Lo v. KJS Eco-Formwork System Phil., Inc.

SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent
(Article 1245, Dacion en pago/Dation in payment)
G.R. No. 149420, October 8, 2003
YNARES-SANTIAGO, J.

FACTS: Respondent KJS sold scaffolding equipment worth P540,425.80 to Petitioner Sonny
Lo, a building contractor. He paid a downpayment of P150,000.00, with the balance made
payable in ten monthly installments. Shortly thereafter, his business experienced financial
difficulties and he defaulted on his payments to KJS after two installments. Consequently, oral
and written demands were made against him.

Months later, Sonny and KJS executed a Deed of Assignment to settle the former’s overdue
balance. Through the Deed, Sonny assigned to KJS his receivables amounting to P335,462.14
from Jomero Realty Corp. However, Jomero refused to pay KJS upon collection, alleging that
Sonny also still had outstanding obligations with them. Thus, respondent KJS filed a case
against petitioner Sonny for recovery of a sum of money. Petitioner Sonny contended that his
obligation to KJS was extinguished through the execution of the Deed of Assignment.

ISSUE: Whether the Deed of Assignment extinguished petitioner’s obligation?

RULING: No, the Deed of Assignment did not extinguish petitioner’s obligation to KJS.

Dacion en pago is a special mode of payment, wherein “the debtor offers another thing to the
creditor who accepts it as the equivalent of payment of an outstanding debt.” The assignment of
credit also produces the effects of a dation in payment. However, the Civil Code, in Article 1628,
requires that “the vendor in good faith shall be responsible for the existence and legality of the
credit at the time of the sale, unless it should have been sold as doubtful; but not for the
solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency was
prior to the sale and of common knowledge.”

In the case at hand, it was the petitioner’s lawful duty to guarantee that the debt assigned (1)
actually existed, and (2) could be successfully and legally collected. Petitioner failed to uphold
this warranty when Jomero showed that its debt to petitioner was extinguished by
compensation, rendering the assigned collectible as non-existent. Thus, petitioner Sonny Lo is
still obligated to pay KJS the amount of his indebtedness.

Assignment of credit= in the nature of sale