Lo v. KJS Eco-Formwork System Philippines, Inc.
REITERATIONFacts
The Antecedents: Respondent KJS ECO-FORMWORK System Phil., Inc. (KJS) sold steel scaffoldings to petitioner Sonny L. Lo (Lo), doing business as San's Enterprises. Lo paid a downpayment and made two installment payments, but later encountered financial difficulties and failed to pay the remaining balance. On October 11, 1990, Lo and KJS executed a Deed of Assignment, wherein Lo assigned his receivables amounting to P335,462.14 from Jomero Realty Corporation to KJS. The Deed stipulated that Lo warranted the existence and legality of the credit and agreed to perform all necessary acts to enable KJS to collect the receivables. When KJS attempted to collect from Jomero Realty, the latter refused to honor the assignment, claiming Lo was also indebted to it. KJS then demanded payment from Lo, who claimed his obligation was extinguished by the Deed of Assignment. Procedural History: KJS filed a collection case against Lo. The Regional Trial Court (RTC) dismissed the complaint, ruling that the Deed of Assignment extinguished Lo's obligation. KJS appealed to the Court of Appeals (CA), which reversed the RTC decision. The CA held that the Deed of Assignment did not extinguish the obligation because Lo failed to comply with his warranty, the object of the Deed did not exist, and Lo violated the terms of the Deed. The Petition: Lo filed a petition for review with the Supreme Court, assailing the CA's decision.
Issue(s)
Whether the Deed of Assignment of credit extinguished petitioner's obligation to respondent. Whether the Court of Appeals erred in declaring the Deed of Assignment void for lack of object. Whether the Court of Appeals erred in holding that the Deed of Assignment did not extinguish the obligation due to petitioner's failure to comply with his warranty.
Ruling
The petition is without merit. The Supreme Court affirmed the decision of the Court of Appeals, ordering petitioner Sonny Lo to pay respondent KJS ECO-FORMWORK SYSTEM PHIL., INC. the sum of P335,462.14 with legal interest. The award of attorney's fees was deleted for lack of evidentiary basis. The rate of legal interest was modified to 12% per annum upon finality of the Decision.
Ratio Decidendi
On whether the Deed of Assignment of credit extinguished petitioner's obligation: An assignment of credit is an agreement where the owner of a credit (assignor) transfers his credit and accessory rights to another (assignee) without the debtor's consent. It can produce the effects of dacion en pago, a special mode of payment where the debtor offers something else as equivalent to the outstanding debt. For a valid dacion en pago, there must be performance of the prestation in lieu of payment, a difference between the prestation due and that given, and an agreement that the obligation is immediately extinguished. The assignment of credit, being in the nature of a sale, carries warranties. Specifically, Article 1628 of the Civil Code states that the vendor in good faith warrants the existence and legality of the credit at the time of sale, unless sold as doubtful, but not the solvency of the debtor unless expressly stipulated or the insolvency was prior and of common knowledge. In this case, Jomero Realty's refusal to honor the assignment due to Lo's indebtedness to it indicated the non-existence of the credit as a collectible amount, thus breaching Lo's warranty. Consequently, Lo remained liable for his original obligation. On whether the Court of Appeals erred in declaring the Deed of Assignment void for lack of object: The Court of Appeals did not err in finding 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. The refusal of Jomero Realty Corporation to honor the Deed of Assignment, based on the claim that petitioner Sonny Lo also had an outstanding indebtedness to it, meant that the receivable assigned by Lo to KJS ECO-FORMWORK System Phil., Inc. was not a clear and existing credit. If Jomero Realty's claim was valid, it implied that the debt owed to Lo had been extinguished by compensation. Therefore, the credit assigned, which was supposed to be the object of the assignment, was effectively non-existent or legally questionable at the time of the assignment, thereby vitiating the contract for lack of a valid object. On whether the Court of Appeals erred in holding that the Deed of Assignment did not extinguish the obligation due to petitioner's failure to comply with his warranty: The Court of Appeals correctly held that the Deed of Assignment did not extinguish the obligation because petitioner failed to comply with his warranty. The Deed explicitly stated that the assignor (petitioner) "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." By warranting the existence of the credit, petitioner implicitly guaranteed its collectibility. His failure to ensure that the receivable was clear and enforceable, as evidenced by Jomero Realty's refusal to pay due to a set-off claim, constituted a breach of this warranty. Therefore, petitioner remained liable to pay the respondent the amount of his indebtedness, as the assignment, in effect, failed to serve its purpose as a mode of payment due to the breach of warranty.
Main Doctrine
An assignment of credit, in the nature of a sale of personal property, may produce the effects of dacion en pago which may extinguish an obligation. However, the assignor, as vendor in good faith, is bound by the warranty of the existence and legality of the credit at the time of the assignment, and failure to comply with this warranty renders the assignor liable for the assigned obligation.