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CONSOLIDATED PLYWOOD CASE.
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Consolidated unilaterally rescinded the contract w/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.
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
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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).
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.
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)
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,
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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:
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
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. . .
CHAN WAN v. TAN KIM
109 Phil 706 Commercial Law Negotiable Instruments
Law Negotiation after Dishonor Holder in Due Course
Tan Kim and her husband (Chen So) issued 11 checks
payable to cash or bearer to be drawn against their

account with the Equitable Banking Corporation.
The checks were negotiated to the White House Shoe
Supply (company). White House then deposited the
checks to their China Bank account.
China Bank then presented the checks to Equitable Bank
but the checks were returned because Equitable Bank
then had no funds to cover the checks. China Bank then
stamped the checks with Account Closed and Non
negotiable China Bank Corporation.
But somehow, Chan Wan got hold of these checks (Chan
Wan was not able to explain in court how he got hold of
the checks). Chan Wan now wants to encash the checks
but Equitable Bank refused accept the said checks.
ISSUE: Whether or not Chan Wan is a holder in due
course.
HELD: No. As a general rule, a dishonored
check/instrument may still be negotiated either by
indorsement or delivery and the holder may be a holder
in due course provided that he received no notice
regarding the dishonor of the instrument. In this case, the
checks were already crossed on their face hence Chan
Wan was properly notified of the dishonor of the checks
at the time of his acquisition.
But may Chan Wan still recover?
Yes. The Negotiable Instruments Law does not provide
that a holder who is not a holder in due course, may not
in any case, recover on the instrument. The holder may
recover directly from the drawee, in this case Tan Kim
and Chen So, unless the drawees have a valid excuse in
refusing payment.
The only disadvantage of a holder who is not a holder in
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due course is that the negotiable instrument is subject to
defense as if it were non- negotiable. The case was
remanded to the lower court for a proper determination
as to how Chan Wan acquired the checks and to
determine if he is indeed entitled to payment based on
some other transactions involving those checks.
If maker has no defense.
VICENTE TAN DE OCAMPO V. GACHALIAN
3 SCRA 596 Mercantile Law Negotiable Instruments
Law Rights of the Holder What Constitutes a Holder in
Due Course Is a payee a holder in due course?
Matilde Gonzales was a patient of the De Ocampo Clinic
owned by Vicente De Ocampo. She incurred a debt
amounting to P441.75. Her husband, Manuel Gonzales
designed a scheme in order to pay off this debt: In 1953,
Manuel went to a certain Anita Gatchalian.
Manuel purported himself to be selling the car of Vicente
De Ocampo. Gatchalian was interested in buying said car
but Manuel told her that De Ocampo will only sell the car
if Gatchalian shows her willingness to pay for it. Manuel
advised Gatchalian to draw a check of P600.00 payable
to De Ocampo so that Manuel may show it to De Ocampo
and that Manuel in the meantime will hold it for
safekeeping. Gatchalian agreed and gave Manuel the
check. After that, Manuel never showed himself to
Gatchalian.
Meanwhile, Manuel gave the check to his wife who in turn
gave the check to De Ocampo as payment of her bills
with the clinic. De Ocampo received the check and even
gave Matilde her change (sukli). On the other hand, since
Gatchalian never saw Manuel again, she placed a stop-
payment on the P600.00 check so De Ocampo was not
able to cash on the check.

Eventually, the issue reached the courts and the trial
court ordered Gatchalian to pay De Ocampo the amount
of the check.
Gatchalian argued that De Ocampo is not entitled to
payment because there was no valid indorsement. De
Ocampo argued tha he is a holder in due course because
he is the named payee.
ISSUE: Whether or not De Ocampo is a holder in due
course.
HELD: No. Section 52 of the Negotiable Instruments Law,
defines holder in due course, thus:
A holder in due course is a holder who has taken the
instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was
overdue, and without notice that it had been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the
title of the person negotiating it.
The Supreme Court emphasized that if one is such a
holder in due course, it is immaterial that he was the
payee and an immediate party to the instrument. The
Supreme Court however ruled that De Ocampo is not a
holder in due course for his lack of good faith. De
Ocampo should have inquired as to the legal title of
Manuel to the said check. The fact that Gatchalian has no
obligation to De Ocampo and yet hes named as the
payee in the check hould have apprised De Ocampo; that
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the check did not correspond to Matilde Gonzales
obligation with the clinic because of the fact that it was
for P600.00 more than the indebtedness; that why was
Manuel in possession of the check all these gave De
Ocampo the duty to ascertain from the holder Manuel
Gonzales what the nature of the latters title to the check
was or the nature of his possession.
G.R. No. L-11526 January 2, 1917
B. A. GREEN, ET AL., plaintiffs-appellees,
v. M. LOPEZ, ET AL., defendants-appellants.
This is an appeal from a judgment for the face value of a
negotiable note, in favor of the plaintiffs who purchased the note,
and against the makers, with a declaration of the subsidiary
liability of the payee, from whom the note was purchased and by
whom it was indorsed to the plaintiffs.
The complaint alleged that the note was indorsed by the payee to
the plaintiffs "for value received," and this allegation was
conclusively established by the evidence adduced at the trial. We
are of opinion that this allegation was substantially equivalent to a
formal allegation that the indorsement was made for a valuable
consideration, and that the truth of this allegation having been
established by the introduction of competent evidence
establishing the fact that the indorsement was made for a
valuable consideration, the purchasers were clearly entitled to
judgment for the face value of the note.
By the decisive weight of authority in this country, where
negotiable paper has been put in circulation, and there is no
infirmity or defense between the antecedent parties thereto, a
purchaser of such security is entitled to recover thereon, as
against the maker, the whole amount, irrespective of what he may
have paid therefor.
It follows that any allegation which sets forth the existence of a

valuable consideration for the transfer by indorsement is
sufficient, notwithstanding the failure to allege expressly the
amount which was in fact paid by the indorser.
What has been said disposes of the various contentions of
appellants based upon the failure of the court below to sustain a
demurrer to the complaint because of the lack of an allegation
setting forth specifically the nature and amount of the
consideration paid by the plaintiffs to the payee of the note, by
whom it was indoresed in their favor.
The real defense relied upon in the court below by the makers of
the note was that the plaintiffs were not bona fide holders of the
note by indorsement, in that they had knowledge of the existence
of certain equitable defenses which the maker were entitled to set
us against the payee of the note, before they acquired it by
indorsement from the payee.
But there was nothing on the face of the note to put the
purchasers on notice of the existence of such equitable defenses.
It was entirely regular in form and came into their possession in
the usual course of business. Under these circumstances the
burden of proof was manifestly upon the makers of the note to
establish the fact of knowledge of these equitable defenses
before they could be permitted to rely upon such defenses as
against the purchasers.
The only evidence tending to establish such knowledge was the
testimony of Lopez, one of the maker of the note, that a person
unknown to him and representing himself to be an employee of
Green, one of the plaintiffs, came to him, and made inquiries as
to the validity and genuineness of the note, stating that his
principal desired this information because he was contemplating
its purchase; and that he then and there explained the nature of
his equitable defenses ad against the payee, and repudiated any
obligation to meet the note.
There is no evidence of record upon which to base a finding that
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these alleged disclosures were in truth and in fact made to an
employee of either of the plaintiffs other than the testimony of
Lopez to the effect that these alleged disclosures were made to a
person unknown to him, who represented himself to be an
employee of one of the plaintiffs; and the testimony of Green, one
of the plaintiffs who stated that before purchasing the note he
sent an employed to call upon the makers of the note to inquire
whether it was a good note which would be paid at maturity, and
that upon his return this employee stated that he had been
informed by the makers of the note that it was a good note duly
executed by them and that it would be paid when due.
We do not stop to consider whether this evidence is sufficient to
establish the fact that the person to whom the maker of the note
claims to have disclosed the alleged equitable defenses was in
truth and in fact the employee sent by the plaintiffs to the makers
of the note for the purpose of inquiring as to is validity, because
we are satisfied that, admitting that the person with whom Lopez
claims to have had the interview was an employee of one or both
of the purchasers, we do not think that the evidence sustains an
affirmative finding that the plaintiffs had knowledge of the alleged
equitable defenses when they purchased the note.
One of the purchasers of the note is a broker, engaged in
business in the city of Manila, and the other is an attorney,
licensed to practice in the courts of these Islands, and it would
require stronger and more convincing evidence than the
interested testimony of one of the makers of the note to satisfy
us, as against their testimony to the contrary, that these
gentlemen were so imprudent as to discount negotiable paper, in
the ordinary course of business, after having received formal
notice of the existence of equitable defenses against the payee;
and our opinion in this regard is strengthened by the undoubted
fact that they took the precaution before purchasing the note to
send an agent to make inquiries as to its validity. We are forced to
conclude with the trial judge that the testimony of the maker of the
note as to the disclosures made to the purchasers' agent must be
rejected, either on the ground that it is wholly false, or upon the

ground that he failed to make himself understood in the course of
his alleged interview with the plaintiffs' agent, with the result in
either event that knowledge of the existence of equitable
defenses was not brought home to the purchasers of the note.
Equitable defenses of this nature can in no event defeat the right
of the holders of a negotiable note by indorsement and for
valuable consideration until and unless knowledged of the
existence of such equitable defenses is brought home to them, or
until it appears that the holders had such knowledged of the
existence of defects in the instrument as to charge them with bad
faith in acquiring it under all the attendant circumstances. (Confer
numerous cases cited in notes, 7 Cyc., p. 945.)
The judgment entered in the court below should be affirmed, with
the costs of this instance against the appellants. So ordered.
FOSSUM v. HERMOSA
44 Phil 713 Commercial Law Negotiable Instruments
Law Presumption as to who is a Holder in Due Course
In 1919, the Fernandez Hermanos (FH) contracted with
the American Iron Products Company, Inc. (AIP), for the
latter to build a shaft for one of the ships managed by FH.
In consideration thereof, a time draft with the Philippine
National Bank (PNB), a negotiable instrument, was
executed by FH in the amount of $2,250.00 payable in 60
days. But later, FH dishonored the draft because AIP was
not able to comply with the specifications of the shaft
ordered by FH.
Nevertheless, Charles Fossum, the agent of AIP here in
the Philippines and the person with whom FH was
transacting with, was able to obtain the draft from the
bank without consideration (for free).
Fossum then instituted an action against FH to recover
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the amount covered by the draft.
Fossum maintains that he is a holder in due course; that
he inherited that status from the previous holder (PNB,
named payee in the draft); that as such, he is entitled to
payment.
ISSUE: Whether or not Fossum is a holder in due course.
HELD: No. In the first place, Fossum, as an agent of AIP,
is well aware that the draft is unenforceable because it
has no consideration, the shaft being substandard. AIP
did not comply with its obligation thus the draft was
dishonored and Fossum was well aware of this as part
of the original party.
Under Sec. 59 of the Negotiable Instruments Law, there is
indeed a presumption that every holder is a holder in due
course, this covers a payee or an indorsee (for bearer
instruments, the bearer). This presumption does not
apply to Fossum because he was not a payee nor an
indorsee.
Hes not an indorsee because the bank merely delivered
the draft to him and the delivery was even without
consideration.
But if the presumption previously applied to PNB, wasnt
that acquired by Fossum?
No. The presumption only covers the present holder, and
not the previous holder. When a holder delivers/indorses
the instrument, he loses that presumption.
It will then become incumbent upon the person who
received the instrument to prove that the previous holder
is a holder in due course especially in this case when the
current holder, Fossum, cannot be granted the
presumption in Sec. 59, which is merely prima facie by

the way, because of the fact that he was an original party
fully notified of the failure of the consideration.
At any rate, PNB itself is not a holder in due course due to
the timely dishonor of the draft by FH.
Further even assuming PNB is a holder in due course,
there is a well-known rule of law that if the original payee
of a note unenforceable for lack of consideration
repurchases (in this case, the draft was not even
repurchased, it was merely delivered back) the
instrument after transferring it to a holder in due course,
the paper again becomes subject in the payees hands to
the same defenses to which it would have been subject if
the paper had never passed through the hands of a
holder in due course. The same is true where the
instrument is re-transferred to an agent of the payee.
Travel-On, Inc. vs Court of Appeals
G.R. No. L-56169 June 26, 1992
-accommodation party
FACTS:
Petitioner Travel-On Inc. is a travel agency from which Arturo
Miranda procured tickets on behalf of airline passengers and
derived commissions therefrom. Miranda was sued by petitioner
to collect on the six postdated checks he issued which were all
dishonored by the drawee banks. Miranda, however, claimed that
he had already fully paid and even overpaid his obligations and
that refunds were in fact due to him. He argued that he had
issued the postdated checks not for the purpose of encashment
to pay his indebtedness but for purposes of accommodation, as
he had in the past accorded similar favors to petitioner. Petitioner
however urges that the postdated checks are per se evidence of
liability on the part of private respondent and further argues that
even assuming that the checks were for accommodation, private
respondent is still liable thereunder considering that petitioner is a
holder for value.
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ISSUE:
Whether Miranda is liable on the postdated checks he issued
even assuming that said checks were issued for accommodation
only.
RULING:
There was no accommodation transaction in the case at bar. In
accommodation transactions recognized by the Negotiable
Instruments Law, an accommodating party lends his credit to the
accommodated party, by issuing or indorsing a check which is
held by a payee or indorsee as a holder in due course, who gave
full value therefor to the accommodated party. The latter, in other
words, receives or realizes full value which the accommodated
party then must repay to the accommodating party. But the
accommodating party is bound on the check to the holder in due
course who is necessarily a third party and is not the
accommodated party. In the case at bar, Travel-On was payee of
all six (6) checks, it presented these checks for payment at the
drawee bank but the checks bounced. Travel-On obviously was
not an accommodated party; it realized no value on the checks
which bounced. Miranda must be held liable on the checks
involved as petitioner is entitled to the benefit of the statutory
presumption that it was a holder in due course and that the
checks were supported by valuable consideration.
**In accommodation transactions recognized by the Negotiable
Instruments Law, an accommodating party lends his credit to the
accommodatedparty,byissuingorindorsingacheckwhichisheldbya
payee or indorsee as a holder in due course, who gave full value
therefortotheaccommodatedparty.Inthecaseatbar,TravelOnwas
thepayeeofallsix(6)checks,itpresentedthesechecksforpaymentat
thedraweebankbutthechecksbounced.TravelOnobviouslywasnot
an accommodated party; it realized no value on the checks which
bounced.
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