Consolidated Plywood Industries, Inc. vs. IFC Leasing and Acceptance Corporation

A promissory note payable only to a specified person, without the words "to order" or "to bearer," is non-negotiable, and its assignee merely steps into the shoes of the assignor and remains subject to all defenses available against the latter. Even if negotiable, a financing company that funded the installment sale from inception with knowledge that collection was conditioned on the goods being non-defective takes in bad faith and is not a holder in due course.

Consolidated Plywood Industries, Inc. was a corporation engaged in logging operations in Baganga, Manay, and Caraga, Davao Oriental. Industrial Products Marketing, marketing arm of Atlantic Gulf & Pacific Company of Manila, dealt in tractors and heavy equipment. IFC Leasing and Acceptance Corporation was a financing corporation engaged in financing and receivable discounting under R.A. No. 5980, otherwise known as the Financing Act, which paid sellers the full price and took assignment of installment papers to collect from buyers.

Consolidated Plywood Industries, Inc., acting through its president Henry Wee and vice-president Rodolfo T. Vergara, needed two additional tractors for its 1978 program of opening roads with simultaneous logging operations in its Davao Oriental concession. Industrial Products Marketing offered two used Allis Crawler tractors, one HDD-21-B and one HDD-16-B. At the buyer's request, the seller inspected the job site to ascertain the work exposure and capability required, then assured the buyer that the used units were fit for the job, giving a 90-day performance and parts-availability warranty upon which the buyer relied.

On April 5, 1978, after paying P210,000.00 down payment, the parties executed a deed of sale with chattel mortgage with promissory note for the balance, covered by a sales invoice for the two units. Simultaneously, by deed of assignment, the seller assigned its rights and interest in the chattel mortgage to IFC Leasing and Acceptance Corporation. The seller then delivered the tractors to the job site and stationed its own mechanics to supervise operations. Barely fourteen days after delivery one tractor broke down, and nine days later the other likewise broke down.

On April 25, 1978, Vergara formally advised the seller of the breakdowns and invoked prompt attention under the warranty. The seller sent mechanics and undertook repairs, but the units never became what they should have been and were no longer serviceable, delaying road-building and logging. Vergara advised that installment payments would be delayed until warranty obligations were fulfilled. On April 7, 1979, Wee asked the seller to pull out the units, recondition them, and offer them for sale, with proceeds to go to respondent and any excess divided between seller and buyer, the latter offering to bear one-half of reconditioning cost. The seller did not respond despite follow-ups, until respondent sued petitioners for the full balance, interest, attorney's fees, and costs.

According to the trial court's factual findings adopted on appeal, the first tractor broke down 14 days after delivery and the second became inoperable 9 days thereafter. The lower courts found no warranty provision in the deed of sale, treated respondent as financing purchaser of a negotiable promissory note discounted for P800,000.00, and enforced payment for the full amount against petitioners notwithstanding the alleged defects.

• Negotiability: Petitioner argued that on its face the promissory note is clearly not a negotiable instrument since it is neither payable to order nor to bearer, lacking the words required by Section 1(d) of the Negotiable Instruments Law.
• Holder in Due Course: Petitioner maintained that respondent is not a holder in due course and at best is a mere assignee of the subject promissory note.
• Defenses Against Assignee: Petitioner argued that since the case involves a non-negotiable instrument transferred by mere assignment, petitioners may raise against respondent all defenses available against the seller-assignor, Industrial Products Marketing.
• Breach of Warranty and Non-Liability: Petitioner maintained that petitioners are not liable because the seller-assignor breached its warranty under the law, and if at all respondent may recover only from the seller-assignor.
• Nature of Transaction: Petitioner argued that assignment of the chattel mortgage by the seller-assignor to respondent does not change the transaction from a sale on installments to a pure loan.
• Admissibility for Lack of Documentary Stamps: Petitioner argued that the promissory note cannot be admitted or used in evidence because requisite documentary stamps were not affixed thereon or cancelled.

• Timeliness: Respondent countered that the petition was filed out of time.
• Negotiability and Holder in Due Course: Respondent argued that the promissory note is a negotiable instrument satisfying Section 1 of the Negotiable Instruments Law and that respondent took it complete and regular, for value, in good faith, before overdue and without notice of dishonor or infirmity, and may enforce it free from prior defenses.
• Warranty Liability: Respondent countered that it is not liable for any breach of warranty, warranty lying only between the seller and the buyer-borrower to whom financing was extended.
• Admissibility: Respondent argued that the promissory note is admissible in evidence.

• Timeliness: Whether the petition for review was filed on time where the motion for reconsideration was allegedly pro-forma.
• Negotiability: Whether the promissory note promising to pay to Industrial Products Marketing a sum in 24 monthly installments is a negotiable instrument where it is neither payable to order nor to bearer.
• Holder in Due Course: Whether respondent is a holder in due course, or a mere assignee, particularly where the sale documents, assignment, and loan disclosure were executed on the same day with respondent's participation and knowledge.
• Defenses and Liability: Whether petitioners may raise breach of express 90-day and implied warranty and rescission against respondent-assignee to defeat liability for the purchase price.

• Timeliness: Yes. The petition was considered filed on time because the motion for reconsideration raised new issues and could not be deemed pro-forma.
• Negotiability: No. The note is non-negotiable for failure to comply with Section 1(d) of the Negotiable Instruments Law requiring negotiable paper to be payable to order or bearer.
• Holder in Due Course: No. Respondent remains a mere assignee; even if the note were negotiable, taking with actual knowledge of conditional rights and as active participant in the installment sale amounts to bad faith under Sections 52 and 56.
• Defenses and Liability: Yes. Defenses of breach of warranty, failure of consideration, and rescission available against the seller-assignor may be raised against respondent under Section 58, negating petitioners' liability on the assigned note.

• Timeliness: Preliminary consideration treated the motion for reconsideration as not pro-forma because it actually raised new issues, so the period was interrupted and the instant petition was timely filed.
• Negotiability: The note promised to pay to Industrial Products Marketing P1,093,789.71 in 24 monthly installments starting July 15, 1978 without "to order," "to the order of," or "to bearer" language. Under Section 1(d) and Section 8, negotiability requires such words of negotiability as expression of consent to transfer with greater maker risk; absent them, the instrument is payable only to the designated person and subsequent takers merely step into his shoes, citing Campos and Campos.
• Holder in Due Course: Respondent itself stipulated the transfer was one single transaction involving assignment of mortgage rights and indorsement of the note, with deed of sale with chattel mortgage with promissory note, deed of assignment, and disclosure all executed the same day among buyer, seller-assignor, and financing company. Respondent thus had actual knowledge that collection was not unconditional but subject to the tractors being non-defective, and failed to prove absence of knowledge justifying good faith. Active participation from inception as moving force precludes holder-in-due-course status, following Commercial Credit Corporation vs. Orange Country Machine Works and Mutual Finance Co. vs. Martin.
• Defenses and Liability: Breach of the express 90-day performance warranty was established by uncontroverted breakdowns 14 days and 23 days after delivery and failed repairs leaving units unserviceable, reinforced by implied warranty of fitness under Articles 1561, 1562, 1564, and 1566 where the buyer made known the logging purpose and relied on the seller's skill after job-site inspection. The buyer validly exercised extrajudicial rescission under Articles 1191 and 1567, electing withdrawal with damages, which under University of the Philippines vs. De los Angeles needs no prior court action though at the rescinding party's risk pending final judgment. As mere assignee, and in any event as non-holder in due course under Section 58, respondent took subject to these defenses; respondent's recourse, if any, lies against the unimpleaded seller-assignor.

• Words of negotiability — A promissory note must contain "to order" or "to bearer" language to be negotiable under Section 1(d) of the Negotiable Instruments Law; these words express consent to transfer with greater maker risk. Applied here, the promise to pay only to Industrial Products Marketing, without such words, rendered the instrument non-negotiable.
• Assignee steps into shoes of assignor — A transferee of a non-negotiable instrument is a mere assignee subject to all defenses available against the assignor. Applied here, IFC Leasing and Acceptance Corporation remained subject to breach-of-warranty and rescission defenses available against Industrial Products Marketing.
• Holder in due course — good faith and notice — Under Sections 52 and 56, a holder in due course must take in good faith and for value without notice of infirmity or defect; actual knowledge or knowledge of facts making taking amount to bad faith defeats the status. Applied here, same-day execution and knowledge that price collection depended on non-defective tractors constituted bad faith.
• Financing company as participant, not holder in due course — A finance company that pursuant to prior arrangement pays the seller the full price, takes indorsement, and actively participates from inception is the moving force and is subject to failure-of-consideration defenses. Applied here, respondent could not invoke holder-in-due-course protection against the buyer of defective tractors.
• Instrument subject to defenses in hands of non-holder in due course — Under Section 58, a negotiable instrument in hands other than a holder in due course is subject to the same defenses as if non-negotiable. Applied here, respondent could not enforce payment free from warranty defenses even on the assumption of negotiability.
• Implied warranty of fitness for particular purpose — Where the buyer makes known the particular purpose and relies on the seller's skill or judgment, there is an implied warranty the goods shall be reasonably fit therefor, with vendor liability for hidden defects under Articles 1561, 1562, 1564, and 1566. Applied here, job-site inspection, assurance of fitness, and 90-day warranty plus early total breakdowns established seller liability.
• Extrajudicial rescission in reciprocal obligations — Under Articles 1191 and 1567, the injured party in reciprocal obligations, including sale with breach of warranty, may choose fulfillment or rescission with damages and may treat the contract as resolved without prior court action at its own risk, subject to final judicial determination. Applied here, the buyer's unilateral rescission after unhonored warranty was recognized, leaving only counterclaim posture if sued and barring assignee recovery.

• "Without the words "or order" or"to the order of, "the instrument is payable only to the person designated therein and is therefore non-negotiable." — States the canonical test for negotiability applied to defeat holder-in-due-course protection.
• "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. ... " — Quotes Section 58 to preserve warranty and failure-of-consideration defenses against the financing assignee.
• "the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk." — Defines the extrajudicial rescission doctrine sustaining the buyer's unilateral rescission for breach of warranty.
• "The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him." — Recites Article 1191 as basis for the buyer's election between fulfillment and rescission with damages.

• University of the Philippines vs. De los Angeles, 35 SCRA 102 — Followed as authority that an injured contracting party may extrajudicially consider a violated contract resolved without prior suit, at its risk pending final judgment, supporting petitioner's rescission.
• Mutual Finance Co. vs. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953] — Cited through Campos and Campos for the United States tendency to protect installment buyers against finance companies by subjecting the latter to failure-of-consideration defenses and placing insolvency risk on the better-positioned financier.
• Commercial Credit Corporation vs. Orange Country Machine Works, 34 Cal. 2d 766 — Followed for the rule that a finance company that is the moving force and active participant from inception cannot be regarded as a holder in due course of the installment note.

• Section 1(d), Negotiable Instruments Law — Requires a negotiable promissory note to be payable to order or to bearer; applied to hold the note payable only to Industrial Products Marketing non-negotiable.
• Section 8, Negotiable Instruments Law — Provides when an instrument is payable to order, only by drawing to order of a specified person or to him or his order; applied to reject negotiability absent such language.
• Sections 52 and 56, Negotiable Instruments Law — Define holder in due course and notice of infirmity or defect, requiring good faith and absence of actual knowledge or bad-faith circumstances; applied to deny respondent that status.
• Sections 57, 58, 60 and 30, Negotiable Instruments Law — Invoked below to claim holder-in-due-course rights free from defenses; Section 58 applied by the Court to subject a non-holder in due course to the same defenses as if non-negotiable.
• Articles 1561, 1562, 1564 and 1566, Civil Code — Impose vendor warranty against hidden defects and implied warranty of quality and fitness where buyer relies on seller's skill, including by trade usage; applied to hold the seller-assignor liable for unserviceable tractors.
• Articles 1191 and 1567, Civil Code — Grant the injured party in reciprocal obligations and the vendee under warranty articles the election between fulfillment or withdrawal/rescission with damages and proportionate price reduction; applied to sustain unilateral rescission.
• R.A. No. 5980, Financing Act — Authorizes financing and receivable discounting relied upon by respondent; noted to describe respondent's business but held not to confer holder-in-due-course immunity.

Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.