G.R. No. L-49120 June 30, 1988
ESTATE OF GEORGE LITTON, petitioner, vs. CIRIACO B. MENDOZA and COURT OF APPEALS, respondents.

FACTS

Alfonso Tan filed a collection suit (Civil Case No. Q-8303) against Ciriaco B. Mendoza for the value of two checks, totaling P80,796.62, which were dishonored. While the case was pending, Tan, by a Deed of Assignment dated March 20, 1966, assigned his litigated credit in the case to George Litton, Sr. as security for an obligation. This deed was formally submitted to the court, and Mendoza was notified. The trial court later held Mendoza liable to Tan. Mendoza appealed to the Court of Appeals, which affirmed the trial court’s decision on January 27, 1977.
Pending that appeal, on February 2, 1971, Mendoza and Tan entered into a compromise agreement wherein Tan acknowledged full settlement of his claims and released Mendoza from all liability. Tan’s counsel of record did not sign the agreement. After the Court of Appeals rendered its affirmance, Mendoza moved for reconsideration, invoking the compromise agreement as a supervening event that extinguished his obligation. The Court of Appeals granted the motion and set aside its own decision based on the compromise. The Estate of George Litton, as assignee, then elevated the case to the Supreme Court.

ISSUE

(1) Can Tan, after assigning his litigated credit to Litton with notice to the court and Mendoza, validly compromise and release Mendoza without the assignee’s consent? (2) Is Mendoza, with knowledge of the assignment, estopped from invoking the compromise to dismiss the action?

RULING

No, the compromise agreement is null and void. The Supreme Court granted the petition, reinstated the Court of Appeals’ original decision affirming Mendoza’s liability, and declared the compromise agreement invalid.
The legal logic is anchored on the nature of an assignment of a litigated credit under Article 1634 of the Civil Code and principles of property rights and good faith. Upon the execution and notification of the Deed of Assignment, Tan’s right to the credit was effectively transferred to Litton as an assignee. Tan no longer had the beneficial ownership or the right to alienate the credit independently. Any act of disposal, including a compromise, without the assignee’s consent is a violation of the assignee’s vested rights. The Court emphasized that from the moment of assignment, Tan held any proceeds from the litigation in trust for Litton.
Furthermore, Mendoza was not a party in good faith entitled to benefit from the compromise. He had actual knowledge of the assignment, as it was formally manifested to the court where he was a party. With such knowledge, he was legally and morally bound to respect the rights of the assignee. Entering into a secret settlement with the assignor constituted bad faith. The Court also noted that Mendoza failed to exercise his right of reimbursement under Article 1634, which allows a debtor to extinguish a assigned credit by reimbursing the assignee. By not doing so and instead dealing with Tan, he cannot invoke the compromise to prejudice the assignee. The compromise, being executed without the consent of the real party in interest (the assignee) and in bad faith, produced no legal effect.