Negotiable Instruments Case Digest: Consolidated Plywood Industries, Inc v. IFC Leasing and Acceptance Corp. (1987)

G.R. No. 72593 April 30, 1987

Lessons Applicable: Requisites of negotiability to antedated and postdated instruments (Negotiable Instruments Law)

FACTS: Consolidated (buyer pays promossor note) > IPM (seller-assignor who violated warranty) > IFC (holder in due course or merely an assignee?)

Consolidated Plywood Industries, Inc (Consolidated) is a corporation engaged in the logging business

For the purpose of opening of additional roads and simultaneous logging operations along the route of roads, it needed 2 additional units of tractors

Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm, Industrial Products Marketing (IPM) (seller-assignor) offered to sell 2 "Used" Allis Crawler Tractors

IPM inspected the job site and assured that the tractors were fit for the job and gave a 90-days performance warranty of the machines and availability of parts.

Consolidated purchased on installment.

It paid the down payment of P210,000

April 5, 1978: IPM issued the sales invoice and the deed of sale with chattel mortgage with promissory note was executed

IPM, by means of a deed of assignment, assigned its rights and interest in the chattel mortgage in favor of IFC Leasing and Acceptance Corp. (IFC)

After 14 days, one of the tractors broke down and after another 9 days, the other tractor too

Because of the breaking down of the tractors, the road building and simultaneous logging operations were delayed

Consolidated unilaterally rescinded the contract w/ IPM

April 7, 1979: Wee of Consolidated asked IPM to pull out the units and have them reconditioned, and thereafter to offer them for sale.

The proceeds were to be given to IFC and the excess will be divided between:

Consolidated which offered to bear one-half 1/2 of the reconditioning cost

IPM didn't do anything

IFC filed against Consolidated for the recovery of the principal sum P1,093,789.71, interest and attorney's fees

RTC and CA: favored IFC

breach of warranty if any, is not a defense available to Consolidated either to withdraw from the contract and/or demand a proportionate reduction of the price with damages in either case

ISSUE: W/N IFC is a holder in due course of the negotiable promissory note so as to bar completely all the available defenses of the Consolidated against IPM

HELD: CA reversed and set aside

Consolidated is a victim of warranrty

The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who, by reason of his trade or profession, should have known them.chanroblesvirtualawlibrary chanrobles virtual law library

ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the goods, as follows:

(1) Where the buyer, expressly or by implication makes known to the seller the particular purpose for which the goods are acquired, and it appears that the buyer relies on the sellers skill or judge judgment (whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose;

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ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed by the usage of trade.chanroblesvirtualawlibrary chanrobles virtual law library

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ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the hidden faults or defects in the thing sold. (Emphasis supplied).

GR: extends to the corporation to whom it assigned its rights and interests

EX: assignee is a holder in due course of the promissory note

assuming the note is negotiable

Consolidated's defenses may not prevail against it.chanroblesvirtualawlibrary chanrobles virtual law library

Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. 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.

The injured party may choose between the fulfillment and the rescission of the obligation with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.chanroblesvirtualawlibrary chanrobles virtual law library

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ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between withdrawing from the contract and demanding a proportionate reduction of the price, with damages in either case. (Emphasis supplied)

Consolidated, having unilaterally and extrajudicially rescinded its contract with the seller-assignor, can no longer sue IPM except by way of counterclaim if IPM sues it because of the rescission

Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note "must be payable to order or bearer" - in this case it is non-negotiable

= expression of consent that the instrument may be transferred

consent is indispensable since a maker assumes greater risk under a negotiable instrument than under a non-negotiable one

When instrument is payable to order

SEC. 8. WHEN PAYABLE TO ORDER. - The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. . . .

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.

Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument but will merely "step into the shoes" of the person designated in the instrument and will thus be open to all defenses available against the latter

Even conceding for purposes of discussion that the promissory note in question is a negotiable instrument, the IFC cannot be a holder in due course due to absence of GF for knowing that the tractors were defective

SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. - A holder in due course is a holder who has taken the instrument under the following conditions: chanrobles virtual law library

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(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of deffect in the title of the person negotiating it

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. - 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 amounts to bad faith. (Emphasis supplied)

We believe the finance company is better able to bear the risk of the dealer's insolvency than the buyer and in a far better position to protect his interests against unscrupulous and insolvent dealers. . .