G.R. No. L-72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T. VERGARA, petitioners, vs. IFC LEASING AND ACCEPTANCE CORPORATION, respondent.

FACTS

Petitioner Consolidated Plywood Industries, Inc., through its officers Wee and Vergara, purchased two used Allis Crawler tractors on installment from Industrial Products Marketing (IPM). The purchase was based on IPM’s express warranty of 90-day performance and its assurance, after a job site inspection, that the tractors were fit for the intended logging operations. A deed of sale with chattel mortgage and a promissory note were executed, and IPM immediately assigned its rights under the chattel mortgage to respondent IFC Leasing and Acceptance Corporation. The tractors broke down within days of delivery. Despite repair attempts by IPM, they remained unserviceable. The petitioners then informed IPM that installment payments would be withheld until the warranty was fulfilled and later requested IPM to repossess and recondition the units, but IPM took no action. IFC Leasing subsequently filed a complaint to recover the unpaid balance under the promissory note from the petitioners.

ISSUE

Whether the respondent finance company, as assignee of the promissory note and chattel mortgage, is a holder in due course immune from the defenses the petitioners have against the original seller-assignor.

RULING

No, the respondent is not a holder in due course. The Supreme Court annulled the decisions of the lower courts, dismissing the complaint against the petitioners. The legal logic is twofold. First, the promissory note in question is non-negotiable. The Court found it was not payable to order or bearer, as it was specifically made payable only to “Ourselves” and subsequently to IPM, lacking the words of negotiability required under the Negotiable Instruments Law. Second, even assuming arguendo that the note was negotiable, the respondent cannot be considered a holder in due course. The evidence established that IFC Leasing actively participated in the transaction from its inception; it was not an innocent subsequent purchaser for value. The deed of assignment was executed simultaneously with the sale, indicating the finance company’s integral role. Following established jurisprudence, a finance company that is closely connected to the seller-assignor from the start of the transaction cannot claim the protected status of a holder in due course. Consequently, under Section 58 of the Negotiable Instruments Law, the respondent’s rights are subject to all defenses which the petitioners have against the seller, including breach of warranty and failure of consideration. The petitioners rightfully withheld payment due to the seller’s failure to deliver functional, warranted equipment. To rule otherwise would sanction unjust enrichment.