07 RCBC Savings Bank V Odrada

RCBC Savings Bank v.
Noel Odrada
Facts
 Odrada sold a secondhand Montero to Teodoro Lim for P1,510,000. Of the total consideration,
P610,000 was initially paid by Lim and the balance of P900,000 was financed by petitioner RCBC
through a car loan obtained by lim.
 When RCBC received the OR and Cert of Reg, RCBC issued 2 manager’s checks dated 12 April 2002
payable to Ordrada for P900,000 and P13,500. After the turnover to Odrada but prior to the
presentation of the check, Lim notified Odrada on 15 April that there was an issue regarding the
Montero’s roadworthiness and asked that the check not be encashed until he has satisfied Lim re: his
complaints
o There was a trace of head-on collision, chassis crippled and welded
o 4 wheel drive shift not functioning
o Odometer was tampered
o Represented as model 1998 but was actually 1997
 Odrada deposited the checks with International Exchange Bank (Ibank) on 16 April and redeposited
them on 19 April but they were both dishonored upon Lim’s instruction to RCBC.
 Odrada thus filed a collection suit against Lim and RCBC in Makati RTC.
 RTC: in favor of Odrada, ruled that the defective condition of the Montero was not a supervening event
that would justify the dishonor of the manager’s checks. The trial court reasoned that a manager’s
check is equivalent to cash and is really the bank’s own check. It may be treated as a promissory note
with the bank as maker. Hence, the check becomes the primary obligation of the bank which issued it
and constitutes a written promise to pay on demand.
 CA: affirmed RTC decision, ruled that when RCBC issued the manager’s checks in favor of Odrada,
RCBC admitted the existence of the payee and his then capacity to endorse, and undertook that on due
presentment the checks which were negotiable would be paid according to its tenor.
Issues & Ruling

[Law on sales] WON Lim can cancel the auto loan for failure in consideration due to the contested
roadworthiness of the vehicle. YES.
 Article 1547 of the Civil Code states: “In a contract of sale, unless a contrary intention appears, there is
an implied warranty that the thing shall be free from any hidden faults or defects.” Article 1566 of the
Civil Code provides that “the vendor is responsible to the vendee for any hidden faults or defects in the
thing sold, even though he was not aware thereof.” As a consequence, the law fixes the liability of the
vendor for hidden defects whether known or unknown to him at the time of the sale.
 Notably, under the law, Odrada’s warranties against hidden defects continued even after the Montero’s
delivery. Consequently, a misrepresentation as to the Montero’s roadworthiness constitutes a breach of
warranty against hidden defects.
[Topical] WON the drawee bank of a manager’s check has the option of refusing payment by interposing a
personal defense of the purchaser of the manager’s check who delivered it to a third party. YES.
 Manager’s check is a check drawn by the bank’s manager upon the bank itself and accepted in
advance by the bank by the act of its issuance. Consequently, upon purchase, the check becomes the
primary obligation of the bank and constitutes its written promise to pay the holder upon demand.
 As a general rule, the drawee bank is not liable until it accepts. Prior to a bill’s acceptance, no
contractual relation exists between the holder and the drawee. Acceptance, therefore, creates a privity
of contract between the holder and the drawee so much so that the latter, once it accepts, becomes the
party primarily liable on the instrument. Accordingly, acceptance is the act which triggers the operation
of the liabilities of the drawee (acceptor) under Section 62 of the NIL.
o Thus, once he accepts, the drawee admits the following: (a) existence of the drawer; (b)
genuineness of the drawer’s signature; (c) capacity and authority of the drawer to draw the
instrument; and (d) existence of the payee and his then capacity to endorse.
 As can be gleaned in a long line of cases decided by this Court, a manager’s check is accepted by the
bank upon its issuance. As compared to an ordinary bill of exchange where acceptance occurs after the
bill is presented to the drawee, the distinct feature of a manager’s check is that it is accepted in
advance.
 As a result, the drawee bank has the unconditional obligation to pay a manager’s check to a
holder in due course irrespective of any available personal defenses. However, 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 subject to defenses.
o In Rizal Commercial Banking v. Hi-Tri Development Corporation, the Court observed that the
mere issuance of a manager’s check does not ipso facto work as an automatic transfer of funds
to the account of the payee. For the holder to acquire title to the instrument, there must still have
been effective delivery. The holder here did not acquire the instrument in due course since title
had not passed for lack of delivery.
o In Mesina v. IAC, the Court ruled that the issuing bank could validly refuse payment because
Mesina was not a holder in due course, and said “the holder of a cashier’s check who is not a
holder in due course cannot enforce such check against the issuing bank which dishonors the
same.”
 In this case, the CA erred when it considered Odrada as a holder in due course.
o Sec. 52 NIL defines a holder in due course as one who has taken the instrument under the ff.
conditions:
 (a) That it is complete and regular upon its face;
 (b) That he became the holder of it before it was overdue, and without notice that it has
been previously dishonored, if such was the fact;
 (c) That he took it in good faith and for value;
 (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.
 Here, Odrada attempted to deposit the manager’s checks on 16 April 2002, a day after Lim had
informed him that there was a serious problem 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.
Clearly, Odrada failed to make an inquiry 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.
Moreover, when Odrada redeposited the manager’s checks on 19 April 2002, he was already formally
notified by RCBC the previous day of the cancellation of Lim’s auto loan transaction. Following UCPB,
RCBC may refuse payment by interposing a personal defense of Lim = that the title of Odrada
had become defective when there arose a partial failure or lack of consideration.
 Section 58 of the Negotiable Instruments Law provides: “In the hands of any holder other than a holder
in due course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable, x x
x.” Since Odrada was not a holder in due course, the instrument becomes subject to personal defenses
under the Negotiable Instruments Law. Hence, RCBC may legally act on a countermand by Lim, the
purchaser of the manager’s checks.
***IF SIR ASKS THOUGH, Lim failed to appear during cross-examination so his testimony involving the hidden
defects were stricken off the record by the trial court, and his failure to appeal from the CA’s decision made it
final and executory as to Lim. In short, Lim remains liable to pay Odrada for the Montero. RCBC is not
liable because it acted in good faith in carrying out the stop payment order of Lim.

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Issues & Ruling

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