It has been stated repeatedly, as a general proposition, under the negotiable instruments law and the

common law that the transferee of an installment note is not a holder in due course as to any part of
the note when the transfer has been made after the maturity of one or more but less than all of the
installments.
- These cases stress the point that the installment was unpaid as well as being overdue on its
face, a factor of significance. More is required.
- There would be little free commerce in installment instruments if before accepting the same the
transferee was required to ascertain whether or not the past due installments had been paid.
- he may assume that the regular course of business has been followed and that each installment
was paid when due.
- It is not significant, like it is where the whole principal is overdue, that the note is still in the
hands of the payee or holder.

Where the whole principal is overdue, that should warn the transferee that the note probably has been
dishonored and there may be some reason for it which would constitute a defense.
- The possession by the payee or holder of an installment note before all of the installments are
due does not signify dishonor.
- The holder would necessarily retain it for collection of the balance of the installments.
- If, however, the installments due on the face of the instrument have not been paid and the
transferee has notice of that fact, he is put on inquiry that there may be some defenses against
it and he cannot be a holder in due course.
o the rule is that a transferee of an installment note is a holder in due course as to the
installments to mature in the future when the transfer is made after one or more but
not all of the installments are due on its face unless the past due installments have not
in fact been paid and he has notice of that fact.

The decision in this case must turn on whether the installment due on January 2, 1928, had been paid,
and if not, whether plaintiffs had notice thereof.

WON there was non payment of the past installments - YES

In regard to payment of the first installment,

plaintiffs alleged
- no part of the principal had been paid on any of appellants' notes, an allegation in substance
that the first installment had not been paid.

The court found that all of plaintiffs' allegations were true, thus finding that the first installment had not
been paid.
- It also found (and it would seem to be conflicting) that pursuant to the marketing contracts
appellants delivered produce to the corporation in 1927, and the corporation on August 31,
1928 (after the transfer of the notes) entered credits on its books for the first installment;
- that plaintiffs were not holders in due course because the notes were transferred after the first
installment was due but that "plaintiffs were purchasers and holders of said notes in good faith
and for value and without notice of any equity or defense in favor of defendants or any of them;
and in this connection the court finds that in each instance said California Cooperative Producers
had in its possession and under its control pursuant to and under the said Financing and
 Manufacturing and Marketing Agreement on said 2nd day of February, 1928, money, property
or credits belonging to each of said defendants, being the products or the proceeds of the
products of such defendants, delivered pursuant to said Financing and Manufacturing and
Marketing Agreement sufficient in value or amount to pay, satisfy and discharge the amount of
said First Installment payments of each of said respective promissory notes in full."

- The court further found that the notes were not to be paid by credits for fruit delivered by the
growers (appellants) stating:

o "It is not true that it was represented by said Producers to said defendants [appellants],
or any of them, that no payment would be required to be made by the signers of said
notes; or that as each yearly installment became on the face of the note due or payable
to said California Cooperative Producers, said California Cooperative Producers would
debit the balance of the amount of the yearly installment then due to said signer of said
note or charge the same against said signer's credit balance, if any, or that thereafter
said Producers would assign said sums or any sum, to corporate reserves, or any
reserves, except as is stated in said Financing and Manufacturing and Marketing
Agreement."
o The court gave judgment for plaintiffs which included the first installment in the
instance of appellant Winchester, but not as to the other two appellants. The conclusion
as to the latter appellants was based, however, on the finding that the statute of
limitation had run upon the first installment as to those appellants.
o It is evident from the foregoing that the court found that the crop which had been
delivered to the corporation by appellants did not constitute payment.
o Although it found the existence of the credits by the delivery of the crop it found that
the first installment had not been paid and gave judgment for it, thus indicating that it
considered that the credits did not constitute payment, a matter which may have turned
on the intention of the parties.
o Therefore, it has been determined in this case that the first of the two conditions, that
is, nonpayment of the past due installment, which makes a transferee after maturity of
one of the installments not a holder in due course, is present.

WON notice - unknown

On the subject of notice to plaintiffs of appellants' failure to pay the first installment, the findings are
unsatisfactory.

It is found that they (plaintiffs) were bona fide holders without notice of any defenses, but it is also
found that they were not holders in due course. They may not have had notice of any defenses, yet they
may have had notice of the default and thus were put upon inquiry. In the latter event they would not
be holders in due course. It is evident from the findings that the court did not consider the case in the
light of the law as heretofore stated.

The evidence with reference to the existence of notice is sketchy.

- Precisely what [30 Cal. 2d 248] was done and said when the notes were transferred is not clear.
 o The $5,000 note for which the instant collateral notes were given as security states:
"This note is secured by a pledge of the following installment notes, payable to the
order of the maker hereof."
o then follows three columns designated "Name of Maker," "Date of Note" and "Amount,"
respectively, under which each note is listed giving the full face amount of the note. I
- it might be inferred from the foregoing that the first installment had not been paid. In the state
of the evidence and the findings we believe the issue of notice should be retried. In the event it
is found that plaintiffs had notice, and were not therefore holders in due course, for the
guidance of the court we will discuss the issues pertinent to the defenses interposed by
appellants.

the corporation and its officers were the agents of appellants in the marketing of their products.
- The stock of the corporation was to be issued to associations of producers.
- The corporation was "in effect owned" by the associations of which appellants were members.
- The notes executed by appellants were part of the same transaction in which they executed the
marketing and association contracts.
- The interest on the $5,000 note delivered to plaintiffs by the corporation was paid until July 17,
1930, but none of the principal was paid although $4,000 of it became due before that date.
- On the issue of appellants' defense of failure of consideration or failure by the corporation to
perform under the marketing contract, it appears that the corporation failed to pay the
premiums on the insurance policies after July, 1930;
- that because of its insolvency, it has failed to and could not since then pay such premiums or
process, manufacture or market appellants' products. Failure of consideration is a good defense
to an action on a negotiable instrument by one not a holder in due course. (Civ. Code, § 3109.)
[4] Failure of consideration is the failure to execute a promise, the performance of which has
been exchanged for performance by the other party. Among other situations, the failure may
arise from the wilful breach of the promise. [5] And in a bilateral contract, such failure of
consideration is a defense to an action for a breach of the contract inasmuch as it is
contemplated that the performance of the unilateral promises shall be in exchange for each
other, the performance being considered as equivalent in value. It is said in Bray v. Lowery, 163
Cal. 256, 260 [124 [30 Cal. 2d 249] P. 1004]: "This case therefore comes within the rule stated in
Richter v. Union Land & Stock Co., 129 Cal. [367] 372 [62 P. 40], as follows: 'In all executory
contracts the several obligations of the parties constitute to each, reciprocally, the consideration
of the contract; and a failure to perform constitutes a failure of consideration--either partial or
total, as the case may be--within the meaning of section 1689 of the Civil Code.' (See, also,
Sterling v. Gregory, 149 Cal. [117], 121 [85 P. 305], and Cleary v. Folger, 84 Cal. 316 [18
Am.St.Rep. 187, 24 P. 280].)" (See, also, Mulborn v. Montezuma Imp. Co., 69 Cal. App. 621, 628
[232 P. 162]; Rest., Contracts, § 266 et seq.; Williston on Contracts (rev. ed.), vol. 3, §§ 813-814.)
[6] In the instant case, although there was no express promise in the marketing contract on the
part of the corporation to process and market appellants-producers' products nor a fixed time
during which the producers agreed to deliver their products to the corporation, we believe it
may fairly be implied that the promises in that connection were to run for at least ten years
inasmuch as the notes were payable in ten annual installments. It will be noted from the
heretofore quoted paragraph from said contract, that in order to assist in the marketing and
processing of the products, and in further consideration of the payment by the corporation of
the premiums on the insurance policies, the notes were given. They were given as an extension
of credit to the corporation, implying that the corporation was to continue its activities and
maintain the insurance policies in return for the continuation of the extension of credit by the
 notes which were payable, not in a lump sum, but in ten annual installments. The court found
that the notes were executed for the purposes mentioned in the marketing contracts and "at
the same time and as a part of the respective transactions." The court also found that from 1927
to 1930 pursuant to the marketing contracts appellants delivered their products to the
corporation and the corporation entered credits on its books as payments on the notes,
indicating that the continued operation of the corporation was exchanged for the payment of
the promissory notes. A further indication of the reciprocal nature of the promise in the notes
and that of the corporation appears from the following clause in the marketing contracts: "The
release of the Producer from delivering his said products or any part thereof in accordance with
said Manufacturing and Marketing Agreement, or a failure on his part so to [30 Cal. 2d 250]
deliver his said products or any part thereof, shall not release the maker from any portion of his
liability under said promissory note." [Emphasis added.] The producers were obligated on the
note even if they violated their agreement to deliver their produce. It necessarily follows that if
they did deliver their products and were able and willing to do so in the future, the corporation
was under an equal obligation to continue to receive, process and market it as long as the
installments on the notes continued to become due.

The breach of the marketing contracts consisted of the failure after 1930 to handle appellants' products
and maintain the insurance policies in force arising from the voluntary bankruptcy of the corporation in
that year rendering it incapable of further performance

Plaintiffs urge that the asserted failure of consideration did not occur until after appellants had notice of
the transfer of their notes to plaintiffs and thus the failure of consideration is not a defense.
- The general rule is that an assignee of a chose in action is subject to all equities and defenses
existing at or before the notice of the assignment.
- But where there is a failure of consideration under a bilateral contract consisting of a breach by
the assignor, such failure is a good defense to an action by the assignee whether it occurred
before or after the notice of assignment.
- It is said:
o "On the other hand, payment to the assignor or other defenses acquired by the debtor
against the assignor after notice of the assignment are invalid, unless the defense,
though acquired after notice, is based on a right of the defendant inherent in the
contract by its terms. Thus if payments under an executory contract are assigned, the
debtor may set up failure of the assignor to fulfill his part of the contract though such
failure occurs after notice of the assignment, for the assignor cannot give another a
larger right than he has himself: ..."
o In the instant case, assuming that plaintiffs were not holders in due course because of
notice of nonpayment of the installment, the availability of the defense here asserted is
not dependent upon actual notice of equities in favor of appellants.
o general rule has been repeatedly stated that an assignee of a note who is not a holder in
due course takes subject to all defenses that would be available against the assignor,
one of such defenses being failure of consideration.

Plaintiffs contend that there was no failure of consideration when the notes were pledged to them.
(That, as we have seen, is immaterial.) [9] And further, that appellants have enjoyed the fruits of the
marketing contract with the corporation and hence are estopped to raise the defense of failure of
consideration.
The failure of consideration was, as above shown, the failure and inability after insolvency of the
corporation to continue to accept, process and market appellants' products and maintain the life
insurance policies in effect.
- In this connection the court found: "That on or about the 21st day of May, 1928 [appellants]
became aware of the transfer of their respective notes ... to plaintiffs, ...; that said [corporation]
was declared a bankrupt on its voluntary [30 Cal. 2d 252] petition September 5th, 1930; that
during the whole time between said dates, [appellants] continued as members of said
corporation and said producers associations [the associations who were stockholders in the
corporation] and delivered and marketed their products through said corporation, enjoyed and
received the benefits of the insurance on their respective lives, the premiums on which
insurance were paid by the corporation; accepted and retained the benefits of the money
borrowed from plaintiffs [the $5,000 borrowed by the corporation for which appellants' notes
were pledged as security], which money was used in the processing and marketing of the
products of [appellants], as above recited, and all other benefits of their membership in and
affiliation with said [corporation] and said Growers Associations, but they never at any time
repudiated or rescinded or attempted to rescind the said transactions between themselves and
said corporation or between said corporations and plaintiffs herein.

"... That [appellants], by the execution of said ... Marketing [contract] ... by the execution of said notes,
and by delivering the same to said corporation for the purpose of extending to it their credit in the
amount of said notes, thereby enabling said corporation to borrow said $5,000 from plaintiffs; by the
receipt of the benefits of life insurance on their respective lives, and the benefits of said loan by
plaintiffs to said defendant corporation, and by all other benefits provided in said ... Marketing
[contract]; and by continuing as members of said corporation after the borrowing of said money as
aforesaid, and after they had knowledge of the borrowing of said money as aforesaid, and after having
knowledge of the transfer of their notes as security therefor, and all of the other matters and things
herein found to be true, said [appellants], ratified the acts of said corporation in borrowing said money
from plaintiffs, and transferring said notes to plaintiffs as security for its repayment; and they are by
their said acts and conduct, and by the benefits they received as herein found, estopped from setting up
any defense to this action on the ground of any alleged fraud ..., or from making any other defense
thereto, ... and that by their said acts and conduct as herein found, said defendants waived any and all
rights that they may or might have had to set up any defense to this action on the ground of any alleged
fraud practiced by their said agent, California Cooperative Producers, or its agent, or from making any
other defenses [30 Cal. 2d 253] thereto, as to the matters hereinabove found." We do not find any
estoppel or reason springing from the foregoing circumstances which prevent appellants defending on
the ground of failure of consideration. The awareness on their part of the pledge of their notes to secure
the payment of the $5,000 did not impose upon them any duty with respect to the assignees. They
could assume that inasmuch as the assignees had no greater rights then, and were subject to the same
defenses as the corporation- assignor, they would govern their acts and protect themselves accordingly.
Certainly they continued as members of the associations, which were stockholders in the corporation,
and delivered their products to the corporation. They were bound to do that under the marketing and
association contracts and were privileged to assume that the corporation would continue its
performance and that the plaintiffs-assignees would be subject to the defenses arising from the failure
of the corporation-assignor to perform. Appellants did receive the benefits of the marketing contracts
prior to insolvency but they were entitled to receive them under those contracts. Plaintiffs cite Maddock
v. Russell, 109 Cal. 417 [42 P. 139], and Rohrbacher v. Kleebauer, 119 Cal. 260 [51 P. 341], for the
proposition that appellants cannot complain because they have enjoyed the fruits of the contracts.
Those cases are not in point inasmuch as the contracts here involved are the marketing contracts and
there has been a failure of consideration therein as above stated. The corporation has been unable to
perform since 1930. Appellants did not rescind the contracts. They had no grounds for doing so in so far
as failure of consideration is concerned. There was no failure of consideration until the insolvency of the
corporation. Appellants did nothing to mislead plaintiffs. It is not found that they promised to pay the
$5,000 the corporation borrowed or to pay to plaintiffs the notes executed by them. Prior to the
insolvency they did not waive the defense of failure of consideration. It had not failed as yet and there is
nothing to indicate that they did so as to a future possibility of a breach by the corporation.

Running through the above quoted finding of the court is an undercurrent intimating that the
corporation was the alter ego of the appellants-producers and the associations to which they belonged;
that the insolvency was their act; and, that hence the $5,000 note was really their note.
- The court also found that the corporation "was in effect owned by [30 Cal. 2d 254] said
'Producers Associations' composed of the fruit growers, the latter constituting the membership
of the 'Producers Association,' and these fruit growers were also directly connected with the
California Cooperative Producers by the Financing, Manufacturing and Marketing agreement
executed by each of them." And that "said corporation and its officers were agents of
[appellants] in the marketing of their products." We see no basis for disregarding the corporate
entity. It was not a nonstock, nonprofit cooperative corporation. It was one in which persons
other than stockholders could share in the profits.
- Accepting the agency relationship the marketing contracts were still binding and the
corporation-agent was obligated to perform thereunder. The borrowing of the $5,000 by the
corporation from plaintiffs was on its own liability, not on that of the members. If that were not
so, we would be disregarding the corporate entity, and the action would have been on the
$5,000 note rather than the pledged notes. The corporation was the agent of appellants in the
sense that it was a processing and marketing agent for the producers. It is true that appellant
Galbreath became a director of the corporation after the $5,000 note was given and appellants'
notes were pledged but that still does not prevent him from asserting failure of consideration
under a contract he had with the corporation. It was still a corporate entity. There is no finding
that the voluntary bankruptcy of the corporation was not in good faith. As far as appears no
other course was open. Indeed on the subject of disregarding the corporate entity, plaintiffs
state in their brief: "Plaintiffs have not at any time contended that the Cooperative was in law
the alter ego of Appellants.

"It should also be borne in mind that this is not an action to enforce shareholders' liability, although a
number of the statements in the opening brief might lead the casual reader to so believe. As appellants
have stated, it had already been decided that the shareholders were liable on the Corporation note here
involved; but they have not met that obligation. This is an action upon promissory notes executed by
Appellants to the California Cooperative Producers and by that organization pledged to the Plaintiffs and
Respondents. By reason of the nature of the defenses interposed by the Defendants, it has become
necessary to show that they were so closely related to the Cooperative that they cannot escape liability
on those notes by the defenses relied upon." [30 Cal. 2d 255]

It will be recalled that as to appellant Winchester judgment was given for the face amount of the note
including the first installment. Inasmuch as it is now conceded by plaintiffs that this appellant was
entitled to a credit for the amount of that installment that portion of the judgment cannot stand. As to
the other appellants the statute of limitation was found to have run on the first installment of each of
said notes.
The judgment is reversed and the case may be retried only upon the issue of notice of nonpayment of
the first installment at the time of the transfer, and judgment may thereafter be entered in
accordance with the views expressed herein in the light of the determination of the issue of notice.