ESTATE OF GEORGE LITTON vs. CIRIACO B.

MENDOZA and COURT OF APPEALS

G.R. No. L-49120 June 30, 1988
Facts:
Bernal spouses are engaged in the manufacturing of embroidery, garments and cotton
materials. Bernals purchased from Tan cotton materials guaranteed by Mendoza. Bernals
issued postdated checks to Mendoza as a security, however, these checks matured without
Mendoza being able to encashed it. As such, Mendoza asks the spouses to issue another
checks in the same amount. Mendoza issued two checks in favor of Tan, which the latter
discounted in a bank. However, the said checks were later returned to Tan with the words
Stop Payment which appears to have been ordered by Mendoza because of the failure of
the Bernal spouses to deposit sufficient funds for the check that the spouses issued in his
favor.
Tan then instituted a case against Mendoza, while the Bernal spouses brought action for
interpleader. While both actions were pending resolution by the trial court, Tan assigned in
favor of George Litton, Sr. his litigatious credit. The RTC and CA ordered Mendoza to pay Tan
P76K. Meanwhile, Mendoza entered into a compromise agreement with Tan, wherein the
latter recognized that all his claims against Mendoza had been settled and that both parties
waive, release and quit whatever claims they may have against each other. After CAs
decision, Mendoza filed MR saying that there was the compromise agreement which
absolved him from liability. Tan opposed this saying the Compromise agreement was null and
void because of the deed of assignment executed in favour of Litton, Sr. He says that with
such, he has no more right to alienate said credit. CA then approved the compromise
agreement. It said that the assignment was by way of securing only his obligation to Litton,
Sr. Thus, Tan retained possession and dominion over the credit (2085). Although considered
as a litigatious credit, such may be validly alienated by Tan and such alienation is subject to
the remedies of Litton under 6 of CC whereby, the assignment if proven prejudicial to Litton,
may entitle Littion to pursue his remedies against Tan. The alienation of a litigatious credit is
further subject to the debtors right of redemption under 1634. Tan died and the action was
continued by the administrators of Litton Estate.
Issue: Is the compromise valid?
Ruling: No. The examination of the Deed of Assignment shows that it fulfills the requisites
of a valid pledge or mortgage. Although 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.
Although the pledgee or the assignee, Litton, Sr. did not ipso facto become 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.

Also, under 1634, the debtor has the corresponding obligation to reimburse the assignee, for
the price he paid or for the value given as consideration for the deed of assignment; failing
here, the compromise agreement does not bind the assignee.

Cruz and Serrano vs. Chua Lee

G.R. No. L-31018, November 6, 1929
Facts: Cornelio Cruz had pledged valuable jewelry to two different pawnshops in the city of
Manila, namely, the Monte de Piedad and Ildefonso Tambunting, receiving therefor twelve
pawn tickets showing that these tickets were renewable, according to the custom of
pawnbrokers, upon payment from time to time of the sum of the money representing the
intent accruing upon the debts.
Cruz represented himself to Chua and pledged to him six pawn tickets of Monte de Piedad
and a week after obtained another loan from Chua. The latter renewed the tickets issued by
paying the interest necessary for its renewal, but these tickets expired and they were not
renewed. The jewelries were sold at public auction and were not redeemed.
Issue: Is Chua liable for the loss of the of the value of the tickets?
Ruling: Yes. It results that one who takes a pawn ticket in pledge acquires domination over
the pledge; and it is the holder who must renew the pledge, if it is to be kept alive. Article
1867 contemplates that the pledgee may have to undergo expenses in order to prevent the
pledge from being lost; and this expenses the pledgee is entitled to recover from the
pledgor. From this it follows that were, in a case like this, the pledge is lost by the failure of
the pledgee to renew the loan, he is liable for the resulting damage. Under Article 1867
(2099 of the NCC), the creditor should take such care of the pledge thing as the good father
of the family. The rights and duties of parties to a pledge of securities for the payment of the
debt may of course be fixed by agreement as to the manner in which they are to be
collected, but as a general rule not only is it the right of the holder of collateral security to
collect the money thereon and apply it to the principal debt but his duties in this respect are
active and he is bound to ordinary diligence to preserve the legal validity and pecuniary
value of the pledge, and if by negligence, wrongful act or omission on his part loss is
sustained, it must be borne by him.