusing payment "y interposing a personal defense of the purchaser of the manager%s check who delivered the check to a third party. In resolving this legal !uestion, this Court will e&amine the nature of a manager%s check and its relation to personal defenses under the (egotia"le Instruments Law. )urisprudence defines a manager%s check as a check drawn "y the "ank%s manager upon the  "ank itself and accepted in advance "y the "ank "y the act of its issuance. It is really the

 "ank%s own check and may "e treated as a promissory note with the "ank as its maker. Conse!uently, upon its purchase, the check "ecomes the primary o"ligation of the "ank and constitutes its written promise to pay the holder upon demand. It is similar to a cashier%s check  "oth as to effect and use in that the "ank represents that the check is drawn against sufficient funds. $s a general rule, the drawee "ank is not lia"le until it accepts. *rior to a "ill%s acceptance, no contractual relation e&ists "etween the holder  and the drawee. $cceptance, therefore, creates a privity of contract "etween the holder and the drawee so much so that the latter, once it accepts, "ecomes the party primarily lia"le on the instrument. $ccordingly, acceptance is the act which triggers the operation of the lia"ilities of the drawee +acceptor under -ection / of the (egotia"le Instruments Law. Thus, once he accepts, the drawee admits the following0 +a e&istence of the drawer1 +" genuineness of the drawer%s signature1 +c capacity and authority of the drawer to draw the instrument1 and +d e&istence of the payee and his then capacity to endorse. $s can "e gleaned in a long line of cases decided "y this Court, a manager%s check is accepted "y the "ank upon its issuance. $s compared to an ordinary "ill of e&change where acceptance occurs after the "ill is presented to the drawee, the distinct feature of a manager%s check is that it is accepted in advance. (ota"ly, the mere issuance of a manager%s check creates a privity of contract "etween the holder and the drawee "ank, the latter primarily  "inding itself to pay according to the tenor of its acceptance. The drawee "ank, as a result, has the unconditional o"ligation to pay a manager%s check to a holder in due course irrespective of any availa"le personal defenses. 2owever, while this Court has consistently held that a manager%s check is automatically accepted, a holder other than a holder in due course  is still su"ect to defences such as if the check had "ecome stale, there is no "ad faith or neglicence for the "ank to refuse to pay + International Corporate Bank v. Spouses Gueco) or if there is lack of delivery + Rizal Commercial Banking Corporation v. Hi-Tri Development Corporation . 'e now address the main legal !uestion0 if the holder of a manager%s check is not a holder in due course, can the drawee "ank interpose a personal defense of the purchaser3 -ee Mesina v. Intermeiate !ppellate Court  and "nite Coconut #lanters Bank v.  Intermeiate !ppellate Court . The foregoing rulings clearly establish that the drawee bank of a manager’s check may interpose personal defenses of the purchaser of the manager’s check if the holder is not a holder in due course. In short, the purchaser of a manager’s check may validly countermand payment to a holder who is not a holder in due course. Accordingly, the drawee bank may refuse to pay the manager’s check by interposing a personal defense of the purchaser. Hence, the resolution of the present case requires a determination of the status of drada as holder of the manager’s checks.

In this case, the Court of $ppeals gravely erred when it considered Odrada as a holder in due course. -ection 4/ of the (egotia"le Instruments Law defines a holder in due course as one who has taken the instrument under the following conditions0 +a That it is complete and regular upon its face1 +" That he "ecame the holder of it "efore it was overdue, and without notice that it has "een  previously dishonored, if such was the fact1 +c That he took it in good faith and for value1 +d That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. +5mphasis supplied To "e a holder in due course, the law re!uires that a party must have ac!uired the instrument in goo $ait% and $or value. 6ood faith means that the person taking the instrument has acted with due honesty with regard to the rights of the parties lia"le on the instrument and that at the time he,took the instrument, the holder has no knowledge of any defect or infirmity of the instrument. To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument would amount to "ad faith. 7alue, on the other hand, is defined as any consideration sufficient to support a simple contract. In the present case, Odrada attempted to deposit the manager%s checks on 8 $pril /99/, a day after Lim had informed him that there was a serious pro"lem with the Montero. Instead of addressing the issue, Odrada decided to deposit the manager%s checks. Odrada%s actions do not amount to good faith. Clearl y, Odrada failed to make an in!uiry even when the circumstances strongly indicated that there arose, at the very least, a partial failure of consideration due to the hidden defects of the Montero. Odrada%s action in depositing the manager%s checks despite knowledge of the Montero%s defects amounted to "ad faith. Moreover, when Odrada redeposited the manager%s checks on 8: $pril /99/, he was already formally notified "y RC#C the previous day of the cancellation of Lim%s auto loan transaction. ;ollowing "C#B, RC#C may refuse payment "y interposing a personal defense of Lim < that the title of Odrada had "ecome defective when there arose a partial failure or lack of consideration. !"#" acted in good faith in following the instructions of $im. The records show that $im notified !"#" of the defective condition of the %ontero before drada presented the manager’s checks. $im informed !"#" of the hidden defects of the %ontero including a misaligned engine, smashed condenser, crippled bumper support, and

defective transmission. !"#" also received a formal notice of cancellation of the auto loan from $im and this prompted !"#" to cancel the manager’s checks since the auto loan was the consideration for issuing the manager’s checks. !"#" acted in good faith in stopping the payment of the manager’s checks.