UP Law F2021 044 Consolidated Plywood vs.

IFC Leasing
NIL – Holder in due course Secs. 52 & 56, NIL 1987 Gutierrez

SUMMARY
Petitioner Company issued a promissory note payable to Industrial Products for the former’s purchase of two units of
tractors from the latter. The sale was subject to a 90-day warranty in case the tractors broke down. On the same day of
the sale, Industrial Products assigned the note to IFC Leasing, a financing company. Twenty-three days after the sale, the
tractors broke down, thus rendering petitioner Company unable to proceed with its operations. In the meantime,
respondent IFC Leasing sought from petitioner the payment of the note. Petitioner moved to dismiss the complaint and
instead prayed that they be paid damages by the respondent Financing Company. Before the Court, the respondent
Financing Company argued that it was a holder in due course of the note; hence the note was enforceable against
petitioner. The Court ruled in favor of petitioner holding that: (1) the note was not a negotiable instrument as it was not
made payable to order or bearer; and (2) that the respondent was not a holder in good faith as to the buyer. The
respondent knew that the note was subject to the condition that the tractors sold were not defective (right to collect
payment was not unconditional) and its action in taking the note amounted to bad faith. Thus, the Court deemed
respondent as a financing company not a holder in good faith as to the buyer. Respondent was a mere assignee and was
subject to the defenses available to petitioner as if the instrument was non-negotiable.

FACTS
 Petitioner Consolidated Plywood Industries (the “Company”) was offered two used tractors by Industrial
Products Marketing for its logging business. Petitioner Corporation requested Industrial Products to inspect the
jobsite to determine the capability of the used tractors, to which the latter assured petitioner, after inspection,
that the said tractors were fit for the job and even gave warranty of 90 days. Because of this petitioner Company,
agreed to purchase on installment the said two units of tractors. The deed of sale with chattel mortgage with
promissory note was executed. The tractors were then delivered to petitioner.

 Simultaneous with the execution of the deed of sale, Industrial Products assigned the its rights and interest in the
chattel mortgage by means of a deed of assignment in favor of respondent IFC Leasing and Acceptance
Corporation (“Financing Company”). Within 23 days after the sale, the two tractors broke down.

 Industrial Products sent its mechanics to the jobsite to conduct the necessary repairs but the tractors could no
longer be serviceable. As such, the road building and logging operations of petitioner Company were delayed and
thus, it advised Industrial Products that its payments would likewise be delayed until the latter fulfilled its
obligation under the warranty.

 The respondent Financing Company then filed a complaint for the recovery of the principal loan and interest. The
petitioner Company moved to dismiss the complaint and instead prayed that the respondent be ordered to pay
the petitioner damages. The trial court ruled in favor of the Financing Company. Upon appeal, the Appellate Court
affirmed the trial court’s decision. It ruled that the Financing Company was a holder in due course of the subject
note; hence, the note was legally enforceable against the petitioner Company.

RATIO
W/N the promissory note is a negotiable instrument – NO
Section 1 (d) of the NIL requires that a promissory note “must be payable to order or bearer.” However, the note in
the present case reads as follows:

"FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE
PESOS & 71/100 only (P1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24
monthly installments starting July 15, 1978 and every 15th of the month thereafter until fully paid. . . . ."

Without the words 'or order' or 'to the order of,' the instrument is payable only to the person designated therein and
is therefore nonnegotiable. 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."
[RELEVANT] W/N Financing Company is a holder in due course – NO

1. THE PROMISSORY NOTE IS NOT A NEGOTIABLE INSTRUMENT.

Considering that the subject promissory note is not a negotiable instrument, it follows that the respondent can never
be a holder in due course but remains a mere assignee of the note in question. Thus, the petitioner may raise against
the respondent all defenses available to it as against the seller-assignor, Industrial Products Marketing.

2. HOLDER IN BAD FAITH

Prior to the sale on installment of the tractors, there was an arrangement between the seller-assignor, Industrial
Products, and the respondent Financing Company whereby the latter would pay the seller-assignor the entire
purchase price and the seller-assignor, in turn, would assign its rights to the respondent Financing Company which
acquired the right to collect the price from the buyer, petitioner Company.
a. The Deed of Sale with Chattel Mortgage with Promissory Note and the Deed of Assignment were all executed on
the same day by the three parties – The respondent had actual knowledge of the fact that the seller-assignor’s
right to collect the price was not unconditional, and that it was subject to the condition that the tractors sold
were not defective.
b. With that actual knowledge of the foregoing facts, respondent’s taking the instrument amounted to bad faith –
Respondent failed to present evidence to prove its lack of knowledge of the mentioned facts.

Sec. 52 of the NIL provides that “A holder in due course is a holder who has taken the instrument under the
following conditions: xxx (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.

Sec. 56 of the NIL provides that “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.”

When is a financing company not a holder in good faith as to the buyer?

Financing transaction: In installment sales, the buyer usually issues a note payable to the seller to cover the
purchase price. Many times, in pursuance of a previous arrangement with the seller, a finance company pays the full
price and the note is indorsed to it, subrogating it to the right to collect the price from the buyer, with interest.

When a finance company actively participates in a transaction of this type from its inception, it cannot be regarded as
a holder in due course of the note given in the transaction. Sec. 58 of the NIL provides that "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.
. . . ."

FALLO

WHEREFORE, in view of the foregoing, the decision of the respondent appellate court dated July 17, 1985, as well as its
resolution dated October 17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against the petitioner before
the trial court is DISMISSED. SO ORDERED.