Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-49120 June 30, 1988
ESTATE OF GEORGE LITTON, petitioner,
vs.
CIRIACO B. MENDOZA and COURT OF APPEALS, respondents.
Ruben G. Bala for respondent Mendoza.

GANCAYCO, J.:
This petition for review presents two (2) main issues, to wit: (1) Can a plaintiff in a case, who had
previously assigned in favor of his creditor his litigated credit in said case, by a deed of assignment
which was duly submitted to the court, validly enter into a compromise agreement thereafter
releasing the defendant therein from his claim without notice to his assignee? and (2) Will such
previous knowledge on the part of the defendant of the assignment made by the plaintiff estop said
defendant from invoking said compromise as a ground for dismissal of the action against him?
The present case stemmed from Civil Case No. Q-8303 1 entitled "Alfonso Tan vs. Ciriaco B.
Mendoza," an action for the collection of a sum of money representing the value of two (2) checks which
plaintiff Tan claims to have been delivered to him by defendant Mendoza, private respondent herein, by
way of guaranty with a commission.
The record discloses that the Bernal spouses 2 are engaged in the manufacture of embroidery,
garments and cotton materials. Sometime in September 1963, C.B.M. Products, 3 with Mendoza as
president, offered to sell to the Bernals textile cotton materials and, for this purpose, Mendoza introduced
the Bernals to Alfonso Tan. Thus, the Bernals purchased on credit from Tan some cotton materials worth
P 80,796.62, payment of which was guaranteed by Mendoza. Thereupon, Tan delivered the said cotton
materials to the Bernals. In view of the said arrangement, on November 1963, C.B.M. Products, through
Mendoza, asked and received from the Bernals PBTC Check No. 626405 for P 80,796.62 dated February
20, 1964 with the understanding that the said check will remain in the possession of Mendoza until the
cotton materials are finally manufactured into garments after which time Mendoza will sell the finished
products for the Bernals. Meanwhile, the said check matured without having been cashed and Mendoza
demanded the issuance of another check 4 in the same amount without a date.
On the other hand, on February 28, 1964, defendant Mendoza issued two (2) PNB checks 5 in favor
of Tan in the total amount of P 80,796.62. He informed the Bernals of the same and told them that they
are indebted to him and asked the latter to sign an instrument whereby Mendoza assigned the said
amount to Insular Products Inc. Tan had the two checks issued by Mendoza discounted in a bank.
However, the said checks were later returned to Tan with the words stamped "stop payment" which
appears to have been ordered by Mendoza for failure of the Bernals to deposit sufficient funds for the
check that the Bernals issued in favor of Mendoza.
Hence, as adverted to above, Tan brought an action against Mendoza docketed as Civil Case No. Q8303 6 while the Bernals brought an action for interpleader docketed as Civil Case No. 56850 7 for not

knowing whom to pay. While both actions were pending resolution by the trial court, on March 20, 1966,
Tan assigned in favor of George Litton, Sr. his litigatious credit * in Civil Case No. 56850 against Mendoza, duly
submitted to the court, with notice to the parties. 8 The deed of assignment was framed in the following tenor:

DEED OF ASSIGNMENT
I, ALFONSO TAN, of age, Chinese, married to UY CHAY UA, residing at No. 6
Kanlaon, Quezon City, doing business under the name and style ALTA
COMMERCIAL by way of securing or guaranteeing my obligation to Mr. GEORGE
LITTON, SR., do by these presents CEDE, ASSIGN, TRANSFER AND CONVEY
unto the said Mr. GEORGE LITTON, SR., my claim against C.B.M. Products, Inc.,
personally guaranteed by Mr. Ciriaco B. Mendoza, in the amount of Eighty-Thousand
Seven Hundred Ninety Six Pesos and Sixty-two centavos (P 80,796.62) the balance
of which, in principal, and excluding, interests, costs, damages and attorney's fees
now stands at P 76,000.00, P 4,796.62, having already been received by the
assignor on December 23, 1965, pursuant to the order of the court in Civil Case No.
56850, C.F.I., Manila, authorizing Alfonso Tan to withdraw the amount of P 4,796.62
then on deposit with the court. All rights, and interests in said net amount, plus
interests and costs, and less attorney's fees, in case the amount allowed therefor be
less than the amounts claimed in the relief in Civil Case 56850 (C.F.I., Manila) and Q8503 (C.F.I., Quezon City) are by these presents covered by this assignment.
I further undertake to hold in trust any and all amounts which may hereafter be
realized from the aforementioned cases for the ASSIGNEE, Mr. GEORGE LITTON,
SR., and to turn over to him such amounts in application to my liability to him, as his
interest may then show, and I further undertake to cooperate towards the successful
prosecution of the aforementioned cases making available myself, as witness or
otherwise, as well as any and all documents thereto appertaining. ... 9
After due trial, the lower court ruled that the said PNB checks were issued by Mendoza in favor of
Tan for a commission in the sum of P 4,847.79 and held Mendoza liable as a drawer whose liability
is primary and not merely as an indorser and thus directed Mendoza to pay Tan the sum of P
76,000.00, the sum still due, plus damages and attorney's fees. 10
Mendoza seasonably filed an appeal with the Court of Appeals, dockted as C.A. G.R. No. 41900-R,
arguing in the main that his liability is one of an accommodation party and not as a drawer.
On January 27, 1977, the Court of Appeals rendered a decision affirming in toto the decision of the
lower court. 11
Meanwhile, on February 2, 1971, pending the resolution of the said appeal, Mendoza entered into a
compromise agreement with Tan wherein the latter acknowledged that all his claims against
Mendoza had been settled and that by reason of said settlement both parties mutually waive,
release and quit whatever claim, right or cause of action one may have against the other, with a
provision that the said compromise agreement shall not in any way affect the right of Tan to enforce
by appropriate action his claims against the Bernal spouses. 12
On February 25, 1977, Mendoza filed a motion for reconsideration praying that the decision of
January 27, 1977 be set aside, principally anchored upon the ground that a compromise agreement
was entered into between him and Tan which in effect released Mendoza from liability. Tan filed an
opposition to this motion claiming that the compromise agreement is null and void as he was not
properly represented by his counsel of record Atty. Quiogue, and was instead represented by a

certain Atty. Laberinto, and principally because of the deed of assignment that he executed in favor
of George Litton, Sr. alleging that with such, he has no more right to alienate said credit.
While the case was still pending reconsideration by the respondent court, Tan, the assignor, died
leaving no properties whatever to satisfy the claim of the estate of the late George Litton, Sr.
In its Resolution dated August 30, 1977,
compromise agreement.

13

the respondent court set aside its decision and approved the

As to the first ground invoked by Tan, now deceased, the respondent court ruled that the nonintervention of Tan's counsel of record in the compromise agreement does not affect the validity of
the settlement on the ground that the client had an undoubted right to compromise a suit without the
intervention of his lawyer, citing Aro vs. Nanawa. 14
As to the second ground, respondent court ruled as follows:
... it is relevant to note that Paragraph 1of the deed of assignment states that the
cession,assignment, transfer, bond conveyance by Alfonso Tan was only by way of
securing, or guaranteeing his obligation to GEORGE LITTON, SR.
Hence, Alfonso Tan retained possession and dominion of the credit (Par. 2, Art. 2085,
Civil Code).
"Even considered as a litigations credit," which indeed characterized the claims
herein of Alfonso Tan, such credit may be validly alienated by Tan (Art. 1634. Civil
Code).
Such alienation is subject to the remedies of Litton under Article 6 of the Civil Code,
whereby the waiver, release, or quit-claim made by plaintiff-appellee Alfonso Tan in
favor of defendant-appellant Ciriaco B. Mendoza, if proven prejudicial to George
Litton, Sr. as assignee under the deed of assignment, may entitle Litton to pursue his
remedies against Tan.
The alienation of a litigatious credit is further subject to the debtor's right of
redemption under Article 1634 of the Civil Code.
As mentioned earlier, the assignor Tan died pending resolution of the motion for reconsideration. The
estate of George Litton, Sr., petitioner herein, as represented by James Litton, son of George Litton,
Sr. and administrator15 of the former's estate, is now appealing the said resolution to this Court as
assignee of the amount sued in Civil Case No. Q-8303, in relation to Civil Case No. 56850.
Before resolving the main issues aforementioned, the question of legal personality of herein
petitioner to bring the instant petition for review, must be resolved.
As a rule, the parties in an appeal through a review on certiorari are the same original parties to the
case. 16 If after the rendition of judgment the original party dies, he should be substituted by his
successor-in-interest. In this case, it is not disputed that no proper substitution of parties was done. This
notwithstanding, the Court so holds that the same cannot and will not materially affect the legal right of
herein petitioner in instituting the instant petition in view of the tenor of the deed of assignment,
particularly paragraph two thereof 17 wherein the assignor, Tan, assumed the responsibility to prosecute
the case and to turn over to the assignee whatever amounts may be realized in the prosecution of the
suit.

We note that private respondent moved for the dismissal of the appeal without notifying the estate of
George Litton, Sr. whereas the former was fully aware of the fact that the said estate is an assignee
of Tan's right in the case litigated. 18 Hence, if herein petitioner failed to observe the proper substitution
of parties when Alfonso Tan died during the pendency of private respondent's motion for reconsideration,
no one is to blame but private respondent himself. Moreover, the right of the petitioner to bring the present
petition is well within the concept of a real party-in-interest in the subject matter of the action. Well-settled
is the rule that a real party-in-interest is a party entitled to the avails of the suit or the party who would be
injured by the judgment. 19 We see the petitioner well within the latter category.
Hence, as the assignee and successor-in-interest of Tan, petitioner has the personality to bring this
petition in substitution of Tan.
Now, the resolution of the main issues.
The purpose of a compromise being to replace and terminate controverted claims, 20 courts
encourage the same. A compromise once approved by final order of the court has the force of res
judicata between parties and should not be disturbed except for vices of consent or forgery. 21
In this case, petitioner seeks to set aside the said compromise on the ground that previous thereto,
Tan executed a deed of assignment in favor of George Litton, Sr. involving the same litigated credit.
We rule for the petitioner. The fact that the deed of assignment was done by way of securing or
guaranteeing Tan's obligation in favor of George Litton, Sr., as observed by the appellate court, will
not in any way alter the resolution on the matter. The validity of the guaranty or pledge in favor of
Litton has not been questioned. Our examination of the deed of assignment shows that it fulfills the
requisites of a valid pledge or mortgage. 22Although it is true that Tan may validly alienate the litigatious
credit as ruled by the appellate court, citing Article 1634 of the Civil Code, said provision should not be
taken to mean as a grant of an absolute right on the part of the assignor Tan to indiscriminately dispose of
the thing or the right given as security. The Court rules that the said provision should be read in
consonance with Article 2097 of the same code. 23 Although the pledgee or the assignee, Litton, Sr. did
not ipso factobecome the creditor of private respondent Mendoza, the pledge being valid, the incorporeal
right assigned by Tan in favor of the former can only be alienated by the latter with due notice to and
consent of Litton, Sr. or his duly authorized representative. To allow the assignor to dispose of or alienate
the security without notice and consent of the assignee will render nugatory the very purpose of a pledge
or an assignment of credit.
Moreover, under Article 1634, 24 the debtor has a corresponding obligation to reimburse the assignee,
Litton, Sr. for the price he paid or for the value given as consideration for the deed of assignment. Failing
in this, the alienation of the litigated credit made by Tan in favor of private respondent by way of a
compromise agreement does not bind the assignee, petitioner herein.
Indeed, a painstaking review of the record of the case reveals that private respondent has, from the
very beginning, been fully aware of the deed of assignment executed by Tan in favor of Litton, Sr. as
said deed was duly submitted to Branch XI of the then Court of First Instance of Manila in Civil Case
No. 56850 (in relation to Civil Case No. Q-8303) where C.B.M. Products is one of the defendants
and the parties were notified through their counsel. 25 As earlier mentioned, private respondent herein
is the president of C.B.M. Products, hence, his contention that he is not aware of the said deed of
assignment deserves scant consideration from the Court. Petitioner pointed out at the same time that
private respondent together with his counsel were served with a copy of the deed of assignment which
allegation remains uncontroverted. Having such knowledge thereof, private respondent is estopped from
entering into a compromise agreement involving the same litigated credit without notice to and consent of
the assignee, petitioner herein. More so, in the light of the fact that no reimbursement has ever been

made in favor of the assignee as required under Article 1634. Private respondent acted in bad faith and in
connivance with assignor Tan so as to defraud the petitioner in entering into the compromise agreement.

WHEREFORE, the petition is GRANTED. The assailed resolution of the respondent court dated
August 30,1977 is hereby SET ASIDE, the said compromise agreement being null and void, and a
new one is hereby rendered reinstating its decision dated January 27, 1977, affirming in toto the
decision of the lower court. This decision is immediately executory. No motion for extension of time
to file a motion for reconsideration will be granted.
SO ORDERED.

Manila Banking Corp. v Anastacio Teodoro, Jr. and Grace Teodoro

Bidin, J. | 1989
1.

2.
3.

4.

5.
6.

April 1966, Spouses Teodoro together with Teodoro Sr executed a PN in favour of Manila Banking Corp
(MBC);
Payable within 120 days (until Aug), with 12% interest per annum;
They failed to pay and left balance of 15k as of September 1969;
May and June 1966, executed two PNs;
8k and 1k respectively payable within 120 days and 12% per annum;
They made partial payment but still left 8.9k balance as of September 1969;
It appears than in 1964, Teodoro Jr executed a Deed of Assignment of Receivables in favour of MBC
from Emergency Employment Administration;
Amounted to 44k;
The deed provided it was for consideration of certain credits, loans, overdrafts and other credit
accommodations extended to the spouses and Teodoro Sr as security for the payment of said sum
and interest thereon; and that they release and quitclaim all its rights, title and interest in the
receivables;
In the stipulations of fact, it was admitted by the parties:
That MBC extended loans to the spouses and Teodoro Jr because of certain contracts entered into by
latter with EEA for fabrication of fishing boats and that the Philippine Fisheries Commission
succeeded EEA after its abolition;
That non-payment of the PNs was due to failure of the Commission to pay spouses;
That the Bank took steps to collect from the Commission but no collection was effected;
For failure of the spouses and Teodor Sr to pay, MBC instituted against them;
Teodoro Sr subsequently died so suit only against the spouses;
TC favoured MBC; MFR denied;
Spouses appealed to CA but since issue pure question of law, CA forwarded to SC;

Issues:
W/N the assignment of receivables has the effect of payment of all the
loans contracted by the spouses; No.
W/N MBC must exhaust all legal remedies against PFC before it can
proceed against the spouses. No

Ratio:
Assignment of credit:
-

An agreement by virtue of which the owner of a credit(assignor) by a legal cause (e.g. sale, dation
in payment, exchange or donation) and without the need of the consent of the debtor, transfers his

credit and its accessory rights to another(assignee) who acquires the power to enforce it to the
same extent as the assignor could have enforced it against the debtor;
May be in form of:
o
Sale
o
Dation in payment - when a debtor, in order to obtain a release from his debt, assigns to his
creditor a credit he has against a third person;
o
Donation when it is by gratuitous title;
o
Guaranty creditor gives as a collateral, to secure his own debt in favour of the assignee,
without transmitting ownership;
Obligations between the parties will depend upon the juridical relation which is the basis of the
assignment;

What is the legal effect of the Assignment (since its validity is not in question):
1.

Assignment of receivables in 1964 did not transfer the ownership of the receivables to MBC and
release the spouses from their loans;
Consideration was for certain credits, loans, overdrafts and credit accommodations worth 10k
extended by MBC to spouses and as security for the payment of said sum and interest thereon;
also quitclaim of rights to MBC of their interest in the receivables;
Stipulated also that it was a continuing guaranty for future loans and correspondingly, the
assignment shall extend to all accounts receivable;

Contention of spouses: not mere guaranty since it was stipulated:

-

That the assignor release and quitclaim to assignee all its rights, title and interest in the
accounts receivable;
That title and right of possession to account receivable is to remain in assignee and it shall have
right to collect directly from the debtor; that whatever the assignor does in connection with
collection of such, it does so as agent and representative and in trust of assignee;
SC: character of transaction is not determined by the language in document but by intention of
the parties;;
If it was intended to secure the payment of money, it must be construed as a pledge.
A transfer of property by the debtor to a creditor, even if sufficient on its farm to make an
absolute conveyance, should be treated as a pledge if the debt continues in existence and is not
discharged by the transfer;

Assignment of receivables did not result from sale or by virtue of a dation in

payment;
-

At time the deed was executed, the loans were non-existent yet;
At most, it was a dation for 10k, the amount of credit with MBC indicated in the deed; at the
time of execution, there was no obligation to be extinguished except for the 10k;
1292: in order that an obligation may be extinguished by another which substitutes the same, it
is imperative that it be so declared in unequivocal terms, or that the old and the new obligations
be on every point incompatible with each other;

Deed of assignment intended as collateral security for the loans, as a

continuing guaranty for whatever sums that would be owing by spouses;
-

2.

In case of doubt as to whether a transaction is a pledge or a dation in payment, the

presumption is in favor of pledge, the latter being the lesser transmission of rights and interests
(Lopez v CA);
MBC need not exhaust all legal remedies against PFC:

Spouses, not being released by the assignment, remain as the principal debtors of MBC, rather
than mere guarantors;
The deed merely guarantees said obligations;
2058 (creditor must have exhausted property of debtor and resorted to all legal remedies
before it can proceed to guarantor) does not apply to them;
Appellants are both the principal debtors and the pledgors or mortgagors;
MBC did try to collect but at OP, it was disapproved; so the loan was basically unsecured;

DISMISSED.

Feliciano, J. concurring.
Justice Bidins, "the character of the transactions between the parties is not,
however, determined by the language used in the document but by their intention
not without exception;
-

Deed here contains language which suggest that the parties intended complete alienation of title to
and rights over the receivables;
Words remise, release and quitclaim and clauses title the title and right of possession to said
accounts receivable is to remain in said assignee" who "shall have the right to collect directly from
the debtor;
Words agent also convey the ideas;
But such must be taken in conjunction with and qualified by other language showing intent of the
parties that title to the receivables shall pass to the assignee for the limited purpose of securing
another, principal obligation owed by the assignor to the assignee;

Title moves from assignor to assignee but that title is defeasible being designed to
collateralize the principal obligation:
-

Operationally: means assignee is burdened to collateralize the principal obligation; taking the
proceeds of the receivables assigned and applying such proceeds to the satisfaction of the principal
obligation and returning any balance remaining thereafter to the assignor;

The parties gave the deed of assignment the form of an absolute conveyance of
title over the receivables assigned, essentially for the convenience of the assignee:
-

Without such nature of absolute conveyance, the assignee would have to foreclose the properties;
he would have to comply with documentation and registration requirements of a pledge or chattel
mortgage);
A deed of assignment by way of security avoids the necessity of a public sale impose by the rule
on pactum commisorium, by in effect placing the sale of the collateral up front;
The foregoing is applicable where the deed of assignment of receivables combines elements of both
a complete alienation of the credits and a security arrangement to assure payment of a principal
obligation;
Where the 2nd element is absent, the assignment would constitute essentially a mode of payment or
dacion en pago;
in order that a deed of assignment of receivables which is in form an absolute conveyance of title to
the credits being assigned, may be qualified and treated as a security arrangement, language to
such effect must be found in the document itself and that language, precisely, is embodied in the
deed of assignment in the instant case;

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-78519 September 26, 1989
VICTORIA YAU CHU, assisted by her husband MICHAEL CHU, petitioners,
vs.
HON. COURT OF APPEALS, FAMILY SAVINGS BANK and/or CAMS TRADING ENTERPRISES,
INC.,respondents.
Francisco A. Lara, Jr. for petitioner.
D. T. Ramos and Associates for respondent Family Savings Bank.
Romulo T. Santos for respondent CAMS Trading.

GRINO-AQUINO, J.:
This is a petition for review on certiorari to annul and set aside the Court of Appeals' decision dated
October 28, 1986 in CA-G.R. CV No. 03269 which affirmed the decision of the trial court in favor of
the private respondents in an action to recover the petitioners' time deposits in the respondent
Family Savings Bank.
Since 1980, the petitioner, Victoria Yau Chu, had been purchasing cement on credit from CAMS
Trading Enterprises, Inc. (hereafter "CAMS Trading" for brevity). To guaranty payment for her
cement withdrawals, she executed in favor of Cams Trading deeds of assignment of her time
deposits in the total sum of P320,000 in the Family Savings Bank (hereafter the Bank). Except for
the serial numbers and the dates of the time deposit certificates, the deeds of assignment, which
were prepared by her own lawyer, uniformly provided
... That the assignment serves as a collateral or guarantee for the payment of my
obligation with the said CAMS TRADING ENTERPRISES, INC. on account of my
cement withdrawal from said company, per separate contract executed between us.
On July 24,1980, Cams Trading notified the Bank that Mrs. Chu had an unpaid account with it in the
sum of P314,639.75. It asked that it be allowed to encash the time deposit certificates which had
been assigned to it by Mrs. Chu. It submitted to the Bank a letter dated July 18, 1980 of Mrs. Chu
admitting that her outstanding account with Cams Trading was P404,500. After verbally advising
Mrs. Chu of the assignee's request to encash her time deposit certificates and obtaining her verbal
conformity thereto, the Bank agreed to encash the certificates.It delivered to Cams Trading the sum
of P283,737.75 only, as one time deposit certificate (No. 0048120954) lacked the proper signatures.
Upon being informed of the encashment, Mrs. Chu demanded from the Bank and Cams Trading that
her time deposit be restored. When neither complied, she filed a complaint to recover the sum of
P283,737.75 from them. The case was docketed in the Regional Trial Court of Makati, Metro Manila
(then CFI of Rizal, Pasig Branch XIX), as Civil Case No. 38861.

In a decision dated December 12, 1983, the trial court dismissed the complaint for lack of merit.
Chu appealed to the Court of Appeals (CA-G.R. CV No. 03269) which affirmed the dismissal of her
complaint.
In this petition for review, she alleges that the Court of Appeals erred:
1. In not annulling the encashment of her time deposit certificates as
a pactum commissorium; and
2. In not finding that the obligations secured by her time deposits had already been
paid.
We find no merit in the petition for review.
The Court of Appeals found that the deeds of assignment were contracts of pledge, but, as the
collateral was also money or an exchange of "peso for peso," the provision in Article 2112 of the Civil
Code for the sale of the thing pledged at public auction to convert it into money to satisfy the
pledgor's obligation, did not have to be followed. All that had to be done to convert the pledgor's time
deposit certificates into cash was to present them to the bank for encashment after due notice to the
debtor.
The encashment of the deposit certificates was not a pacto commissorio which is prohibited under
Art. 2088 of the Civil Code. A pacto commissorio is a provision for the automatic appropriation of the
pledged or mortgaged property by the creditor in payment of the loan upon its maturity. The
prohibition against a pacto commissorio is intended to protect the obligor, pledgor, or mortgagor
against being overreached by his creditor who holds a pledge or mortgage over property whose
value is much more than the debt. Where, as in this case, the security for the debt is also money
deposited in a bank, the amount of which is even less than the debt, it was not illegal for the creditor
to encash the time deposit certificates to pay the debtors' overdue obligation, with the latter's
consent.
Whether the debt had already been paid as now alleged by the debtor, is a factual question which
the Court of Appeals found not to have been proven for the evidence which the debtor sought to
present on appeal, were receipts for payments made prior to July 18, 1980. Since the petitioner
signed on July 18, 1980 a letter admitting her indebtedness to be in the sum of P404,500, and there
is no proof of payment made by her thereafter to reduce or extinguish her debt, the application of her
time deposits, which she had assigned to the creditor to secure the payment of her debt, was proper.
The Court of Appeals did not commit a reversible error in holding that it was so.
WHEREFORE, the petition for review is denied. Costs against the appellant.
SO ORDERED.