Lo vs KJS Eco-Formwork System Ph., Inc.

 
G.R. No. 149420. October 8, 2003
YNARES-SANTIAGO, J.:

Section 3 of Chattel Mortgage Law, Article 2140

Doctrine: 
Sec. 3. Chattel mortgage defined. — A chattel mortgage is a conditional sale of personal property as security
for the payment of a debt, or the performance of some other obligation specified therein, the condition
being that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other
act named. If the condition is performed according to its terms the mortgage and sale immediately become
void, and the mortgagee is thereby divested of his title.

ART. 2140. By chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the
performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the
contract is a pledge and not a chattel mortgage.

Facts:
RTC Makati CA SC
Respondent Dismiss the Reverses.Order Lo to pay KJS w/ 6% interest per annum and Hence, we affirm the decision of the
filed an complaint on the atty’s fee equivalent to 10% of the amount due and costs of Court of Appeals ordering petitioner to
action for ground that the the suit.  pay respondent the sum of P335,46214
recovery assignment with legal interest thereon. However,
extinguished the Reasons:  we find that the award by the Court of
obligation.  (1) petitioner failed to comply with his warranty under the Appeals of attorney’s fees is without
Deed;  factual basis. No evidence or testimony
(2) the object of the Deed did not exist at the time of the was presented to substantiate this
transaction, rendering it void pursuant to Article 1409 of the claim. Attorney’s fees, being in the
Civil Code; and  nature of actual damages, must be duly
(3) petitioner violated the terms of the Deed of Assignment substantiated by competent proof.
when he failed to execute and do all acts and deeds as shall be
necessary to effectually enable the respondent to recover the
collectibles.

KJS corporation engaged in the sale of steel scaffoldings, while petitioner Sonny L. Lo, doing business under the name and
style San’s Enterprises, is a building contractor. The petitioner ordered scaffolding equipment from the respondent worth
P540,425.80. He paid a down payment in the amount of P150,000.00. The balance was made payable in ten monthly
installments. Respondent delivered and petitioner was able to pay the first 2 monthly installment. But he was not able to
settle despite the oral and written demands against him. They executed a Deed of Assignment whereby Lo assigned KJS his
receivables of P335,462.14 from Jomero Realty Corp.  KJS tried to collect from Jomero Realty but it refused to honor the
Deed of Assignment because it claimed that the petitioner was also indebted to it. KJS sent a letter demanding payment to
Lo but Lo refused claiming that his obligation was extinguished when they executed the Deed of Assignment. 

ISSUE:
1. Is Lo’s obligation to KJS extinguished when they executed the Deed of Assignment?
2. Is the deed of assignment in the same nature as a chattel mortgage?

RULING:
1. No, the petitioner’s obligation was not extinguished with the execution of the deed of assignment.
 
An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal
cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his
credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same
extent as the assignor could enforce it against the debtor.
 
The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be charged against the debtor’s debt.  As such, the vendor in good
faith shall be responsible, for the existence and legality of the credit at the time of the sale but not for the solvency
of the debtor, in specified circumstances.
 
Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal property, produced
the effects of a dation in payment which may extinguish the obligation. However, as in any other contract of sale,
the vendor or assignor is bound by certain warranties.  More specifically, the first paragraph of Article 1628 of the
Civil Code provides:
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.
 
From the above provision, petitioner, as vendor or assignor, is bound to warrant the existence and legality of the
credit at the time of the sale or assignment.  When Jomero claimed that it was no longer indebted to petitioner
since the latter also had an unpaid obligation to it, it essentially meant that its obligation to petitioner has been
 extinguished by compensation. In other words, respondent alleged the non-existence of the credit and asserted its
claim to petitioner’s warranty under the assignment.  Therefore, it is necessary for the petitioner to make good its
warranty and pay the obligation.
 
Furthermore, the petitioner  breached his obligation under the Deed of Assignment, to execute and do all such
further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover whatever
collectibles said ASSIGNOR has in accordance with the true intent and meaning of these presents.
 
Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured the performance
thereof in case the same is later found to be inexistent.  He should be held liable to pay to respondent the amount
of his indebtedness.

2. No, it is not. A chattel mortgage pertains to a registered security in the Chattel Mortgage Register, a
security for an outstanding loan, ownership is with the debtor, hence no transfer thereto. In the case at bar,
the collectibles were alienated to the creditor as means of payment of his loan. By virtue of which, the
ownership was transferred to the creditor upon meeting of minds between parties.

++++++

Doctrine In Chattel Mortgage, the ownership remains with the debtor. Debtor may use the security, unless otherwise
provided in the contract between the parties. Unlike in dacion en pago, the transfer of ownership would
result to extinguishment of debt whereby the value of the properties is the equivalent value of the debt.
Loan in chattel mortgage subsists but in dacion en pago is extinguished.

The essence of this case is to differentiate chattel mortgage against dacion en pago

Chattel mortgage Dacion en pago

Ownership remains with the debtor. Ownership transferred to creditor

Security for loan Payment for loan
Loan subsists Loan is extinguished.