1.

Estate of Litton v Mendoza and CA | 1998

1. 1963, CMB Products (with Mendoza as president) offered to sell textile cotton
materials to the Bernal spouses (engaged in manufacture of embroidery, garments
and cotton materials);
- For this purpose, Mendoza introduced the spouses to Alfonso Tan;
2. The spouses purchased on credit from Tan cotton materials (80k);
- Mendoza guaranteed the payment of the debt;
3. Tan then delivered the cotton materials to the spouses;
4. In view of the arrangement, CBM Products (thru Mendoza) asked for and received
a post-dated check (Feb 20, 1964) for the payment of the spouses debt;
- It was understood that Mendoza will retain the check until the cotton materials
are finally manufactured into garments, after which Mendoza will sell the
finished products for the spouses;
5. Meanwhile, the check matured without having been cashed so Mendoza demanded
for another check without a date;
6. Feb. 28, 1964, Mendoza issued two checks in favour of Tan (worth 80k);
- He told the spouses of the same and told them they are indebted to him and
asked the spouses to sign an instrument whereby Mendoza assigned the said
amount to Insular Products, Inc.;
7. Tan had the two checks discounted but were later returned with words stop
payment;
- It appears it was ordered by Mendoza for failure of the spouses to deposit
sufficient funds for the check issued by the spouses in his favour;
8. Tan sued Mendoza while the spouses brought an action for interpleader for not
knowing whom to pay;
- Pendente lite, Tan assigned in favour of Littion, Sr his litigatious credit (in
action of spouses) against Mendoza, duly submitted to the court, with notice
to the parties;
9. TC ordered Mendoza to pay Tan 76k;
- CA affirmed (1977);
10. Meanwhile, in 1971, Mendoza entered into Compromise Agreement with Tan
wherein the latter recognized that his claims against Mendoza had been settled and
because of that, both waives any claim against the other; with a provision that it no
way affects Tans right to go against the spouses;
11. 1977 (after CAs decision), Mendoza filed MFR 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;
12. 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; 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;

W/N compromise valid. No.

Ratio:
1. Purpose of compromise: to replace and terminate controverted claims; once
approved, it has the force of res judicata (except for vices of consent or forgery);
- Petitioner seeks to set aside the compromise agreement since prior thereto,
Tan executed a deed of assignment in favour of Littion, Sr. involving the same
litigated credit;
2. Compromise Agreement set aside:
- Fact that assignment was done by way of securing Tans obligation in favour
of Littion, Sr. does not affect the resolution of the matter;
- Validity of pledge/guaranty in favour of Liiton has not been questioned;
Deed of assignment fulfils the requirements of a valid pledge or mortgage;
- Although Tan may validly alienate the litigatious credit (1634), it does not
give him (assignor/Tan) absolute right to indiscriminately dispose of the thing;
- Said provision (1634) should be read in consonance with 2097; although the
pledgee/assignee (Litton, Sr.) did not become ipso facto become the creditor
of Mendoza, the pledge being invalid, the incorporeal right assigned by Tan in
favour of Mendoza can only be alienated by Tan with due notice to and
consent of Litton, Sr. or his duly authorized representative;
- To allow it would 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;
Notes:
- From the very beginning, Mendoza was, from the very beginning, aware of
the deed of assignment; as it was submitted to the court where CBM was one
of the defendants;
- Having such knowledge, Mendoza is estopped from entering into the
compromise agreement involving the same litigate credit without notice to and
consent of the assignee;
- Mendoza acted in bad faith and in connivance with assignor Tan to defraud
Littion, Sr. in entering in the compromise agreement;

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

Bidin, J. | 1989
1. 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 perannum;
- They failed to pay and left balance of 15k as of September 1969;
2. 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;
3. 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;
4. 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 itsabolition;
- 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;
5. For failure of the spouses and Teodor Sr to pay, MBC instituted against them;
- Teodoro Sr subsequently died so suit only against the spouses;
6. TC favoured MBC; MFR denied;
- Spouses appealed to CA but since issue pure question oflaw, 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:
Sale
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;
Donation when it is by gratuitous title;
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;
- 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);
2. 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.

Issue: Did the encashment of Victorias time deposit certificates amount to

pactumcommissorium? NO.
3. Yau Chu v. Court of Appeals
G.R. No. L-78519/26 September 1989
Facts:
Since 1980, Victoria Yau Chu had been purchasing cement on credit from
CAMS Trading Enterprises, Inc.
To guaranty payment for her cement withdrawals, she executed in favor
of CAMS deeds of assignment of her time deposits in Family Savings
Bank.
The total amount came up to P320,000.
In July 1980, CAMS notified the bank that Victoria had an unpaid account
with it in the sum of about P314K and requested the encashment of the time
deposit certificates assigned to it by Victoria.
As proof, it submitted to the bank a letter from Victoria admitting her
outstanding account with CAMS reaching P404.5K.
The bank verbally advised Victoria of CAMS request and after she verbally
agreed, the bank encashed the certificates and delivered about P283,000
Victoria then demanded that the bank and CAMS restore her time deposit.
When both refused, she filed a complaint to recover the sum from them before
the RTC of Makati.
The RTC dismissed the complaint for lack of merit. Court of Appeals
affirmed. Before the Supreme Court she argued that the encashment of her
time deposit certificates was pactum commissorium.

Ruling: Petition denied.

Ratio:
Since the collateral in this case was also money, there was no need to sell the
thing pledged at public auction in order to satisfy the pledgors obligation.
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 pactum commissorium as
prohibited
under Article
2088
of
the
Civil
Code. A pactum
commissorium is a provision for the automatic appropriation of the pledged or
mortgaged property by the creditor in payment of the loan upon its maturity.
This prohibition 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 is not illegal for the creditor to
encash the time deposit certificates to pay the debtors overdue obligation, with
the latters consent.