G.R. No. 149420 ; October 8, 2003
SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.

FACTS

Petitioner Sonny Lo, a building contractor, purchased scaffolding equipment from respondent KJS Eco-Formwork System Phil., Inc. for P540,425.80. After paying a down payment and two installments, Lo encountered financial difficulties and defaulted on the balance. To settle the outstanding obligation of P335,462.14, the parties executed a Deed of Assignment on October 11, 1990. Under this deed, Lo assigned to KJS his receivables of the same amount from Jomero Realty Corporation. The deed contained warranties that the credit was justly owing and that Lo would do all acts necessary to enable KJS to recover the assigned amount.
When KJS sought 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 refused, contending his obligation was extinguished by the assignment. KJS filed a complaint for sum of money. The trial court dismissed the complaint, ruling the assignment extinguished the obligation. The Court of Appeals reversed, holding the assignment did not extinguish the debt and ordering Lo to pay.

ISSUE

Whether the Deed of Assignment extinguished petitioner Lo’s obligation to respondent KJS.

RULING

No, the Deed of Assignment did not extinguish the obligation. An assignment of credit is a mode of extinguishing an obligation only if it functions as a dacion en pago, meaning the assignment is accepted as an equivalent performance of the debt. Here, the assignment was not a dacion en pago but a sale of credit. The deed’s terms and the circumstances showed KJS merely acquired the right to collect from Jomero Realty as a means of satisfying Lo’s debt, not as an immediate and absolute payment. Consequently, Lo’s original obligation to KJS remained, merely suspending its enforcement pending collection from the assigned debtor.
Crucially, the assigned credit was ineffective because Jomero Realty refused to honor it. Under Article 1628 of the Civil Code, an assignor in good faith warrants the existence and legality of the credit at the time of sale. By assigning a credit that Jomero Realty validly contested due to a prior claim, Lo breached this warranty. The failure of the assignment, through no fault of KJS, meant the primary obligation was not extinguished. Lo remained liable for the original debt. The Supreme Court affirmed the appellate decision ordering Lo to pay P335,462.14 with legal interest, but deleted the award of attorney’s fees for lack of evidentiary basis.