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RepublicofthePhilippines

SUPREMECOURT
Manila
SECONDDIVISION
G.R.No.72593April30,1987
CONSOLIDATEDPLYWOODINDUSTRIES,INC.,HENRYWEE,and
RODOLFOT.VERGARA,petitioners,
vs.
IFCLEASINGANDACCEPTANCECORPORATION,respondent.
GUTIERREZ,JR.,J.:
ThisisapetitionforcertiorariunderRule45oftheRulesofCourtwhichassailson
questionsoflawadecisionoftheIntermediateAppellateCourtinACG.R.CVNo.
68609datedJuly17,1985,aswellasitsresolutiondatedOctober17,1985,denying
themotionforreconsideration.
Theantecedentfactsculledfromthepetitionareasfollows:
Thepetitionerisacorporationengagedintheloggingbusiness.Ithadforitsprogram
ofloggingactivitiesfortheyear1978theopeningofadditionalroads,and
simultaneousloggingoperationsalongtherouteofsaidroads,initslogging
concessionareaatBaganga,Manay,andCaraga,DavaoOriental.Forthispurpose,it
neededtwo(2)additionalunitsoftractors.
Cognizantofpetitionercorporation'sneedandpurpose,AtlanticGulf&Pacific
CompanyofManila,throughitssistercompanyandmarketingarm,Industrial
ProductsMarketing(the"sellerassignor"),acorporationdealingintractorsandother
heavyequipmentbusiness,offeredtoselltopetitionercorporationtwo(2)"Used"
AllisCrawlerTractors,one(1)anHDD21BandtheotheranHDD16B.
Inordertoascertaintheextentofworktowhichthetractorsweretobeexposed,
(t.s.n.,May28,1980,p.44)andtodeterminethecapabilityofthe"Used"tractors
beingoffered,petitionercorporationrequestedthesellerassignortoinspectthejob
site.Afterconductingsaidinspection,thesellerassignorassuredpetitioner
corporationthatthe"Used"AllisCrawlerTractorswhichwerebeingofferedwerefit
forthejob,andgavethecorrespondingwarrantyofninety(90)daysperformanceof
themachinesandavailabilityofparts.(t.s.n.,May28,1980,pp.5966).
Withsaidassuranceandwarranty,andrelyingonthesellerassignor'sskilland
judgment,petitionercorporationthroughpetitionersWeeandVergara,presidentand
vicepresident,respectively,agreedtopurchaseoninstallmentsaidtwo(2)unitsof
"Used"AllisCrawlerTractors.ItalsopaidthedownpaymentofTwoHundredTen
ThousandPesos(P210,000.00).

OnApril5,1978,thesellerassignorissuedthesalesinvoiceforthetwo2)unitsof
tractors(Exh."3A").Atthesametime,thedeedofsalewithchattelmortgagewith
promissorynotewasexecuted(Exh."2").
Simultaneouslywiththeexecutionofthedeedofsalewithchattelmortgagewith
promissorynote,thesellerassignor,bymeansofadeedofassignment(Eexh."1"),
assigneditsrightsandinterestinthechattelmortgageinfavoroftherespondent.
Immediatelythereafter,thesellerassignordeliveredsaidtwo(2)unitsof"Used"
tractorstothepetitionercorporation'sjobsiteandasagreed,thesellerassignor
stationeditsownmechanicstosupervisetheoperationsofthemachines.
Barelyfourteen(14)dayshadelapsedaftertheirdeliverywhenoneofthetractors
brokedownandafteranothernine(9)days,theothertractorlikewisebrokedown
(t.s.n.,May28,1980,pp.6869).
OnApril25,1978,petitionerRodolfoT.Vergaraformallyadvisedthesellerassignor
ofthefactthatthetractorsbrokedownandrequestedforthesellerassignor'susual
promptattentionunderthewarranty(Eexh."5").
InresponsetotheformaladvicebypetitionerRodolfoT.Vergara,Exhibit"5,"the
sellerassignorsenttothejobsiteitsmechanicstoconductthenecessaryrepairs
(Exhs."6,""6A,""6B,"16C,""16C1,""6D,"and"6E"),butthetractorsdidnot
comeouttobewhattheyshouldbeaftertherepairswereundertakenbecausethe
unitswerenolongerserviceable(t.s.n.,May28,1980,p.78).
Becauseofthebreakingdownofthetractors,theroadbuildingandsimultaneous
loggingoperationsofpetitionercorporationweredelayedandpetitionerVergara
advisedthesellerassignorthatthepaymentsoftheinstallmentsaslistedinthe
promissorynotewouldlikewisebedelayeduntilthesellerassignorcompletelyfulfills
itsobligationunderitswarranty(t.s.n,May28,1980,p.79).
Sincethetractorswerenolongerserviceable,onApril7,1979,petitionerWeeasked
thesellerassignortopullouttheunitsandhavethemreconditioned,andthereafterto
offerthemforsale.Theproceedsweretobegiventotherespondentandtheexcess,if
any,tobedividedbetweenthesellerassignorandpetitionercorporationwhich
offeredtobearonehalf(1/2)ofthereconditioningcost(Eexh."7").
Noresponsetothisletter,Exhibit"7,"wasreceivedbythepetitionercorporationand
despiteseveralfollowupcalls,thesellerassignordidnothingwithregardtothe
request,untilthecomplaintinthiscasewasfiledbytherespondentagainstthe
petitioners,thecorporation,Wee,andVergara.
Thecomplaintwasfiledbytherespondentagainstthepetitionersfortherecoveryof
theprincipalsumofOneMillionNinetyThreeThousandSevenHundredEightyNine
Pesos&71/100(P1,093,789.71),accruedinterestofOneHundredFiftyOne
ThousandSixHundredEighteenPesos&86/100(P151,618.86)asofAugust15,
1979,accruinginterestthereafterattherateoftwelve(12%)percentperannum,

attorney'sfeesofTwoHundredFortyNineThousandEightyOnePesos&71/100
(P249,081.71)andcostsofsuit.
Thepetitionersfiledtheiramendedanswerprayingforthedismissalofthecomplaint
andaskingthetrialcourttoordertherespondenttopaythepetitionersdamagesinan
amountatthesounddiscretionofthecourt,TwentyThousandPesos(P20,000.00)as
andforattorney'sfees,andFiveThousandPesos(P5,000.00)forexpensesof
litigation.Thepetitionerslikewiseprayedforsuchotherandfurtherreliefaswouldbe
justunderthepremises.
InadecisiondatedApril20,1981,thetrialcourtrenderedthefollowingjudgment:
WHEREFORE,judgmentisherebyrendered:
1.orderingdefendantstopayjointlyandseverallyintheirofficialand
personalcapacitiestheprincipalsumofONEMILLIONNINETY
THREETHOUSANDSEVENHUNDREDNINETYEIGHTPESOS
&71/100(P1,093,798.71)withaccruedinterestofONEHUNDRED
FIFTYONETHOUSANDSIXHUNDREDEIGHTEENPESOS&
86/100(P151,618.,86)asofAugust15,1979andaccruinginterest
thereafterattherateof12%perannum;
2.orderingdefendantstopayjointlyandseverallyattorney'sfees
equivalenttotenpercent(10%)oftheprincipalandtopaythecostsof
thesuit.
Defendants'counterclaimisdisallowed.(pp.4546,Rollo)
OnJune8,1981,thetrialcourtissuedanorderdenyingthemotionforreconsideration
filedbythepetitioners.
Thus,thepetitionersappealedtotheIntermediateAppellateCourtandassigned
thereinthefollowingerrors:
I
THATTHELOWERCOURTERREDINFINDINGTHATTHESELLER
ATLANTICGULFANDPACIFICCOMPANYOFMANILADIDNOTAPPROVE
DEFENDANTSAPPELLANTSCLAIMOFWARRANTY.
II
THATTHELOWERCOURTERREDINFINDINGTHATPLAINTIFF
APPELLEEISAHOLDERINDUECOURSEOFTHEPROMISSORYNOTE
ANDSUEDUNDERSAIDNOTEASHOLDERTHEREOFINDUECOURSE.

OnJuly17,1985,theIntermediateAppellateCourtissuedthechallengeddecision
affirmingintotothedecisionofthetrialcourt.Thepertinentportionsofthedecision
areasfollows:
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Fromtheevidencepresentedbythepartiesontheissueofwarranty,
Weareoftheconsideredopinionthatasidefromthefactthatno
provisionofwarrantyappearsorisprovidedintheDeedofSaleofthe
tractorsandevenadmittingthatinacontractofsaleunlessacontrary
intentionappears,thereisanimpliedwarranty,thedefenseofbreach
ofwarranty,ifthereisany,asinthiscase,doesnotlieinfavorofthe
appellantsandagainsttheplaintiffappelleewhoistheassigneeofthe
promissorynoteandaholderofthesameinduecourse.Warrantylies
inthiscaseonlybetweenIndustrialProductsMarketingand
ConsolidatedPlywoodIndustries,Inc.Theplaintiffappellantherein
uponapplicationbyappellantcorporationgrantedfinancingforthe
purchaseofthequestionedunitsofFiatAllisCrawler,Tractors.
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Holdingthatbreachofwarrantyifany,isnotadefenseavailableto
appellantseithertowithdrawfromthecontractand/ordemanda
proportionatereductionofthepricewithdamagesineithercase(Art.
1567,NewCivilCode).Wenowcometotheissueastowhetherthe
plaintiffappelleeisaholderinduecourseofthepromissorynote.
Tobeginwith,itisbeyondargumentsthattheplaintiffappelleeisa
financingcorporationengagedinfinancingandreceivablediscounting
extendingcreditfacilitiestoconsumersandindustrial,commercialor
agriculturalenterprisesbydiscountingorfactoringcommercialpapers
oraccountsreceivabledulyauthorizedpursuanttoR.A.5980
otherwiseknownastheFinancingAct.
Astudyofthequestionedpromissorynoterevealsthatitisa
negotiableinstrumentwhichwasdiscountedorsoldtotheIFCLeasing
andAcceptanceCorporationforP800,000.00(Exh."A")considering
thefollowing.itisinwritingandsignedbythemaker;itcontainsan
unconditionalpromisetopayacertainsumofmoneypayableata
fixedordeterminablefuturetime;itispayabletoorder(Sec.1,NIL);
thepromissorynotewasnegotiatedwhenitwastransferredand
deliveredbyIPMtotheappelleeanddulyendorsedtothelatter(Sec.
30,NIL);itwastakenintheconditionsthatthenotewascompleteand
regularuponitsfacebeforethesamewasoverdueandwithoutnotice,
thatithadbeenpreviouslydishonoredandthatthenoteisingoodfaith
andforvaluewithoutnoticeofanyinfirmityordefectinthetitleof
IPM(Sec.52,NIL);thatIFCLeasingandAcceptanceCorporation
heldtheinstrumentfreefromanydefectoftitleofpriorpartiesand

freefromdefensesavailabletopriorpartiesamongthemselvesand
mayenforcepaymentoftheinstrumentforthefullamountthereof
againstallpartiesliablethereon(Sec.57,NIL);theappellantsengaged
thattheywouldpaythenoteaccordingtoitstenor,andadmitthe
existenceofthepayeeIPManditscapacitytoendorse(Sec.60,NIL).
Inviewoftheessentialelementsfoundinthequestionedpromissory
note,Weopinethatthesameislegallyandconclusivelyenforceable
againstthedefendantsappellants.
WHEREFORE,findingthedecisionappealedfromaccordingtolaw
andevidence,Wefindtheappealwithoutmeritandthusaffirmthe
decisionintoto.Withcostsagainsttheappellants.(pp.5055,Rollo)
Thepetitioners'motionforreconsiderationofthedecisionofJuly17,1985was
deniedbytheIntermediateAppellateCourtinitsresolutiondatedOctober17,1985,a
copyofwhichwasreceivedbythepetitionersonOctober21,1985.
Hence,thispetitionwasfiledonthefollowinggrounds:
I.
ONITSFACE,THEPROMISSORYNOTEISCLEARLYNOTANEGOTIABLE
INSTRUMENTASDEFINEDUNDERTHELAWSINCEITISNEITHER
PAYABLETOORDERNORTOBEARER.
II
THERESPONDENTISNOTAHOLDERINDUECOURSE:ATBEST,ITISA
MEREASSIGNEEOFTHESUBJECTPROMISSORYNOTE.
III.
SINCETHEINSTANTCASEINVOLVESANONNEGOTIABLEINSTRUMENT
ANDTHETRANSFEROFRIGHTSWASTHROUGHAMEREASSIGNMENT,
THEPETITIONERSMAYRAISEAGAINSTTHERESPONDENTALL
DEFENSESTHATAREAVAILABLETOITASAGAINSTTHESELLER
ASSIGNOR,INDUSTRIALPRODUCTSMARKETING.
IV.
THEPETITIONERSARENOTLIABLEFORTHEPAYMENTOFTHE
PROMISSORYNOTEBECAUSE:
A)THESELLERASSIGNORISGUILTYOFBREACHOFWARRANTY
UNDERTHELAW;

B)IFATALL,THERESPONDENTMAYRECOVERONLYFROMTHE
SELLERASSIGNOROFTHEPROMISSORYNOTE.
V.
THEASSIGNMENTOFTHECHATTELMORTGAGEBYTHESELLER
ASSIGNORINFAVOROFTHERESPONDENTDOESNOTCHANGETHE
NATUREOFTHETRANSACTIONFROMBEINGASALEON
INSTALLMENTSTOAPURELOAN.
VI.
THEPROMISSORYNOTECANNOTBEADMITTEDORUSEDINEVIDENCE
INANYCOURTBECAUSETHEREQUISITEDOCUMENTARYSTAMPS
HAVENOTBEENAFFIXEDTHEREONORCANCELLED.
ThepetitionersprayedthatjudgmentberenderedsettingasidethedecisiondatedJuly
17,1985,aswellastheresolutiondatedOctober17,1985anddismissingthe
complaintbutgrantingpetitioners'counterclaimsbeforethecourtoforigin.
Ontheotherhand,therespondentcorporationinitscommenttothepetitionfiledon
February20,1986,contendedthatthepetitionwasfiledoutoftime;thatthe
promissorynoteisanegotiableinstrumentandrespondentaholderinduecourse;that
respondentisnotliableforanybreachofwarranty;andfinally,thatthepromissory
noteisadmissibleinevidence.
Thecoreissuehereiniswhetherornotthepromissorynoteinquestionisanegotiable
instrumentsoastobarcompletelyalltheavailabledefensesofthepetitioneragainst
therespondentassignee.
Preliminarily,itmustbeestablishedattheoutsetthatweconsidertheinstantpetition
tohavebeenfiledontimebecausethepetitioners'motionforreconsiderationactually
raisednewissues.Itcannot,therefore,beconsideredproformal.
Thepetitionisimpressedwithmerit.
First,thereisnoquestionthatthesellerassignorbreacheditsexpress90daywarranty
becausethefindingsofthetrialcourt,adoptedbytherespondentappellatecourt,that
"14daysafterdelivery,thefirsttractorbrokedownand9days,thereafter,thesecond
tractorbecameinoperable"aresustainedbytherecords.Thepetitionerwasclearlya
victimofawarrantynothonoredbythemaker.
TheCivilCodeprovidesthat:
ART.1561.Thevendorshallberesponsibleforwarrantyagainstthe
hiddendefectswhichthethingsoldmayhave,shouldtheyrenderit
unfitfortheuseforwhichitisintended,orshouldtheydiminishits
fitnessforsuchusetosuchanextentthat,hadthevendeebeenaware

thereof,hewouldnothaveacquireditorwouldhavegivenalower
priceforit;butsaidvendorshallnotbeanswerableforpatentdefects
orthosewhichmaybevisible,orforthosewhicharenotvisibleifthe
vendeeisanexpertwho,byreasonofhistradeorprofession,should
haveknownthem.
ART.1562.Inasaleofgoods,thereisanimpliedwarrantyor
conditionastothequalityorfitnessofthegoods,asfollows:
(1)Wherethebuyer,expresslyorbyimplicationmakesknowntothe
sellertheparticularpurposeforwhichthegoodsareacquired,andit
appearsthatthebuyerreliesonthesellersskillorjudgejudgment
(whetherhebethegrowerormanufacturerornot),thereisanimplied
warrantythatthegoodsshallbereasonablyfitforsuchpurpose;
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ART.1564.Animpliedwarrantyorconditionastothequalityor
fitnessforaparticularpurposemaybeannexedbytheusageoftrade.
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ART.1566.Thevendorisresponsibletothevendeeforanyhidden
faultsordefectsinthethingsoldeventhoughhewasnotaware
thereof.
Thisprovisionshallnotapplyifthecontraryhasbeenstipulated,and
thevendorwasnotawareofthehiddenfaultsordefectsinthething
sold.(Emphasissupplied).
Itispatentthen,thatthesellerassignorisliableforitsbreachofwarrantyagainstthe
petitioner.Thisliabilityasageneralrule,extendstothecorporationtowhomit
assigneditsrightsandinterestsunlesstheassigneeisaholderinduecourseofthe
promissorynoteinquestion,assumingthenoteisnegotiable,inwhichcasethelatter's
rightsarebasedonthenegotiableinstrumentandassumingfurtherthatthepetitioner's
defensesmaynotprevailagainstit.
Secondly,itlikewisecannotbedeniedthatassoonasthetractorsbrokedown,the
petitionercorporationnotifiedthesellerassignor'ssistercompany,AG&P,aboutthe
breakdownbasedonthesellerassignor'sexpress90daywarranty,withwhichthe
lattercompliedbysendingitsmechanics.However,duetothesellerassignor'sdelay
anditsfailuretocomplywithitswarranty,thetractorsbecametotallyunserviceable
anduselessforthepurposeforwhichtheywerepurchased.
Thirdly,thepetitionercorporation,thereafter,unilaterallyrescindeditscontractwith
thesellerassignor.
Articles1191and1567oftheCivilCodeprovidethat:

ART.1191.Thepowertorescindobligationsisimpliedinreciprocal
ones,incaseoneoftheobligorsshouldnotcomplywithwhatis
incumbentuponhim.
Theinjuredpartymaychoosebetweenthefulfillmentandthe
rescissionoftheobligationwiththepaymentofdamagesineither
case.Hemayalsoseekrescission,evenafterhehaschosenfulfillment,
ifthelattershouldbecomeimpossible.
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ART.1567.Inthecasesofarticles1561,1562,1564,1565and
1566,thevendeemayelectbetweenwithdrawingfromthecontract
anddemandingaproportionatereductionoftheprice,withdamages
ineithercase.(Emphasissupplied)
Petitioner,havingunilaterallyandextrajudiciallyrescindeditscontractwiththe
sellerassignor,necessarilycannolongersuethesellerassignorexceptbywayof
counterclaimifthesellerassignorsuesitbecauseoftherescission.
InthecaseoftheUniversityofthePhilippinesv.DelosAngeles(35SCRA102)we
held:
Inotherwords,thepartywhodeemsthecontractviolatedmay
consideritresolvedorrescinded,andactaccordingly,without
previouscourtaction,butitproceedsatitsownrisk.Foritisonlythe
finaljudgmentofthecorrespondingcourtthatwillconclusivelyand
finallysettlewhethertheactiontakenwasorwasnotcorrectinlaw.
Butthelawdefinitelydoesnotrequirethatthecontractingpartywho
believesitselfinjuredmustfirstfilesuitandwaitforadjudgement
beforetakingextrajudicialstepstoprotectitsinterest.Otherwise,the
partyinjuredbytheother'sbreachwillhavetopassivelysitandwatch
itsdamagesaccumulateduringthependencyofthesuituntilthefinal
judgmentofrescissionisrenderedwhenthelawitselfrequiresthathe
shouldexerciseduediligencetominimizeitsowndamages(Civil
Code,Article2203).(Emphasissupplied)
Goingbacktothecoreissue,werulethatthepromissorynoteinquestionisnota
negotiableinstrument.
Thepertinentportionofthenoteisasfollows:
FORVALUERECEIVED,I/wejointlyandseverallypromisetopay
totheINDUSTRIALPRODUCTSMARKETING,thesumofONE
MILLIONNINETYTHREETHOUSANDSEVENHUNDRED
EIGHTYNINEPESOS&71/100only(P1,093,789.71),Philippine
Currency,thesaidprincipalsum,tobepayablein24monthly

installmentsstartingJuly15,1978andevery15thofthemonth
thereafteruntilfullypaid....
Consideringthatparagraph(d),Section1oftheNegotiableInstrumentsLawrequires
thatapromissorynote"mustbepayabletoorderorbearer,"itcannotbedeniedthat
thepromissorynoteinquestionisnotanegotiableinstrument.
Theinstrumentinordertobeconsiderednegotiablilityi.e.must
containthesocalled'wordsofnegotiable,mustbepayableto'order'or
'bearer'.Thesewordsserveasanexpressionofconsentthatthe
instrumentmaybetransferred.Thisconsentisindispensablesincea
makerassumesgreaterriskunderanegotiableinstrumentthanundera
nonnegotiableone....
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Wheninstrumentispayabletoorder.
SEC.8.WHENPAYABLETOORDER.Theinstrumentispayable
toorderwhereitisdrawnpayabletotheorderofaspecifiedpersonor
tohimorhisorder....
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Thesearetheonlytwowaysbywhichaninstrumentmaybemade
payabletoorder.Theremustalwaysbeaspecifiedpersonnamedin
theinstrument.Itmeansthatthebillornoteistobepaidtotheperson
designatedintheinstrumentortoanypersontowhomhehasindorsed
anddeliveredthesame.Withoutthewords"ororder"or"totheorder
of,"theinstrumentispayableonlytothepersondesignatedtherein
andisthereforenonnegotiable.Anysubsequentpurchaserthereof
willnotenjoytheadvantagesofbeingaholderofanegotiable
instrumentbutwillmerely"stepintotheshoes"oftheperson
designatedintheinstrumentandwillthusbeopentoalldefenses
availableagainstthelatter."(CamposandCampos,NotesandSelected
CasesonNegotiableInstrumentsLaw,ThirdEdition,page38).
(Emphasissupplied)
Therefore,consideringthatthesubjectpromissorynoteisnotanegotiableinstrument,
itfollowsthattherespondentcanneverbeaholderinduecoursebutremainsamere
assigneeofthenoteinquestion.Thus,thepetitionermayraiseagainsttherespondent
alldefensesavailabletoitasagainstthesellerassignorIndustrialProductsMarketing.
Thisbeingso,therewasnoneedforthepetitionertoimpliedthesellerassignorwhen
itwassuedbytherespondentassigneebecausethepetitioner'sdefensesapplytoboth
oreitherofeitherofthem.Actually,therecordsshowthateventherespondentitself
admittedtobeingamereassigneeofthepromissorynoteinquestion,towit:

ATTY.PALACA:
Didwegetitrightfromthecounselthatwhatisbeing
assignedistheDeedofSalewithChattelMortgagewith
thepromissorynotewhichisastestifiedtobythe
witnesswasindorsed?(CounselforPlaintiffnodding
hishead.)Thenwehavenofurtherquestionsoncross,
COURT:
Youconfirmhismanifestation?Youarenoddingyour
head?Doyouconfirmthat?
ATTY.ILAGAN:
TheDeedofSalecannotbeassigned.Adeedofsaleis
atransactionbetweentwopersons;whatisassignedare
rights,therightsofthemortgageewereassignedtothe
IFCLeasing&AcceptanceCorporation.
COURT:
Heputsitinasimplewayasonedeedofsaleand
chattelmortgagewereassigned;...youwanttomakea
distinction,oneisanassignmentofmortgagerightand
theotheroneisindorsementofthepromissorynote.
Whatcounselfordefendantswantsisthatyoustipulate
thatitiscontainedinonesingletransaction?
ATTY.ILAGAN:
Westipulateitisonesingletransaction.(pp.2729,
TSN.,February13,1980).
Secondly,evenconcedingforpurposesofdiscussionthatthepromissorynotein
questionisanegotiableinstrument,therespondentcannotbeaholderinduecourse
foramoresignificantreason.
Theevidencepresentedintheinstantcaseshowsthatpriortothesaleoninstallment
ofthetractors,therewasanarrangementbetweenthesellerassignor,Industrial
ProductsMarketing,andtherespondentwherebythelatterwouldpaytheseller
assignortheentirepurchasepriceandthesellerassignor,inturn,wouldassignits
rightstotherespondentwhichacquiredtherighttocollectthepricefromthebuyer,
hereinpetitionerConsolidatedPlywoodIndustries,Inc.
AmereperusaloftheDeedofSalewithChattelMortgagewithPromissoryNote,the
DeedofAssignmentandtheDisclosureofLoan/CreditTransactionshowsthatsaid
documentsevidencingthesaleoninstallmentofthetractorswereallexecutedonthe

samedaybyandamongthebuyer,whichishereinpetitionerConsolidatedPlywood
Industries,Inc.;thesellerassignorwhichistheIndustrialProductsMarketing;andthe
assigneefinancingcompany,whichistherespondent.Therefore,therespondenthad
actualknowledgeofthefactthatthesellerassignor'srighttocollectthepurchase
pricewasnotunconditional,andthatitwassubjecttotheconditionthatthetractors
soldwerenotdefective.Therespondentknewthatwhenthetractorsturnedouttobe
defective,itwouldbesubjecttothedefenseoffailureofconsiderationandcannot
recoverthepurchasepricefromthepetitioners.Evenassumingforthesakeof
argumentthatthepromissorynoteisnegotiable,therespondent,whichtookthesame
withactualknowledgeoftheforegoingfactssothatitsactionintakingtheinstrument
amountedtobadfaith,isnotaholderinduecourse.Assuch,therespondentissubject
toalldefenseswhichthepetitionersmayraiseagainstthesellerassignor.Anyother
interpretationwouldbemostinequitoustotheunfortunatebuyerwhoisnotonly
saddledwithtwouselesstractorsbutmustalsofacealawsuitfromtheassigneefor
theentirepurchasepriceandallitsincidentswithoutbeingabletoraisevaliddefenses
availableasagainsttheassignor.
Lastly,therespondentfailedtopresentanyevidencetoprovethatithadno
knowledgeofanyfact,whichwouldjustifyitsactoftakingthepromissorynoteas
notamountingtobadfaith.
Sections52and56oftheNegotiableInstrumentsLawprovidethat:negotiatingit.
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SEC.52.WHATCONSTITUTESAHOLDERINDUECOURSE.
Aholderinduecourseisaholderwhohastakentheinstrumentunder
thefollowingconditions:
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(c)Thathetookitingoodfaithandforvalue
(d)Thatthetimeitwasnegotiatedbyhimhehadnonoticeofany
infirmityintheinstrumentofdeffectinthetitleoftheperson
negotiatingit
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SEC.56.WHATCONSTITUTESNOTICEOFDEFFECT.To
constitutenoticeofaninfirmityintheinstrumentordefectinthetitle
ofthepersonnegotiatingthesame,thepersontowhomitisnegotiated
musthavehadactualknowledgeoftheinfirmityordefect,or
knowledgeofsuchfactsthathisactionintakingtheinstrument
amountstobadfaith.(Emphasissupplied)

WesubscribetotheviewofCamposandCamposthatafinancingcompanyisnota
holderingoodfaithastothebuyer,towit:
Ininstallmentsales,thebuyerusuallyissuesanotepayabletothe
sellertocoverthepurchaseprice.Manytimes,inpursuanceofa
previousarrangementwiththeseller,afinancecompanypaysthefull
priceandthenoteisindorsedtoit,subrogatingittotherighttocollect
thepricefromthebuyer,withinterest.Withtheincreasingfrequency
ofinstallmentbuyinginthiscountry,itismostprobablethatthe
tendencyofthecourtsintheUnitedStatestoprotectthebuyeragainst
thefinancecompanywill,thefinancecompanywillbesubjecttothe
defenseoffailureofconsiderationandcannotrecoverthepurchase
pricefromthebuyer.Asagainsttheargumentthatsucharulewould
seriouslyaffect"acertainmodeoftransactingbusinessadopted
throughouttheState,"acourtinonecasestated:
Itmaybethatourholdingherewillrequiresome
changesinbusinessmethodsandwillimposeagreater
burdenonthefinancecompanies.Wethinkthebuyer
Mr.&Mrs.GeneralPublicshouldhavesome
protectionsomewherealongtheline.Webelievethe
financecompanyisbetterabletobeartheriskofthe
dealer'sinsolvencythanthebuyerandinafarbetter
positiontoprotecthisinterestsagainstunscrupulous
andinsolventdealers....
Ifthisopinionimposesgreatburdensonfinance
companiesitisapotentargumentinfavorofarule
whichwinaffordpublicprotectiontothegeneral
buyingpublicagainstunscrupulousdealersinpersonal
property....(MutualFinanceCo.v.Martin,63So.2d
649,44ALR2d1[1953])(CamposandCampos,Notes
andSelectedCasesonNegotiableInstrumentsLaw,
ThirdEdition,p.128).
InthecaseofCommercialCreditCorporationv.OrangeCountryMachineWorks(34
Cal.2d766)involvingsimilarfacts,itwasheldthatinaveryrealsense,thefinance
companywasamovingforceinthetransactionfromitsveryinceptionandactedasa
partytoit.Whenafinancecompanyactivelyparticipatesinatransactionofthistype
fromitsinception,itcannotberegardedasaholderinduecourseofthenotegivenin
thetransaction.
Inlikemanner,therefore,evenassumingthatthesubjectpromissorynoteis
negotiable,therespondent,afinancingcompanywhichactivelyparticipatedinthe
saleoninstallmentofthesubjecttwoAllisCrawlertractors,cannotberegardedasa
holderinduecourseofsaidnote.Itfollowsthattherespondent'srightsunderthe
promissorynoteinvolvedinthiscasearesubjecttoalldefensesthatthepetitioners
haveagainstthesellerassignor,IndustrialProductsMarketing.ForSection58ofthe

NegotiableInstrumentsLawprovidesthat"inthehandsofanyholderotherthana
holderinduecourse,anegotiableinstrumentissubjecttothesamedefensesasifit
werenonnegotiable...."
Prescindingfromtheforegoingandsettingasideotherperipheralissues,wefindthat
boththetrialandrespondentappellatecourterredinholdingthepromissorynotein
questiontobenegotiable.Sucharulingdoesnotonlyviolatethelawandapplicable
jurisprudence,butwouldresultinunjustenrichmentonthepartofboththeassigner
assignorandrespondentassigneeattheexpenseofthepetitionercorporationwhich
rightfullyrescindedaninequitablecontract.Wenote,however,thatsincetheseller
assignorhasnotbeenimpleadedherein,thereisnoobstaclefortherespondenttofile
acivilSuitandlitigateitsclaimsagainstthesellerassignorintheratherunlikely
possibilitythatitsodesires,
WHEREFORE,inviewoftheforegoing,thedecisionoftherespondentappellate
courtdatedJuly17,1985,aswellasitsresolutiondatedOctober17,1986,arehereby
ANNULLEDandSETASIDE.Thecomplaintagainstthepetitionerbeforethetrial
courtisDISMISSED.
SOORDERED.