Lo vs. KJS Eco-Formwork System Phil., Inc.

An assignor who executes an assignment of credit as dacion en pago warrants the existence and legality of the credit at the time of the assignment, and the original obligation is not extinguished if the credit is found non-existent due to compensation.

Petitioner Sonny L. Lo, a building contractor doing business as San’s Enterprises, purchased scaffolding equipment on installment from respondent KJS ECO-FORMWORK System Phil., Inc. After paying the downpayment and the first two monthly installments, petitioner defaulted due to financial difficulties.

• Purchase and Default: On February 22, 1990, petitioner ordered scaffolding equipment worth P540,425.80, paid a downpayment of P150,000.00, and agreed to pay the balance in ten monthly installments. Petitioner paid only the first two installments and subsequently defaulted.
• Deed of Assignment: On October 11, 1990, petitioner executed a Deed of Assignment, transferring his receivables amounting to P335,462.14 from Jomero Realty Corporation to respondent to settle the unpaid balance. The deed stipulated that petitioner would execute all acts necessary to enable respondent to recover the collectibles.
• Refusal to Honor: When respondent attempted to collect from Jomero Realty Corporation, the latter refused to honor the assignment, claiming it was no longer indebted to petitioner because petitioner also had an outstanding obligation to it, effectively extinguishing the debt by compensation.
• Demand and Refusal: On November 26, 1990, respondent demanded payment from petitioner, who refused, asserting that his obligation had been extinguished by the Deed of Assignment.

• Validity of Assignment: Petitioner argued that the Court of Appeals erred in declaring the Deed of Assignment void for lack of object based on a mere hearsay claim.
• Extinguishment of Obligation: Petitioner maintained that the obligation was extinguished upon the execution of the Deed of Assignment, and the appellate court erred in ruling that he failed to comply with his warranty thereunder.
• Reversal and Damages: Petitioner contended that the Court of Appeals erred in reversing the trial court's decision and in ordering the payment of interest and attorney's fees.

• Breach of Warranty: Respondent countered that petitioner failed to comply with his warranty under the Deed of Assignment regarding the existence and legality of the credit.
• Non-Existent Object: Respondent argued that the object of the Deed of Assignment did not exist at the time of the transaction, rendering it void pursuant to Article 1409 of the Civil Code.
• Violation of Stipulations: Respondent maintained that petitioner violated the terms of the Deed by failing to execute acts necessary to enable respondent to recover the collectibles.

• Validity of Assignment: Whether the Deed of Assignment is void for lack of object based on the third party's refusal to honor it.
• Extinguishment of Obligation: Whether the execution of the Deed of Assignment extinguished petitioner's obligation despite the assigned credit being non-existent due to compensation.
• Award of Damages: Whether the appellate court correctly ordered the payment of the principal amount, interest, and attorney's fees.

• Validity of Assignment: The assignment is not void for lack of object per se; rather, the assignor is liable for breach of warranty. The third party's claim of compensation meant the credit was non-existent at the time of the assignment.
• Extinguishment of Obligation: The original obligation was not extinguished. Under Article 1628 of the Civil Code, the vendor or assignor in good faith is responsible for the existence and legality of the credit at the time of the sale. Because the credit was extinguished by compensation, petitioner breached this warranty and must make good the obligation. Furthermore, petitioner breached the express stipulation in the deed to execute all acts necessary to enable recovery.
• Award of Damages: The payment of the principal amount with legal interest was affirmed. However, the award of attorney's fees was deleted for lack of evidentiary basis, as no evidence or testimony was presented to substantiate the claim.

• Assignment of Credit — An agreement by virtue of which the owner of a credit, by a legal cause and without the consent of the debtor, transfers his credit and accessory rights to another, who acquires the power to enforce it to the same extent as the assignor.
• Dacion en Pago — A special mode of payment where the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. Requisites: (1) performance of the prestation in lieu of payment (animo solvendi); (2) difference between the prestation due and that given in substitution (aliud pro alio); (3) agreement that the obligation is immediately extinguished by the performance of a different prestation.
• Warranty in Sale of Credit (Art. 1628) — The vendor in good faith is responsible for the existence and legality of the credit at the time of the sale, but not for the solvency of the debtor, unless expressly stipulated or unless the insolvency was prior and of common knowledge. Applied to hold the assignor liable when the assigned credit was extinguished by compensation at the time of the assignment.

• "An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor."
• "The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale, unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge."

• South City Homes, Inc., et al. v. BA Finance Corporation, G.R. No. 135462, 7 December 2001 — Followed for the definition of assignment of credit.
• Filinvest Credit Corporation v. Philippine Acetylene, Co., Inc., G.R. No. L-50449, January 30, 1982 — Followed for the definition of dacion en pago.
• Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, 12 July 1994 — Followed for the rule that upon finality of judgment, the legal interest rate shall be 12% per annum when the obligation becomes equivalent to a forbearance of credit.

• Article 1628, Civil Code — Provides the warranty of the vendor in good faith for the existence and legality of the credit at the time of sale. Applied to hold the assignor liable for the non-existent credit due to compensation.
• Article 1278, Civil Code — Provides that compensation takes place when two persons, in their own rights, are creditors and debtors of each other. Cited to explain why the third party's refusal to honor the assignment meant the credit was non-existent.
• Article 1231, Civil Code — Enumerates modes of extinguishing obligations, including payment or performance. Cited in relation to dacion en pago as a mode of payment.
• Article 417, Civil Code — Classifies obligations and actions having for their object movables or demandable sums as personal property. Cited to support the nature of assignment of credit as a sale of personal property.
• Article 1409, Civil Code — Provides that contracts whose object did not exist at the time of the transaction are void. Cited as the appellate court's basis, which the Supreme Court reframed as a breach of warranty rather than voiding the contract entirely.

Davide, Jr., C.J., (Chairman), Vitug, Carpio and Azcuna, JJ.