Case Summary (G.R. No. L-5360)
Deed of Assignment (October 11, 1990)
The parties executed a Deed of Assignment by which petitioner assigned to respondent receivables amounting to P335,462.14 purportedly collectible from Jomero Realty Corporation. The deed expressly transferred collectibles and conferred on respondent the power to demand, collect, receive, compound, compromise and give acquittance in the assignor’s stead. It also contained warranties that the debt was justly owing and due and a stipulation that the assignor would not take any action to diminish or discharge the debt. Further, the assignor expressly agreed to execute, at his cost, such further acts as reasonably necessary to enable the assignee to recover the assigned collectibles.
Initial Refusal by Third Party and Pre‑litigation Demands
When respondent attempted to collect from Jomero Realty Corporation, Jomero refused to honor the assignment, asserting that petitioner himself owed Jomero money (thus asserting compensation). Respondent then demanded payment from petitioner (letter dated November 26, 1990), but petitioner refused, contending that his obligation to respondent had been extinguished by the Deed of Assignment.
Procedural History
Respondent filed an action for recovery of a sum of money against petitioner on January 10, 1991 before the Regional Trial Court of Makati (Civil Case No. 91-074). The trial court (Aug. 25, 1994) dismissed the complaint, holding that the Deed of Assignment extinguished the obligation. On appeal, the Court of Appeals (Apr. 19, 2001) reversed and ordered petitioner to pay P335,462.14 with 6% legal interest from January 10, 1991, plus attorney’s fees equal to 10% and costs. Petitioner’s motion for reconsideration was denied. The Supreme Court thereafter reviewed the case.
Issues Presented on Review
- Whether the Deed of Assignment extinguished petitioner’s obligation to respondent; 2) whether the assignment was null and void for lack of object at the time of the transaction; 3) whether petitioner breached his warranty and covenant to assist under the Deed of Assignment; and 4) propriety of the Court of Appeals’ awards of interest and attorney’s fees.
Governing Legal Concepts Applied
The Court characterized an assignment of credit as a transfer of a credit and its accessory rights by the assignor (vendor) to an assignee, who acquires the power to enforce the credit. The decision analyzed the transaction in the light of dacion en pago (a special mode of payment) and of the law on sale of credits. The requisites of valid dacion en pago were recited: (1) performance with animo solvendi by delivery of a thing, real right, or credit against a third person; (2) aliud pro alio (a difference between the prestation due and that given in substitution); and (3) agreement that the obligation is immediately extinguished. The Court also applied Article 1628 of the Civil Code: the vendor in good faith is responsible for the existence and legality of the credit at the time of sale (unless sold as doubtful); the vendor is not responsible for solvency of the debtor except where expressly stipulated or where insolvency was prior and of common knowledge. The Court referenced the Civil Code provisions treating obligations as extinguished by payment and compensation (Articles cited in the record).
Court of Appeals’ Rationale and Supreme Court’s Response
The Court of Appeals concluded that the assignment did not extinguish petitioner’s obligation because: (a) petitioner allegedly failed to comply with his warranty under the Deed of Assignment; (b) the object of the Deed (the receivable) did not exist at the time of the transaction, rendering the instrument void under Article 1409; and (c) petitioner failed to execute the acts necessary to enable respondent to recover the collectibles. The Supreme Court agreed with the Court of Appeals’ essential conclusion that the assignment did not extinguish petitioner’s obligation, but framed the outcome principally on petitioner’s express warranty and covenant to assist. The Court reasoned that Jomero’s claim that it was no longer indebted to petitioner meant the assigned credit was alleged to be nonexistent due to compensation; this allegation triggered petitioner’s warranty obligation under Article 1628 and the express terms of the Deed. Because petitioner warranted the existence and legality of the credit and undertook to perform acts at his cost to enable recovery, he bore the risk of nonexistence and was liable to respondent when Jomero asserted extinguishment by compensation.
Breach of Covenant to Assist and Resulting Liability
The Supreme Court emphasized the Deed’s clause obliging the assignor to execute, at his cost, such acts and deeds as reasonably necessary to effect collection. By so stipulating and by
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Parties and Nature of the Case
- Petitioner: Sonny L. Lo, doing business under the name and style San's Enterprises, a building contractor.
- Respondent: KJS Eco-Formwork System Phil., Inc., a corporation engaged in the sale of steel scaffoldings.
- Nature of action: Civil action for recovery of a sum of money filed by respondent against petitioner arising from an unpaid balance for scaffolding equipment and an executed Deed of Assignment of petitioner’s receivables.
Factual Background
- On February 22, 1990, petitioner ordered scaffolding equipment from respondent valued at P540,425.80 (Exhibit "A", Records, p. 128).
- Petitioner paid a downpayment of P150,000.00; the balance was made payable in ten monthly installments.
- Respondent delivered the scaffoldings to petitioner (Exhibits "B-B-8", Records, pp. 130-138).
- Petitioner paid the first two monthly installments but thereafter encountered financial difficulties and failed to settle his obligation despite oral and written demands (Exhibit "C", Records, p. 139).
- On October 11, 1990, petitioner and respondent executed a Deed of Assignment assigning petitioner’s receivables in the amount of P335,462.14 from Jomero Realty Corporation to respondent (Records, pp. 142-143).
- Respondent attempted to collect the assigned credit from Jomero Realty Corporation, but Jomero refused to honor the Deed of Assignment, claiming petitioner was also indebted to Jomero (TSN, April 28, 1993, p. 25).
- On November 26, 1990, respondent sent a letter to petitioner demanding payment; petitioner refused, asserting his obligation had been extinguished by the Deed of Assignment (Exhibit "C", Records, p. 139).
- Consequent litigation: on January 10, 1991 respondent filed Civil Case No. 91-074 before the Regional Trial Court of Makati, Branch 147, for recovery of a sum of money (Records, pp. 1-6).
Deed of Assignment — Pertinent Provisions Quoted
- The Deed recites petitioner was the contractor for construction of a residential house for Jomero Realty Corporation and that petitioner purchased scaffolding on account from respondent leaving an obligation of P335,462.14 to respondent (Records, p. 142).
- Material clauses included:
- Assignment clause: petitioner "hereby assigns, transfers and sets over unto the ASSIGNEE all collectibles amounting to the said amount of P335,462.14."
- Powers granted: respondent given "full power and authority to demand, collect, receive, compound, compromise and give acquittance for the same or any part thereof, and in the name and stead of the said ASSIGNOR."
- Warranty and non-diminution clause: petitioner "has not done and will not cause anything to be done to diminish or discharge said debt, or delay or to prevent the ASSIGNEE ... from collecting the same."
- Covenant to assist: petitioner agreed that he "shall and will at times hereafter, at the request of said ASSIGNEE ... execute and do all such further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has ..." (Records, pp. 142-143; italics in source).
Trial Court Proceedings and Ruling
- At trial, petitioner argued that the Deed of Assignment extinguished his obligation.
- Respondent presented testimony (notably by its employee Almeda BaAaga) that Jomero refused to honor the assignment because Jomero claimed petitioner was indebted to it.
- On August 25, 1994, the Regional Trial Court, presided by Judge Teofilo L. Guadiz, Jr., rendered judgment dismissing the complaint on the ground that the assignment of credit extinguished the obligation; the decretal portion ordered dismissal and ordered plaintiff to pay defendant attorney's fees in the amount of P25,000.00.
Court of Appeals Proceedings and Ruling
- Respondent appealed to the Court of Appeals.
- On April 19, 2001, the Court of Appeals (opinion penned by Justice Hilarion L. Aquino, with Justices Ma. Alicia Austria-Martinez and Jose L. Sabio, Jr., concurring) reversed the trial court.
- Dispositive ruling of the Court of Appeals ordered petitioner Sonny Lo to pay KJS Eco-Formwork System Phil., Inc. P335,462.14 with legal interest of 6% per annum from January 10, 1991 until fully paid, attorney’s fees equivalent to 10% of the amount due, and costs of suit (Decision, CA-G.R. CV No. 47713, p. 6; Rollo, p. 14).
- The Court of Appeals reasoned that:
- Petitioner failed to comply with his warranty under the Deed.
- The object of the Deed did not exist at the time of the transaction (void under Article 1409 of the Civil Code).
- Petitioner violated the Deed’s terms by failing to execute further acts necessary to enable respondent to recover the collectibles.
Supreme Court Petition and Assigned Errors
- Petitioner filed a petition for review, assigning errors including:
- Error in declaring the Deed of Assignment null and void for lack of object on basis of hearsay (Assignment I).
- Error in holding the Deed did not extinguish petitioner’s obligation based on an incorrect notion that petitioner failed to comply with his warranty (Assignment II).
- Error in reversing the trial court and ordering payment of interests and attorney's fees (Assignment III)