Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 89252 May 24, 1993

RAUL SESBREÑO, petitioner,

vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS
BANK, respondents.

Salva, Villanueva & Associates for Delta Motors Corporation.

Reyes, Salazar & Associates for Pilipinas Bank.

FELICIANO, J.:

On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the
amount of P300,000.00 with the Philippine Underwriters Finance Corporation
("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would
mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following
documents to petitioner:

(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of

one (1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for
a term of 32 days at 17.0% per annum;

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale
of DMC PN No. 2731 to petitioner, with the notation that the said security was
in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt
("DCR") No. 10805 dated 9 February 1981; and

(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of
petitioner's investment), with petitioner as payee, Philfinance as drawer, and
Insular Bank of Asia and America as drawee, in the total amount of
P304,533.33.

On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance.
However, the checks were dishonored for having been drawn against insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private
respondent Pilipinas Bank ("Pilipinas"). It reads as follows:

PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila

February 9, 19
———————
VALUE DATE

TO Raul Sesbreño
 April 6, 1981
———————
MATURITY DA

NO. 10805

DENOMINATED CUSTODIAN RECEIPT

This confirms that as a duly Custodian Bank, and upon instruction of

PHILIPPINE UNDERWRITES FINANCE CORPORATION, we have in our
custody the following securities to you [sic] the extent herein indicated.

SERIAL MAT. FACE ISSUED REGISTERED AMOUNT

NUMBER DATE VALUE BY HOLDER PAYEE

2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33

UNDERWRITERS
FINANCE CORP.

We further certify that these securities may be inspected by you or your duly
authorized representative at any time during regular banking hours.

Upon your written instructions we shall undertake physical delivery of the

above securities fully assigned to you should this Denominated
Custodianship Receipt remain outstanding in your favor thirty (30) days after
its maturity.

PILIPI
NAS
BANK
(By
Elizabe
th De
Villa
Illegibl
e
Signat
ure)1

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent

Pilipinas, Makati Branch, and handed her a demand letter informing the bank that his
placement with Philfinance in the amount reflected in the DCR No. 10805 had remained
unpaid and outstanding, and that he in effect was asking for the physical delivery of the
underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731
and found: that the security had been issued on 10 April 1980; that it would mature on 6
April 1981; that it had a face value of P2,300,833.33, with the Philfinance as "payee" and
private respondent Delta Motors Corporation ("Delta") as "maker;" and that on face of the
promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor
any certificate of participation in respect thereof, to petitioner.

Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, again
2

asking private respondent Pilipinas for physical delivery of the original of DMC PN No.
2731. Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for written
instructions, as has been supposedly agreed upon in "Securities Custodianship Agreement"
between Pilipinas and Philfinance. Philfinance did not provide the appropriate instructions;
Pilipinas never released DMC PN No. 2731, nor any other instrument in respect thereof, to
petitioner.
Petitioner also made a written demand on 14 July 1981 upon private respondent Delta for
3

the partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof,
had assigned to him said Note to the extent of P307,933.33. Delta, however, denied any
liability to petitioner on the promissory note, and explained in turn that it had previously
agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730)
against Philfinance PN No. 143-A issued in favor of Delta.

In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of
the Securities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered
to the SEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4

As petitioner had failed to collect his investment and interest thereon, he filed on 28
September 1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City,
Branch 21, against private respondents Delta and Pilipinas. The trial court, in a decision
5

dated 5 August 1987, dismissed the complaint and counterclaims for lack of merit and for
lack of cause of action, with costs against petitioner.

Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a

Decision dated 21 March 1989, the Court of Appeals denied the appeal and held: 6

Be that as it may, from the evidence on record, if there is anyone that appears
liable for the travails of plaintiff-appellant, it is Philfinance. As correctly
observed by the trial court:

This act of Philfinance in accepting the investment of plaintiff

and charging it against DMC PN No. 2731 when its entire face
value was already obligated or earmarked for set-off or
compensation is difficult to comprehend and may have been
motivated with bad faith. Philfinance, therefore, is solely and
legally obligated to return the investment of plaintiff, together
with its earnings, and to answer all the damages plaintiff has
suffered incident thereto. Unfortunately for plaintiff, Philfinance
was not impleaded as one of the defendants in this case at bar;
hence, this Court is without jurisdiction to pronounce judgement
against it. (p. 11, Decision)

WHEREFORE, finding no reversible error in the decision appealed from, the

same is hereby affirmed in toto. Cost against plaintiff-appellant.

Petitioner moved for reconsideration of the above Decision, without success.

Hence, this Petition for Review on Certiorari.

After consideration of the allegations contained and issues raised in the pleadings, the
Court resolved to give due course to the petition and required the parties to file their
respective memoranda. 7

Petitioner reiterates the assignment of errors he directed at the trial court decision, and
contends that respondent court of Appeals gravely erred: (i) in concluding that he cannot
recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in
failing to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view
of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii) in
refusing to pierce the veil of corporate entity between Philfinance, and private respondents
Delta and Pilipinas, considering that the three (3) entities belong to the "Silverio Group of
Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8

There are at least two (2) sets of relationships which we need to address: firstly, the
relationship of petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect of
Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the
relationship of petitioner and Philfinance. However, since Philfinance has not been
impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction
over the person of Philfinance. It is, consequently, not necessary for present purposes to
deal with this third relationship, except to the extent it necessarily impinges upon or
intersects the first and second relationships.

I.

We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in
respect of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without
recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this
point:

Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731
as the same is "non-negotiable" as stamped on its face (Exhibit "6"),
negotiation being defined as the transfer of an instrument from one person to
another so as to constitute the transferee the holder of the instrument (Sec.
30, Negotiable Instruments Law). A person not a holder cannot sue on the
instrument in his own name and cannot demand or receive payment (Section
51, id.)9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note
had been validly transferred, in part to him by assignment and that as a result of such
transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of
that Note assigned to him by the payee Philfinance.

Delta, however, disputes petitioner's contention and argues:

(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise
transferred by Philfinance as manifested by the word "non-negotiable" stamp
across the face of the Note and because maker Delta and payee Philfinance
10

intended that this Note would be offset against the outstanding obligation of
Philfinance represented by Philfinance PN No. 143-A issued to Delta as
payee;

(2) that the assignment of DMC PN No. 2731 by Philfinance was without
Delta's consent, if not against its instructions; and

(3) assuming (arguendo only) that the partial assignment in favor of petitioner
was valid, petitioner took the Note subject to the defenses available to Delta,
in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No.
143-A. 11

We consider Delta's arguments seriatim.

Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be
distinguished from the assignment or transfer of an instrument whether that be negotiable or
non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant
statute may be negotiated either by indorsement thereof coupled with delivery, or by
delivery alone where the negotiable instrument is in bearer form. A negotiable instrument
may, however, instead of being negotiated, also be assigned or transferred. The legal
consequences of negotiation as distinguished from assignment of a negotiable instrument
are, of course, different. A non-negotiable instrument may, obviously, not be negotiated; but
it may be assigned or transferred, absent an express prohibition against assignment or
transfer written in the face of the instrument:
 The words "not negotiable," stamped on the face of the bill of lading, did not
destroy its assignability, but the sole effect was to exempt the bill from the
statutory provisions relative thereto, and a bill, though not negotiable, may be
transferred by assignment; the assignee taking subject to the equities
between the original parties. (Emphasis added)
12

DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped
"non-transferable" or "non-assignable." It contained no stipulation which prohibited
Philfinance from assigning or transferring, in whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and
which should be quoted in full:

April
10,
1980

Philippine Underwriters Finance Corp.

Benavidez St., Makati,
Metro Manila.

Attention: Mr. Alfredo O. Banaria

SVP-Treasurer

GENTLEMEN:

This refers to our outstanding placement of P4,601,666.67 as evidenced by

your Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6,
1981.

As agreed upon, we enclose our non-negotiable Promissory Note No. 2730

and 2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic]
against your PN No. 143-A upon co-terminal maturity.

Please deliver the proceeds of our PNs to our representative, Mr. Eric
Castillo.

Very
Truly
Yours,

(Sgd.)
Floren
cio B.
Biagan
Senior
Vice
Presid
ent13

We find nothing in his "Letter of Agreement" which can be reasonably construed as a

prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731,
before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of
Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a prohibition
cannot be invoked against an assignee or transferee of the Note who parted with valuable
consideration in good faith and without notice of such prohibition. It is not disputed that
petitioner was such an assignee or transferee. Our conclusion on this point is reinforced by
the fact that what Philfinance and Delta were doing by their exchange of their promissory
notes was this: Delta invested, by making a money market placement with Philfinance,
approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed
back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes:
DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance
was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta
promissory notes.

Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731
had been effected without the consent of Delta, we note that such consent was not
necessary for the validity and enforceability of the assignment in favor of petitioner. Delta's
14

argument that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731
constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken.
Conventional subrogation, which in the first place is never lightly inferred, must be clearly
15

established by the unequivocal terms of the substituting obligation or by the evident

incompatibility of the new and old obligations on every point. Nothing of the sort is present
16

in the instant case.

It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No.
2731 to Philfinance, an entity engaged in the business of buying and selling debt
instruments and other securities, and more generally, in money market transactions.
In Perez v. Court of Appeals, the Court, speaking through Mme. Justice Herrera, made the
17

following important statement:

There is another aspect to this case. What is involved here is a money market
transaction. As defined by Lawrence Smith "the money market is a market
dealing in standardized short-term credit instruments (involving large
amounts) where lenders and borrowers do not deal directly with each other
but through a middle manor a dealer in the open market." It involves
"commercial papers" which are instruments "evidencing indebtness of any
person or entity. . ., which are issued, endorsed, sold or transferred or in any
manner conveyed to another person or entity, with or without recourse". The
fundamental function of the money market device in its operation is to match
and bring together in a most impersonal manner both the "fund users" and
the "fund suppliers." The money market is an "impersonal market", free from
personal considerations. "The market mechanism is intended to provide quick
mobility of money and securities."

The impersonal character of the money market device overlooks the

individuals or entities concerned. The issuer of a commercial paper in the
money market necessarily knows in advance that it would be expenditiously
transacted and transferred to any investor/lender without need of notice to
said issuer. In practice, no notification is given to the borrower or issuer of
commercial paper of the sale or transfer to the investor.

xxx xxx xxx

There is need to individuate a money market transaction, a relatively novel

institution in the Philippine commercial scene. It has been intended to
facilitate the flow and acquisition of capital on an impersonal basis. And as
specifically required by Presidential Decree No. 678, the investing public
must be given adequate and effective protection in availing of the credit of a
borrower in the commercial paper market. (Citations omitted; emphasis
18

supplied)

We turn to Delta's arguments concerning alleged compensation or offsetting between DMC

PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time
Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981,
no compensation had as yet taken place and indeed none could have taken place. The
essential requirements of compensation are listed in the Civil Code as follows:
 Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;

(2) That both debts consists in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;

(3) That the two debts are due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy,

commenced by third persons and communicated in due time to the debtor.
(Emphasis supplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due.
This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with
Philfinance, where Delta acknowledged that the relevant promissory notes were "to be
offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."

As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49)
days before the "co-terminal maturity" date, that is to say, before any compensation had
taken place. Further, the assignment to petitioner would have prevented compensation had
taken place between Philfinance and Delta, to the extent of P304,533.33, because upon
execution of the assignment in favor of petitioner, Philfinance and Delta would have ceased
to be creditors and debtors of each other in their own right to the extent of the amount
assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by
Philfinance in favor of petitioner was a valid one and that petitioner accordingly became
owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.

The record shows, however, that petitioner notified Delta of the fact of the assignment to
him only on 14 July 1981, that is, after the maturity not only of the money market
19

placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No.
143-A. In other words, petitioner notified Delta of his rights as assignee after compensation
had taken place by operation of law because the offsetting instruments had both reached
maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater that
the rights of the assignor, since the assignee is merely substituted in the place of the
assignor and that the assignee acquires his rights subject to the equities — i.e., the
20

defenses — which the debtor could have set up against the original assignor before notice
of the assignment was given to the debtor. Article 1285 of the Civil Code provides that:

Art. 1285. The debtor who has consented to the assignment of rights made by
a creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to
the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up
the compensation of all credits prior to the same and also later ones until he
had knowledge of the assignment. (Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having knowledge of the
assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-
Tico, the Court explained that:
21

[n]o man is bound to remain a debtor; he may pay to him with whom he
contacted to pay; and if he pay before notice that his debt has been assigned,
the law holds him exonerated, for the reason that it is the duty of the person
who has acquired a title by transfer to demand payment of the debt, to give
his debt or notice.22

At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July
1981, DMC PN No. 2731 had already been discharged by compensation. Since the
assignor Philfinance could not have then compelled payment anew by Delta of DMC PN No.
2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting from Delta
the portion of the Note assigned to him.

It bears some emphasis that petitioner could have notified Delta of the assignment or sale
was effected on 9 February 1981. He could have notified Delta as soon as his money
market placement matured on 13 March 1981 without payment thereof being made by
Philfinance; at that time, compensation had yet to set in and discharge DMC PN No. 2731.
Again petitioner could have notified Delta on 26 March 1981 when petitioner received from
Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805 issued by private
respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at any
time before the maturity date of DMC PN No. 2731. Because petitioner failed to do so, and
because the record is bare of any indication that Philfinance had itself notified Delta of the
assignment to petitioner, the Court is compelled to uphold the defense of compensation
raised by private respondent Delta. Of course, Philfinance remains liable to petitioner under
the terms of the assignment made by Philfinance to petitioner.

II.

We turn now to the relationship between petitioner and private respondent Pilipinas.
Petitioner contends that Pilipinas became solidarily liable with Philfinance and Delta when
Pilipinas issued DCR No. 10805 with the following words:

Upon your written instruction, we [Pilipinas] shall undertake physical delivery

of the above securities fully assigned to you —. 23

The Court is not persuaded. We find nothing in the DCR that establishes an obligation on
the part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of
liability in solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR
as a confirmation on the part of Pilipinas that:

(1) it has in its custody, as duly constituted custodian bank, DMC PN No.
2731 of a certain face value, to mature on 6 April 1981 and payable to the
order of Philfinance;

(2) Pilipinas was, from and after said date of the assignment by Philfinance to
petitioner (9 February 1981), holding that Note on behalf and for the benefit
of petitioner, at least to the extent it had been assigned to petitioner by payee
Philfinance;24

(3) petitioner may inspect the Note either "personally or by authorized

representative", at any time during regular bank hours; and

(4) upon written instructions of petitioner, Pilipinas would physically deliver

the DMC PN No. 2731 (or a participation therein to the extent of
P307,933.33) "should this Denominated Custodianship receipt remain
outstanding in [petitioner's] favor thirty (30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as
converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to
petitioner, either upon maturity thereof or any other time. We note that both in his complaint
and in his testimony before the trial court, petitioner referred merely to the obligation of
private respondent Pilipinas to effect the physical delivery to him of DMC PN No.
2731. Accordingly, petitioner's theory that Pilipinas had assumed a solidary obligation to
25

pay the amount represented by a portion of the Note assigned to him by Philfinance,
appears to be a new theory constructed only after the trial court had ruled against him. The
solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred.
Under article 1207 of the Civil Code, "there is a solidary liability only when the law or the
nature of the obligation requires solidarity," The record here exhibits no express assumption
of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed to
us to any law which imposed such liability upon Pilipinas nor has petitioner argued that the
very nature of the custodianship assumed by private respondent Pilipinas necessarily
implies solidary liability under the securities, custody of which was taken by Pilipinas.
Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and private
respondent Delta under DMC PN No. 2731.

We do not, however, mean to suggest that Pilipinas has no responsibility and liability in
respect of petitioner under the terms of the DCR. To the contrary, we find, after prolonged
analysis and deliberation, that private respondent Pilipinas had breached its undertaking
under the DCR to petitioner Sesbreño.

We believe and so hold that a contract of deposit was constituted by the act of Philfinance
in designating Pilipinas as custodian or depositary bank. The depositor was initially
Philfinance; the obligation of the depository was owed, however, to petitioner Sesbreño as
beneficiary of the custodianship or depository agreement. We do not consider that this is a
simple case of a stipulation pour autri. The custodianship or depositary agreement was
established as an integral part of the money market transaction entered into by petitioner
with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-
vendor deposited that Note with Pilipinas in order that the thing sold would be placed
outside the control of the vendor. Indeed, the constituting of the depositary or custodianship
agreement was equivalent to constructive delivery of the Note (to the extent it had been
sold or assigned to petitioner) to petitioner. It will be seen that custodianship agreements
are designed to facilitate transactions in the money market by providing a basis for
confidence on the part of the investors or placers that the instruments bought by them are
effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their
reach, that those instruments will be there available to the placers of funds should they have
need of them. The depositary in a contract of deposit is obliged to return the security or the
thing deposited upon demand of the depositor (or, in the presented case, of the beneficiary)
of the contract, even though a term for such return may have been established in the said
contract. Accordingly, any stipulation in the contract of deposit or custodianship that runs
26

counter to the fundamental purpose of that agreement or which was not brought to the
notice of and accepted by the placer-beneficiary, cannot be enforced as against such
beneficiary-placer.

We believe that the position taken above is supported by considerations of public policy. If
there is any party that needs the equalizing protection of the law in money market
transactions, it is the members of the general public whom place their savings in such
market for the purpose of generating interest revenues. The custodian bank, if it is not
27

related either in terms of equity ownership or management control to the borrower of the
funds, or the commercial paper dealer, is normally a preferred or traditional banker of such
borrower or dealer (here, Philfinance). The custodian bank would have every incentive to
protect the interest of its client the borrower or dealer as against the placer of funds. The
providers of such funds must be safeguarded from the impact of stipulations privately made
between the borrowers or dealers and the custodian banks, and disclosed to fund-providers
only after trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security
deposited with it when petitioner first demanded physical delivery thereof on 2 April 1981.
We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet
matured and therefore, compensation or offsetting against Philfinance PN No. 143-A
had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas
purported to require and await the instructions of Philfinance, in obvious contravention of its
undertaking under the DCR to effect physical delivery of the Note upon receipt of "written
instructions" from petitioner Sesbreño. The ostensible term written into the DCR (i.e.,
"should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was
not a defense against petitioner's demand for physical surrender of the Note on at least
three grounds: firstly, such term was never brought to the attention of petitioner Sesbreño at
the time the money market placement with Philfinance was made; secondly, such term runs
counter to the very purpose of the custodianship or depositary agreement as an integral
part of a money market transaction; and thirdly, it is inconsistent with the provisions of
Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled
to demand physical delivery of the Note held by Pilipinas as soon as petitioner's money
market placement matured on 13 March 1981 without payment from Philfinance.

We conclude, therefore, that private respondent Pilipinas must respond to petitioner for
damages sustained by arising out of its breach of duty. By failing to deliver the Note to the
petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully
deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted
from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for
present purposes. Prima facie, the damages suffered by petitioner consisted of
P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by
reason of discharge of the Note by compensation, plus legal interest of six percent (6%)per
annum containing from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such right of
reimbursement as Pilipinas may have vis-a-vis Philfinance.

III.

The third principal contention of petitioner — that Philfinance and private respondents Delta
and Pilipinas should be treated as one corporate entity — need not detain us for long.

In the first place, as already noted, jurisdiction over the person of Philfinance was never
acquired either by the trial court nor by the respondent Court of Appeals. Petitioner similarly
did not seek to implead Philfinance in the Petition before us.

Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas
have been organized as separate corporate entities. Petitioner asks us to pierce their
separate corporate entities, but has been able only to cite the presence of a common
Director — Mr. Ricardo Silverio, Sr., sitting on the Board of Directors of all three (3)
companies. Petitioner has neither alleged nor proved that one or another of the three (3)
concededly related companies used the other two (2) as mere alter egos or that the
corporate affairs of the other two (2) were administered and managed for the benefit of one.
There is simply not enough evidence of record to justify disregarding the separate corporate
personalities of delta and Pilipinas and to hold them liable for any assumed or undetermined
liability of Philfinance to petitioner.
28

WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in
C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby
MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed
petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank is hereby
ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal
interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so
modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

Bidin, Davide, Jr., Romero and Melo, JJ., concur.

SESBRENO V. CA
222 SCRA 466
FACTS:
Petitioner made a placement with Philfinance. The latter delivered to him
documents, some of which was a promissory note from Delta Motors and
a post-dated check. The post-dated checks were dishonored. This
prompted petitioner to ask for the promissory note from DMC and it was
discovered that the note issued by DMC was marked as non-negotiable.
As Sesbreno failed to recover his money, he filed case against DMC and
Philfinance.

HELD:
The non-negotiability of the instrument doesn’t mean that it is non-
assignable or transferable. It may still be assigned or transferred in
whole or in part, even without the consent of the promissory note, since
consent is not necessary for the validity of the assignment.

In assignment, the assignee is merely placed in the position of the

assignors and acquires the instrument subject to all the defenses
that
might have been set up against the original payee.

Republic of the Philippines

SUPREME COURT
Manila
 SECOND DIVISION

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T.

VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.

Carpio, Villaraza & Cruz Law Offices for petitioners.

Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which assails on
questions of law a decision of the Intermediate Appellate Court in AC-G.R. CV No. 68609
dated July 17, 1985, as well as its resolution dated October 17, 1985, denying the motion
for reconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for its program of
logging activities for the year 1978 the opening of additional roads, and simultaneous
logging operations along the route of said roads, in its logging concession area at Baganga,
Manay, and Caraga, Davao Oriental. For this purpose, it needed two (2) additional units of
tractors.

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific Company of
Manila, through its sister company and marketing arm, Industrial Products Marketing (the
"seller-assignor"), a corporation dealing in tractors and other heavy equipment business,
offered to sell to petitioner-corporation two (2) "Used" Allis Crawler Tractors, one (1) an
HDD-21-B and the other an HDD-16-B.

In order to ascertain the extent of work to which the tractors were to be exposed, (t.s.n.,
May 28, 1980, p. 44) and to determine the capability of the "Used" tractors being offered,
petitioner-corporation requested the seller-assignor to inspect the job site. After conducting
said inspection, the seller-assignor assured petitioner-corporation that the "Used" Allis
Crawler Tractors which were being offered were fit for the job, and gave the corresponding
warranty of ninety (90) days performance of the machines and availability of parts. (t.s.n.,
May 28, 1980, pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor's skill and judgment,
petitioner-corporation through petitioners Wee and Vergara, president and vice- president,
respectively, agreed to purchase on installment said two (2) units of "Used" Allis Crawler
Tractors. It also paid the down payment of Two Hundred Ten Thousand Pesos
(P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors
(Exh. "3-A"). At the same time, the deed of sale with chattel mortgage with promissory note
was executed (Exh. "2").

Simultaneously with the execution of the deed of sale with chattel mortgage with promissory
note, the seller-assignor, by means of a deed of assignment (E exh. " 1 "), assigned its
rights and interest in the chattel mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to
the petitioner-corporation's job site and as agreed, the seller-assignor stationed its own
mechanics to supervise the operations of the machines.

Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke
down and after another nine (9) days, the other tractor likewise broke down (t.s.n., May 28,
1980, pp. 68-69).

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the
fact that the tractors broke down and requested for the seller-assignor's usual prompt
attention under the warranty (E exh. " 5 ").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the seller-
assignor sent to the job site its mechanics to conduct the necessary repairs (Exhs. "6," "6-
A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did not come out to be what
they should be after the repairs were undertaken because the units were no longer
serviceable (t. s. n., May 28, 1980, p. 78).

Because of the breaking down of the tractors, the road building and simultaneous logging
operations of petitioner-corporation were delayed and petitioner Vergara advised the seller-
assignor that the payments of the installments as listed in the promissory note would
likewise be delayed until the seller-assignor completely fulfills its obligation under its
warranty (t.s.n, May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the
seller-assignor to pull out the units and have them reconditioned, and thereafter to offer
them for sale. The proceeds were to be given to the respondent and the excess, if any, to
be divided between the seller-assignor and petitioner-corporation which offered to bear one-
half (1/2) of the reconditioning cost (E exh. " 7 ").

No response to this letter, Exhibit "7," was received by the petitioner-corporation and
despite several follow-up calls, the seller-assignor did nothing with regard to the request,
until the complaint in this case was filed by the respondent against the petitioners, the
corporation, Wee, and Vergara.

The complaint was filed by the respondent against the petitioners for the recovery of the
principal sum of One Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos &
71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One Thousand Six Hundred
Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing interest thereafter
at the rate of twelve (12%) percent per annum, attorney's fees of Two Hundred Forty Nine
Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs of suit.

The petitioners filed their amended answer praying for the dismissal of the complaint and
asking the trial court to order the respondent to pay the petitioners damages in an amount
at the sound discretion of the court, Twenty Thousand Pesos (P20,000.00) as and for
attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of litigation. The
petitioners likewise prayed for such other and further relief as would be just under the
premises.

In a decision dated April 20, 1981, the trial court rendered the following judgment:

WHEREFORE, judgment is hereby rendered:

1. ordering defendants to pay jointly and severally in their official and personal
capacities the principal sum of ONE MILLION NINETY THREE THOUSAND
SEVEN HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with
accrued interest of ONE HUNDRED FIFTY ONE THOUSAND SIX
HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86) as of August 15,
1979 and accruing interest thereafter at the rate of 12% per annum;
 2. ordering defendants to pay jointly and severally attorney's fees equivalent
to ten percent (10%) of the principal and to pay the costs of the suit.

Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for reconsideration filed
by the petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and assigned therein the
following errors:

THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF
AND PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS
CLAIM OF WARRANTY.

II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A

HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID
NOTE AS HOLDER THEREOF IN DUE COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged decision
affirming in toto the decision of the trial court. The pertinent portions of the decision are as
follows:

xxx xxx xxx

From the evidence presented by the parties on the issue of warranty, We are
of the considered opinion that aside from the fact that no provision of
warranty appears or is provided in the Deed of Sale of the tractors and even
admitting that in a contract of sale unless a contrary intention appears, there
is an implied warranty, the defense of breach of warranty, if there is any, as in
this case, does not lie in favor of the appellants and against the plaintiff-
appellee who is the assignee of the promissory note and a holder of the same
in due course. Warranty lies in this case only between Industrial Products
Marketing and Consolidated Plywood Industries, Inc. The plaintiff-appellant
herein upon application by appellant corporation granted financing for the
purchase of the questioned units of Fiat-Allis Crawler,Tractors.

xxx xxx xxx

Holding that breach of warranty if any, is not a defense available to appellants

either to withdraw from the contract and/or demand a proportionate reduction
of the price with damages in either case (Art. 1567, New Civil Code). We now
come to the issue as to whether the plaintiff-appellee is a holder in due
course of the promissory note.

To begin with, it is beyond arguments that the plaintiff-appellee is a financing

corporation engaged in financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or agricultural enterprises
by discounting or factoring commercial papers or accounts receivable duly
authorized pursuant to R.A. 5980 otherwise known as the Financing Act.

A study of the questioned promissory note reveals that it is a negotiable

instrument which was discounted or sold to the IFC Leasing and Acceptance
Corporation for P800,000.00 (Exh. "A") considering the following. it is in
 writing and signed by the maker; it contains an unconditional promise to pay a
certain sum of money payable at a fixed or determinable future time; it is
payable to order (Sec. 1, NIL); the promissory note was negotiated when it
was transferred and delivered by IPM to the appellee and duly endorsed to
the latter (Sec. 30, NIL); it was taken in the conditions that the note was
complete and regular upon its face before the same was overdue and without
notice, that it had been previously dishonored and that the note is in good
faith and for value without notice of any infirmity or defect in the title of IPM
(Sec. 52, NIL); that IFC Leasing and Acceptance Corporation held the
instrument free from any defect of title of prior parties and free from defenses
available to prior parties among themselves and may enforce payment of the
instrument for the full amount thereof against all parties liable thereon (Sec.
57, NIL); the appellants engaged that they would pay the note according to its
tenor, and admit the existence of the payee IPM and its capacity to endorse
(Sec. 60, NIL).

In view of the essential elements found in the questioned promissory note,

We opine that the same is legally and conclusively enforceable against the
defendants-appellants.

WHEREFORE, finding the decision appealed from according to law and

evidence, We find the appeal without merit and thus affirm the decision in
toto. With costs against the appellants. (pp. 50-55, Rollo)

The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied by
the Intermediate Appellate Court in its resolution dated October 17, 1985, a copy of which
was received by the petitioners on October 21, 1985.

Hence, this petition was filed on the following grounds:

I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE

INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO
ORDER NOR TO BEARER.

II

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE

ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND THE

TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS
MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT
AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.

IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY
NOTE BECAUSE:

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-

ASSIGNOR OF THE PROMISSORY NOTE.
V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR IN

FAVOR OF THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE
TRANSACTION FROM BEING A SALE ON INSTALLMENTS TO A PURE LOAN.

VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY

COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN
AFFIXED THEREON OR CANCELLED.

The petitioners prayed that judgment be rendered setting aside the decision dated July 17,
1985, as well as the resolution dated October 17, 1985 and dismissing the complaint but
granting petitioners' counterclaims before the court of origin.

On the other hand, the respondent corporation in its comment to the petition filed on
February 20, 1986, contended that the petition was filed out of time; that the promissory
note is a negotiable instrument and respondent a holder in due course; that respondent is
not liable for any breach of warranty; and finally, that the promissory note is admissible in
evidence.

The core issue herein is whether or not the promissory note in question is a negotiable
instrument so as to bar completely all the available defenses of the petitioner against the
respondent-assignee.

Preliminarily, it must be established at the outset that we consider the instant petition to
have been filed on time because the petitioners' motion for reconsideration actually raised
new issues. It cannot, therefore, be considered pro- formal.

The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-day warranty
because the findings of the trial court, adopted by the respondent appellate court, that "14
days after delivery, the first tractor broke down and 9 days, thereafter, the second tractor
became inoperable" are sustained by the records. The petitioner was clearly a victim of a
warranty not honored by the maker.

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.

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;
 xxx xxx xxx

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.

xxx xxx xxx

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).

It is patent then, that the seller-assignor is liable for its breach of warranty against the
petitioner. This liability as a general rule, extends to the corporation to whom it assigned its
rights and interests unless the assignee is a holder in due course of the promissory note in
question, assuming the note is negotiable, in which case the latter's rights are based on the
negotiable instrument and assuming further that the petitioner's defenses may not prevail
against it.

Secondly, it likewise cannot be denied that as soon as the tractors broke down, the
petitioner-corporation notified the seller-assignor's sister company, AG & P, about the
breakdown based on the seller-assignor's express 90-day warranty, with which the latter
complied by sending its mechanics. However, due to the seller-assignor's delay and its
failure to comply with its warranty, the tractors became totally unserviceable and useless for
the purpose for which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the
seller-assignor.

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.

xxx xxx xxx

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)

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

In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we held:

In other words, 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. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the action
 taken was or was not correct in law. But the law definitely does not require
that the contracting party who believes itself injured must first file suit and
wait for adjudgement before taking extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's breach will have to passively sit
and watch its damages accumulate during the pendency of the suit until the
final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code,
Article 2203). (Emphasis supplied)

Going back to the core issue, we rule that the promissory note in question is not a
negotiable instrument.

The pertinent portion of the note is 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 (P 1,093,789.71), 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. ...

Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer, " it cannot be denied that the
promissory note in question is not a negotiable instrument.

The instrument in order to be considered negotiablility-i.e. must contain the

so-called 'words of negotiable, must be payable to 'order' or 'bearer'. These
words serve as an expression of consent that the instrument may be
transferred. This consent is indispensable since a maker assumes greater
risk under a negotiable instrument than under a non-negotiable one. ...

xxx xxx xxx

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. . . .

xxx xxx xxx

These are the only two ways by which an instrument may be made payable to
order. There must always be a specified person named in the instrument. It
means that the bill or note is to be paid to the person designated in the
instrument or to any person to whom he has indorsed and delivered the
same. 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." (Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law, Third Edition, page 38).
(Emphasis supplied)

Therefore, 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.
This being so, there was no need for the petitioner to implied the seller-assignor when it
was sued by the respondent-assignee because the petitioner's defenses apply to both or
either of either of them. Actually, the records show that even the respondent itself admitted
to being a mere assignee of the promissory note in question, to wit:

ATTY. PALACA:

Did we get it right from the counsel that what is being assigned
is the Deed of Sale with Chattel Mortgage with the promissory
note which is as testified to by the witness was indorsed?
(Counsel for Plaintiff nodding his head.) Then we have no
further questions on cross,

COURT:

You confirm his manifestation? You are nodding your head? Do

you confirm that?

ATTY. ILAGAN:

The Deed of Sale cannot be assigned. A deed of sale is a

transaction between two persons; what is assigned are rights,
the rights of the mortgagee were assigned to the IFC Leasing &
Acceptance Corporation.

COURT:

He puts it in a simple way as one-deed of sale and chattel

mortgage were assigned; . . . you want to make a distinction,
one is an assignment of mortgage right and the other one is
indorsement of the promissory note. What counsel for
defendants wants is that you stipulate that it is contained in one
single transaction?

ATTY. ILAGAN:

We stipulate it is one single transaction. (pp. 27-29, TSN.,

February 13, 1980).

Secondly, even conceding for purposes of discussion that the promissory note in question is
a negotiable instrument, the respondent cannot be a holder in due course for a more
significant reason.

The evidence presented in the instant case shows that prior to the sale on installment of the
tractors, there was an arrangement between the seller-assignor, Industrial Products
Marketing, and the respondent 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
which acquired the right to collect the price from the buyer, herein petitioner Consolidated
Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed
of Assignment and the Disclosure of Loan/Credit Transaction shows that said documents
evidencing the sale on installment of the tractors were all executed on the same day by and
among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the
seller-assignor which is the Industrial Products Marketing; and the assignee-financing
company, which is the respondent. Therefore, the respondent had actual knowledge of the
fact that the seller-assignor's right to collect the purchase price was not unconditional, and
that it was subject to the condition that the tractors -sold were not defective. The respondent
knew that when the tractors turned out to be defective, it would be subject to the defense of
failure of consideration and cannot recover the purchase price from the petitioners. Even
assuming for the sake of argument that the promissory note is negotiable, the respondent,
which took the same with actual knowledge of the foregoing facts so that its action in taking
the instrument amounted to bad faith, is not a holder in due course. As such, the respondent
is subject to all defenses which the petitioners may raise against the seller-assignor. Any
other interpretation would be most inequitous to the unfortunate buyer who is not only
saddled with two useless tractors but must also face a lawsuit from the assignee for the
entire purchase price and all its incidents without being able to raise valid defenses
available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no knowledge of
any fact, which would justify its act of taking the promissory note as not amounting to bad
faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.

xxx xxx xxx

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:

xxx xxx xxx

xxx xxx xxx

(c) That he took it in good faith and for value

(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

xxx xxx xxx

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 subscribe to the view of Campos and Campos that a financing company is not a holder
in good faith as to the buyer, to wit:

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. With the increasing frequency of installment buying in this
country, it is most probable that the tendency of the courts in the United
States to protect the buyer against the finance company will , the finance
company will be subject to the defense of failure of consideration and cannot
recover the purchase price from the buyer. As against the argument that such
a rule would seriously affect "a certain mode of transacting business adopted
throughout the State," a court in one case stated:

It may be that our holding here will require some changes in

business methods and will impose a greater burden on the
finance companies. We think the buyer-Mr. & Mrs. General
Public-should have some protection somewhere along the line.
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. . . .

If this opinion imposes great burdens on finance companies it is

a potent argument in favor of a rule which win afford public
protection to the general buying public against unscrupulous
dealers in personal property. . . . (Mutual Finance Co. v. Martin,
63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and Campos,
Notes and Selected Cases on Negotiable Instruments Law,
Third Edition, p. 128).

In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal.
2d 766) involving similar facts, it was held that in a very real sense, the finance company
was a moving force in the transaction from its very inception and acted as a party to it.
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.

In like manner, therefore, even assuming that the subject promissory note is negotiable, the
respondent, a financing company which actively participated in the sale on installment of the
subject two Allis Crawler tractors, cannot be regarded as a holder in due course of said
note. It follows that the respondent's rights under the promissory note involved in this case
are subject to all defenses that the petitioners have against the seller-assignor, Industrial
Products Marketing. For Section 58 of the Negotiable Instruments Law 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 non-negotiable. ... "

Prescinding from the foregoing and setting aside other peripheral issues, we find that both
the trial and respondent appellate court erred in holding the promissory note in question to
be negotiable. Such a ruling does not only violate the law and applicable jurisprudence, but
would result in unjust enrichment on the part of both the assigner- assignor and respondent
assignee at the expense of the petitioner-corporation which rightfully rescinded an
inequitable contract. We note, however, that since the seller-assignor has not been
impleaded herein, there is no obstacle for the respondent to file a civil Suit and litigate its
claims against the seller- assignor in the rather unlikely possibility that it so desires,

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.

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

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:

 IPM

 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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(c) That he took it in good faith and for value

(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. . .