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RCBC SAVINGS BANK v. NOEL M. ODRADA

FACTS:

Respondent Noel M. Odrada sold a second-hand Mitsubishi Montero to petitioner Teodoro L. Lim for One Million Five Hundred Ten Thousand Pesos (P1,510,000). The balance of Nine Hundred Thousand Pesos (P900,000) was financed by petitioner RCBC Savings Bank (RCBC) through a car loan obtained by Lim. As a requirement for the approval of the loan, RCBC required Lim to submit the original copies of the Certificate of Registration (CR) and Official Receipt (OR) in his name. Unable to produce the Montero's OR and CR, Lim requested RCBC to execute a letter addressed to Odrada informing the latter that his application for a car loan had been approved. RCBC issued a letter stating that the balance of the loan would be delivered to Odrada upon submission of the OR and CR. Following the letter and initial down payment, Odrada executed a Deed of Absolute Sale in favor of Lim and the latter took possession of the Montero. Prior to the presentation of the manager's checks issued by RCBC to Odrada, Lim notified Odrada that there were issues regarding the roadworthiness of the Montero. The manager's checks were subsequently dishonored upon Lim's instruction, and Odrada filed a collection suit against Lim and RCBC in the Regional Trial Court of Makati. The trial court ruled in favor of Odrada, stating that Lim was not the proper party to exercise the right of rescission and that RCBC was primarily liable for the value of the manager's checks.

The case involves a contract of sale between Odrada and Lim for a vehicle. After the initial downpayment and execution of the deed of sale, Odrada delivered the vehicle to Lim. However, it was later discovered that the vehicle had hidden defects and was not roadworthy. Odrada admitted that there were defects in the vehicle but refused to rescind the contract.

Odrada also received two manager's checks from RCBC, representing Lim's payment for the remaining balance of the vehicle's purchase price. RCBC issued the manager's checks in favor of Odrada. However, Lim informed Odrada that he canceled the auto loan and countermanded the manager's checks.

Odrada filed a complaint against RCBC and Lim for the payment of the amount represented by the manager's checks and damages. The trial court ruled in favor of Odrada and ordered RCBC and Lim to pay Odrada damages, including moral and exemplary damages, and attorney's fees.

RCBC and Lim appealed to the Court of Appeals, which affirmed the trial court's decision but reduced the amount of damages awarded. RCBC filed a motion for reconsideration, which was denied. RCBC then filed a petition before the Supreme Court.

ISSUES:

  1. Whether or not Lim can cancel the auto loan despite the failure in consideration due to the contested roadworthiness of the vehicle delivered by Odrada to him.

  2. Whether or not Lim can validly countermand the manager's checks in the hands of a holder who does not hold the same in due course.

RULING:

  1. On the cancellation of the auto loan due to failure in consideration

    • The Court ruled that Odrada, as the seller, continued to have responsibility for implied warranties even after the delivery of the Montero to Lim. Despite this, the Commercial Bank rightly obliged to pay the checks unless the holder was not in due course.

  2. On the validity of countermanding the manager's checks

    • The Court ruled that since Odrada was not a holder in due course due to lack of good faith (he attempted to deposit the manager's checks despite being informed of the vehicle’s defects), RCBC could validly refuse payment by interposing Lim's personal defense. RCBC acted in good faith in following Lim's instructions.

PRINCIPLES:

  1. Implied Warranty against Hidden Defects (Civil Code Art. 1547 & 1566)

    • The vendor is responsible for any hidden defects unknown to the vendee at the time of sale.

  2. Nature of Manager's Checks

    • A manager's check, being accepted upon issuance, is a primary obligation of the bank and similar to a promissory note.

  3. Holder in Due Course (Negotiable Instruments Law Sec. 52)

    • A holder in due course must acquire the instrument complete, regular, for value, and in good faith, without notice of any defect.

  4. Dishonoring Checks

    • The drawee bank can refuse payment of a manager's check if the holder is not a holder in due course and the instrument is subject to personal defenses (Negotiable Instruments Law Sec. 58).

  5. Countermanding Payment

    • Payment can be countermanded if the holder does not meet the criteria for being a holder in due course, allowing the drawee bank to interpose the defenses of the purchaser.

The Court's decisions in landmark cases such as Mesina v. Intermediate Appellate Court and United Coconut Planters Bank v. Intermediate Appellate Court emphasize that a holder other than in due course cannot enforce a manager's check against the issuing bank if dishonored for valid reasons.