G.R. No. 219037, 19 October 2016, 806 SCRA 646

FACTS:

Odrada sold a second-hand Mitsubishi Montero to Lim. Lim obtained an auto-loan in RCBC. After initial payment, Odrada executed a Deed of Absolute Sale to Lim while Lim took possession of the car. RCBC delivered Manager’s checks to Odrada. Prior to the checks’ presentation, Lim notified Odrada in a letter that there was an issue regarding the roadworthiness of the car and requested Odrada to not deposit the manager’s checks. Odrada, however, deposited said checks. The checks were consequently dishonored upon Lim’s instruction to RCBC. Because of the dishonor, Odrada filed a collection case against both Lim and RCBC. The RTC ruled in favor of Odrada.

Both Lim and RCBC appealed to the CA which 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 instruments would be accepted or paid, or both according to its tenor. The appellate court held that the effective delivery of the checks to Odrada made RCBC liable for the checks. It negated RCBC’s defense of want of consideration, finding Odrada a holder in due course of the manager’s checks.

ISSUE:

Whether or not Odrada is a holder in due course of the manager’s checks.

RULING:

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. Notably, the mere issuance of a manager’s check creates a privity of contract between the holder and the drawee bank, the latter primarily binding itself to pay according to the tenor of its acceptance.

The drawee bank, as a result, 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.

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.

Court of Appeals gravely erred when it considered Odrada as a holder in due course. Section 52 of the Negotiable Instruments Law defines a holder in due course as one who has taken the instrument under the following 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.

To be a holder in due course, the law requires that a party must have acquired the instrument in good faith and for value.

Good faith means that the person taking the instrument has acted with due honesty with regard to the rights of the parties liable 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 bad faith.

Value, 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 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. Odrada’s action in depositing the manager’s checks despite knowledge of the Montero’s defects amounted to bad faith.

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 non-negotiable, 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.

*Case digest by Jelyn c. Ondong, JD-IV, Andres Bonifacio Law School, SY 2019-2020