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470 SALES

Chapter 8

ASSIGNMENT OF CREDITS AND OTHER

INCORPOREAL RIGHTS

ART. 1624. An assignment of credits and other in-

corporeal rights shall be perfected in accordance with
the provisions of article 1475. (n)

Assignment of credit defined.

Assignment of credit is a contract by which the owner (assignor/
creditor) of a credit and other incorporeal rights transfers, either
onerously or gratuitously, to another (assignee) his rights and
actions against a third person (debtor).
It is the process of transferring the right of the assignor to the
assignee who would then be allowed to proceed against the
debtor1 for the enforcement or satisfaction of the credit to the same
extent as the assignor could.
Where the assignment is on account of pure liberality on the
part of the assignor, the rules on donation would be pertinent;
where valuable consideration is involved, the assignment partakes
of the nature of a contract of sale or purchase. (Nyco Sales Corpo-
ration vs. BA Finance Corporation, 200 SCRA 637 [1991]; Project
Builders, Inc. vs. Court of Appeals, 149 SCAD 322, 358 SCRA 626
[2001].)

Nature of assignment of credit.

(1) Assignment of credit and other incorporeal rights is a con-
sensual, bilateral, onerous, and commutative or aleatory contract.
1
Assignment of receivables is a commonplace commercial transaction today. It is an
activity or operation that permits the assignee to monetize or realize the value of
receivables before the maturity thereof. (Atok Finance Corporation vs. Court of Ap- peals,
41 SCAD 450, 222 SCRA 232 [1993].)

470
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Art. 1624 ASSIGNMENT OF CREDITS AND OTHER 471

INCORPOREAL RIGHTS

(2) The assignment involves no transfer of ownership but

merely effects the transfer of rights which the assignor has at the
time to the assignee. (Casabuena vs. Court of Appeals, 91 SCAD
933, 286 SCRA 594 [1998].) As a consequence of the assignment,
the third party (assignee) steps into the shoes of the original credi-
tor (assignor) as a subrogee of the latter. (see South City Homes,
Inc. vs. BA Finance Corporation, 159 SCAD 880, 371 SCRA 603
[2001].)
(3) It may be done gratuitously (i.e., by donation) or onerously.
If done onerously (i.e., exchange, dacion en pago), whatever may
be the legal cause, it is really a sale. Thus, the subject matter is the
credit or right assigned; the consideration is the price paid for the
credit or right; and the consent is the agreement of the parties to
the assignment of the credit or right at the agreed price. Hence,
Article 1475 is made applicable.
(a) There is, however, one important difference and, that
is, after the transfer, a definite third person is obliged; whereas
in sale, the subject obliged is the whole world which must
respect the title to the buyer. (10 Manresa 376.)
(b) In assignments, a consideration is not always a requi-
site, unlike in sales. Thus, an assignee may maintain an action
based on his title and is immaterial whether or not he paid any
consideration therefor. Furthermore, in an assignment, title is
transferred but possession need not be delivered. (Philippine
National Bank vs. Court of Appeals, 82 SCAD 472, 272 SCRA
291 [1997].)
(c) As a general rule, all principles governing sales also
apply to this transaction. As in sale, the assignee cannot ac-
quire a greater right than that pertaining to the assignor.
Hence, the act of assignment cannot operate to erase liens or
restrictions burdening the right assigned. (Gonzales vs. Land
Bank of the Philippines, 183 SCRA 520 [1990].)

Perfection of contract for assignment

of credit.
The contract for the assignment or transfer of credit and other
incorporeal rights is perfected from the moment the parties agree
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472 SALES Art. 1625

upon the credit or right assigned and upon the price even if nei-
ther has been delivered. (see Art. 1475.)
However, the assignee will acquire ownership only upon de-
livery. (see Arts. 1498, par. 2 and 1501.)

Assignment distinguished from other

terms.
(1) Renunciation is the abandonment of a right without a trans-
fer to another. (see Art. 1270.)
(2) Agency involves representation, not transmission wherein
the agent acts for the principal.
(3) Substitution is the change of a new debtor for the previ-
ous debtor with the credit remaining in the same creditor. (see 10
Manresa 377.)
(4) Subrogation is the change in the person of the creditor with
the credit being extinguished. (see 8 Manresa 400.)

ART. 1625. An assignment of a credit, right or ac-

tion shall produce no effect as against third persons,
unless it appears in a public instrument, or the instru-
ment is recorded in the Registry of Property in case
the assignment involves real property. (1526)

Binding effect of assignment.

(1) As between the parties, the assignment is valid although
it appears only in a private document so long as the law does not
require a specific form for its validity. (see Art. 1356.)
(2) To affect third persons, the assignment must appear in a
public instrument, and in case it involves real property, it is in-
dispensable that it be recorded in the Registry of Property. (see
Lopez vs. Alvarez, 9 Phil. 28 [1908].)
(3) The assignee merely steps into the shoes of the assignor,
the former acquiring the credit subject to defenses (e.g., fraud,
prescription, etc.) available to the debtor against the assignor. The
assignee is deemed subrogated to the rights as well as to the ob-
ligations of the seller. He cannot acquire greater rights than those
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Art. 1626 ASSIGNMENT OF CREDITS AND OTHER 473

INCORPOREAL RIGHTS

pertaining to the assignor. (Koa vs. Court of Appeals, 219 SCRA

541 [1993].) Hence, the act of assignment cannot operate to efface
liens or restrictions burdening the right assigned. (Casabuena vs.
Court of Appeals, 91 SCAD 933, 286 SCRA 594 [1998].)

ART. 1626. The debtor who, before having knowl-

edge of the assignment, pays his creditor shall be
released from the obligation. (1527)

Consent of debtor to assignment

not required.
In an assignment of credit, the consent of the debtor is not
essential in order that it may produce legal effects. Hence, the duty
to pay does not depend on the consent of the debtor; otherwise,
all creditors would be prevented from assigning their credits be-
cause of the possibility of the debtors’ refusal to give consent.
(Sison vs. Yap Tico, 37 Phil. 587 [1918]; Rodriguez vs. Court of
Appeals, 207 SCRA 553 [1992].)
The law speaks not of consent but of notice to the debtor. The
purpose of the notice by the assignee is to inform the debtor that
from the date of the assignment he should make payment to the
assignee and not to the original creditor. (Ibid.)

Effect of payment by debtor after

assignment of credit.
(1) Before notice. — The notice is thus for the protection of the
assignee because before the said notice, payment to the original
creditor is valid. (Elizalde & Co., Inc. vs. Biñan Transportation Co.,
[C.A.] 56 O.G. 5886.) “No man is bound to remain a debtor; he
may pay to him with whom he contracted to pay; and if he pay
before notice that his debt has been assigned, the law holds him
exonerated, for the reason that it is the duty of the person who
has acquired a will by transfer to demand payment of the debt to
give debtor notice.” (Sison vs. Yaptico, supra.) In such case, the
assignee has a right of action against the assignor, the original
creditor. In the absence of notice, the burden of proving that the
debtor had knowledge of the assignment is on the interested party
which is the assignee. (see 10 Manresa 377.)
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474 SALES Arts. 1627-1628

It has been held that since the law does not require the regis-
tration of an assignment of a chattel mortgage, its registration does
not ipso facto operate as constructive notice to the mortgagor. (Sison
vs. Yap Tico, supra.)
(2) After notice, or before notice but debtor had knowledge of as-
signment. — Payment by the debtor to the original creditor after
the former had received notice of the assignment, whether or not
he consented, is not valid as against the assignee. Even without
notice, the debtor will not also be released from his obligation
should he pay the creditor after having had knowledge of the
assignment of the obligation. He thereby acts in bad faith. He can
be made to pay again by the assignee.

ART. 1627. The assignment of a credit includes all

the accessory rights, such as a guaranty, mortgage,
pledge or preference. (1528)

Extent of assignment of credit.

The assignment of credit includes not only the credit itself but
also all rights accessory thereto. (see Art. 1537.) This follows the
familiar rule that the accessory follows the principal. But the par-
ties may stipulate that the accessory rights shall not be included
in the assignment.

EXAMPLE:
D owes C P1,000.00, with G as guarantor. C assigns his credit
to T with notice given to D.
In case D fails to pay T, the latter may enforce the guaranty
of G unless the credit was transferred with express stipulation
that G shall be released from his obligation.

ART. 1628. The vendor in good faith shall be re-

sponsible 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.
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Art. 1628 ASSIGNMENT OF CREDITS AND OTHER 475

INCORPOREAL RIGHTS

Even in these cases he shall only be liable for the

price received and for the expenses specified in No. 1
of Article 1616.
The vendor in bad faith shall always be answer-
able for the payment of all expenses, and for dam-
ages. (1529)

Warranties of the assignor of credit.

In dation in payment or dacion en pago, as a special mode of
payment, the debtor offers another thing to the creditor who ac-
cepts it as equivalent of payment of an outstanding debt. (see Art.
1245.) the undertaking really partakes of the nature of sale. As
such, the vendor in good faith shall be responsible for the exist-
ence and legality of the credit. An assignment credit which is in
the nature of sale of personal property produces the effects of a
dation in payment which may extinguish the obligation. How-
ever, as in any other contract of sale, the vendor or assignor is
bound by certain warranties. More specifically, they are provided
in Article 1628 (par. 1.). (Lo vs. KJS Eco-Formwork System, Phil.,
Inc., 413 SCRA 182 [2003].)
(1) When a creditor assigns his credit, he warrants only the
(a) existence and (b) legality of the credit at the perfection of the
contract. He is not even liable for the warranty if the credit had
been sold as doubtful.
(2) There is no warranty as to the solvency of the debtor un-
less it is expressly stipulated or unless the insolvency was already
existing and of public knowledge at the time of the assignment.
If there be any breach of the above warranties, the assignor-
vendor shall be held answerable therefor.

Liabilities of the assignor of credit.

(1) For violation of the above warranties, the liability of the
vendor (assignor) in good faith is limited only to the price received
and to the expenses of the contract, and any other legitimate pay-
ments by reason of the assignment. (Art. 1616, par. 1.)
(2) The assignor in bad faith is liable not only for the payment
of the price and all expenses, but also for damages. An assignor in
bad faith is one who has knowledge of any of the circumstances
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476 SALES Art. 1629

mentioned above (i.e., non-existence or illegality of the credit,

insolvency of the debtor, etc.) while an assignor in good faith is one
who is ignorant of them.

EXAMPLE:
D owes C P20,000.00, which represents the purchase price
of a car bought by D. C assigns the credit to T.
C is liable to T if at the time of the assignment the credit
has already prescribed, or has been paid, or is annullable and
its nullity is subsequently declared because C warrants the ex-
istence and legality of the credit.
But C is not liable if D cannot fulfill his obligation due to in-
solvency because insolvency has nothing to do with the exist-
ence and legality of the credit unless it has been so expressly
stipulated, or the insolvency of D was existing prior to the as-
signment and of common or public knowledge although it was
not known to C (for C is conclusively presumed to have known
of the same), or known to C although it was not of common
knowledge.
If C lacks sufficient data to determine whether the credit is
still enforceable or not, as for instance, whether the period of
prescription was interrupted and there is a full disclosure of
such fact when the credit was assigned, he cannot be held re-
sponsible even for the existence and legality of the credit.

ART. 1629. In case the assignor in good faith

should have made himself responsible for the sol-
vency of the debtor, and the contracting parties should
not have agreed upon the duration of the liability, it
shall last for one year only, from the time of the as-
signment if the period had already expired.
If the credit should be payable within a term or
period which has not yet expired, the liability shall
cease one year after the maturity. (1530a)

Duration of assignor’s liability where

debtor’s solvency guaranteed.
This provision does not apply if the assignor acted in bad faith.
(see Art. 1628.)
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Art. 1629 ASSIGNMENT OF CREDITS AND OTHER 477

INCORPOREAL RIGHTS

In case the assignor has expressly warranted the solvency of

the debtor,2 the duration of the assignor’s liability shall be as fol-
lows:
(1) If there is a stipulation, then for the term or period fixed;
(2) If there is no stipulation:
(a) for one year from the assignment of the credit when
the period for payment of the credit has expired; or
(b) for one year after its maturity, when such period for
payment has not yet expired.

EXAMPLE:
D owes C P50,000.00 payable on July 1, 2004. C assigns his
credits to T with C making himself responsible for the solvency
of D.
(1) If the agreement is that the duration of C’s liability shall
last for two years from July 1, 2004, then his guaranty shall last
as agreed upon.
(2) If there is no stipulation, and the assignment was made
on August 1, 2004, the liability is limited to one year from the
assignment.
(3) However, if the assignment was made on June 1, 2004,
the responsibility shall cease exactly one year after July 1, 2004
or one year after the maturity of the debt.

Reasons for the rule.

There are two reasons for the rule contained in Article 1629.
First, to prevent fraud which may be committed by feigning
the solvency of the debtor at the time of the assignment when in
fact he is insolvent; and
2
The liability of the assignor under Article 1629 is ex lege; it rests on the breach of the
warranty of solvency. Where the liability is ex contractu, the limiting period set out in Article
1629 is not applicable. Thus, in a case, although the assignor warrants the sol-
vency of the debtors under the deed of assignment, it also binds itself to become solidarily
liable with the other respondents in case of non-payment by the debtors. “The effect of
non-payment by the original trade debtors was a breach of warranty of solvency by [the
assignor], resulting in turn in assumption of solidary liability by [it] under the receiva-
bles assigned. In other words, the assignor becomes a solidary debtor under the terms
of the receivables covered and transferred by virtue of the Deed of Assignment.’’ (Atok
Finance Corporation vs. Court of Appeals, 41 SCAD 450, 222 SCRA 232 [1993].)
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478 SALES Art. 1630

Second, to oblige the assignee to exert efforts in the recovery

of the credit and thereby avoid that by his oversight, the assignor
may suffer. (10 Manresa 400-401.)

ART. 1630. One who sells an inheritance without

enumerating the things of which it is composed, shall
only be answerable for his character as an heir. (1531)

Sale of successional or hereditary

rights.
This article refers to the sale of successional right or the right
to an inheritance before partition.
(1) Subject of sale is hereditary right, not objects which make up
inheritance. — An inheritance may be sold either with specifica-
tion of the properties to be alienated or without enumerating the
things comprising it, that is to say, the hereditary rights only. (Arts.
1630, 1632.) What the law prohibits is the sale of a future inherit-
ance, upon which no contract can be made other than those mak-
ing a division inter vivos of an estate in accordance with Article
1347 of the Civil Code. (Abella vs. Cinco, [C.A.] 37, O.G. 924.)
Hereditary rights in an estate under judicial settlement can be
validly sold without need for approval by the probate court. (Heirs
of P. Escanlar vs. Court of Appeals, 88 SCAD 532, 281 SCRA 176
[1997].)
(2) Warranties of seller. — The seller of an inheritance warrants
only the fact of his heirship but he does not warrant the objects
which make up his inheritance. The sale is, therefore, a sort of an
aleatory contract because the assignee bears the risk that the es-
tate may not be sufficient to pay the obligations of the deceased.
(10 Manresa 404; see Art. 2010.)

EXAMPLE:
H and I are the heirs of the estate left by D, deceased. Be-
fore partition and without specifying his definite share in the
inheritance, H sold his share to B for P100,000.00.
In this case, H only warrants the fact that he is an heir to D.
He is not liable to B should his share after partition be less than
P100,000.00.
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Art. 1631 ASSIGNMENT OF CREDITS AND OTHER 479

INCORPOREAL RIGHTS

(3) Limitation. — There is no law which prohibits an heir

from selling his interests in an inheritance before partition (see
Art. 1088.) except that any such sale must be deemed subject to
the result of the administration proceedings and any pending
litigation. (Beltran vs. Soriano, 32 Phil. 66 [1916].) Pursuant to
Article 774 (Civil Code), “the rights to the succession are trans-
mitted from the moment of the death of the decedent.” In other
words, the person concerned is an heir and may exercise his
rights as such, from the very moment of the death of the
decedent. (Saturnino vs. Paulino, 97 Phil. 50 [1955].)
(4) Distinguished from a waiver of hereditary rights. — There
is a marked difference between a sale of hereditary rights and a
waiver of hereditary rights. The first presumes the existence of
a contract of deed of sale between the parties. The second is,
technically speaking, a mode of extinction of ownership where
there is an abdication or intentional relinquishment of a known
right with knowledge of its existence and intention to relin-
quish it, in favor of other persons who are co-heirs in the suc-
cession. (Acap vs. Court of Appeals, 66 SCAD 359, 251 SCRA
30 [1995].)

ART. 1631. One who sells for a lump sum the whole
of a certain rights, rents, or products, shall comply by
answering for the legitimacy of the whole in gen- eral;
but he shall not be obliged to warrant each of the
various parts of which it may be composed, ex- cept
in the case of eviction from the whole or the part of
greater value. (1532a)

Sale of whole of certain rights, rents, or

products.
In the sale of the whole of certain rights, rents, or products for
a lump sum, the subject matter is the totality of such rights, rents,
or products. As a consequence, the vendor warrants only the
legitimacy of the whole and not the various parts of which it may
be composed. The vendor is not liable for eviction of each of the
various parts unless the eviction involves the whole or the part of
greater value.
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480 SALES Arts. 1632-1633

EXAMPLE:
P is a partner in a partnership. He sells all his interests to B
for the lump sum of P150,000.00. Upon the dissolution of the
partnership, B received the share of P in its assets consisting of
P50,000.00, some office equipment and a car. Subsequently, the
car was recovered by C, a creditor of the partnership.
P is not liable to B because P does not warrant each of the
various parts of his interest in the partnership but only the le-
gitimacy of his rights as partner taken as a whole. But if the
value of the car exceeds P75,000.00, P will be liable because B is
evicted from “the part of greater value.”

ART. 1632. Should the vendor have profited by

some of the fruits or received anything from the in-
heritance sold, he shall pay the vendee thereof, if the
contrary has not been stipulated. (1533)

Liability of vendor of inheritance

for fruits received.
Unless otherwise stipulated, the fruits of an inheritance are
included in the sale thereof. (see Art. 1537.) If the vendor merely
received the fruits, he must deliver them to the vendee; if they
have been consumed, he must reimburse the vendee; if they have
been sold, he must deliver the price of the sale. (see 10 Manresa
406.)
The liability of the vendor for anything received from the in-
heritance sold is subject to any agreement to the contrary.

ART. 1633. The vendee shall, on his part, reimburse

the vendor for all that the latter may have paid for the
debts of and charges on the estate and satisfy the
credits he may have against the same, unless there is
an agreement to the contrary. (1534)

Liability of vendee for debts of

and charges on estate.
Since under Article 1632 the vendor is obliged to pay the
vendee the fruits or anything received from the inheritance, it is
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Art. 1634 ASSIGNMENT OF CREDITS AND OTHER 481

INCORPOREAL RIGHTS

also just that the vendee be required to reimburse the vendor for
whatever the latter has paid for the debts of and charges on the
estate.
The liability of the vendee for the debts and charges is like-
wise subject to any contrary agreement.

ART. 1634. When a credit or other incorporeal right

in litigation is sold, the debtor shall have a right to
extinguish it by reimbursing the assignee for the price
the latter paid therefor, the judicial costs, incurred by
him, and the interest on the price from the day on
which the same was paid.
A credit or other incorporeal right shall be consid-
ered in litigation from the time the complaint concern-
ing the same is answered.
The debtor may exercise his right within thirty days
from the date the assignee demands payment from
him. (1535)

Legal redemption in sale of credit or other

incorporeal right in litigation.
This article is an instance of legal redemption.
The following are the requisites before the right of legal re-
demption can be exercised:
(1) There must be a sale or assignment of a credit. The con-
cept of sale must be understood in its restricted sense. The right
cannot be exercised if the transaction is exchange or donation (see
10 Manresa 416.);
(2) There must be a pending litigation at the time of the as-
signment. The complaint by the assignor must have been filed and
answered by the creditor before the sale of the credit. Article 1634
applies only to a claim in litigation the meaning of which is not a
claim open to litigation, but one which is actually litigated; that is
to say, disputed or contested, which happens only after an an-
swer interposed in a suit (Robinson vs. Garry, 8 Phil. 275 [1907].);
(3) The debtor must pay the assignee:
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482 SALES Art. 1634

(a) the price paid by him;

(b) the judicial costs incurred by him; and
(c) the interest on the price from the date of payment; and
(4) The right must be exercised by the debtor within thirty (30)
days from the date the assignee demands (judicially or extra-ju-
dicially) payment from him. A debtor who has paid the full
amount of a litigated credit to one who has purchased such liti-
gated credit cannot counterclaim the difference between the
amount paid by such debtor and the amount paid by the pur-
chaser of such litigated credit unless such debtor shall make use
of his right to do so within the prescribed period.

ILLUSTRATIVE CASES:
1. Mortgagee assigned its rights as such and as highest bidder
in foreclosure sale of mortgaged land while there was a pending case
between unpaid seller of the land and mortgagor (buyer).
Facts: S sold several lots to B, who, after securing registra-
tion of said lots in her name, mortgaged them to C (bank). B
failed to complete payment of the purchase price. The sale was
rescinded by the court without prejudice to the right of C, which
was adjudged a mortgagee in good faith. C foreclosed the mort-
gage. At the public auction, C was the highest bidder. Subse-
quently, C assigned its rights as mortgagee and as the highest
bidder to D (NIDC).
S filed a motion to cancel the encumbrance of D from the
certificates of title concerned which was granted by the lower
court on the ground that C “should have submitted the deed of
assignment for approval of the court knowing that the subject
matter of said deed is in custodia legis and so that the consent of
S could be taken.”
Issue: Upon the facts, has a valid assignment been made by
C to D of its rights over the lots in question?
Held: Yes. There is nothing in our statutes or jurisprudence
which prohibits a creditor without the consent of the debtor
from making an assignment of his credit and the rights acces-
sory thereto; and, certainly, an assignment of credit and its ac-
cessory rights does not at all obliterate the obligation of the
debtor to pay, but merely puts the assignee in the place of his
assignor. Indeed, Article 1634 definitely recognizes the likeli-
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Art. 1634 ASSIGNMENT OF CREDITS AND OTHER 483

INCORPOREAL RIGHTS

hood that credits and other incorporeal rights in litigation may

be assigned pendente lite and, in such event, provides that the
debtor may extinguish his obligation by making appropriate
reimbursement to the assignee.
In other words, an assignment of credit pendente lite does
not extinguish the credit or accessory rights assigned, but sim-
ply changes the bag into which the debtor must empty the
money in payment. (National Investment & Development Corp. vs.
De Los Angeles, 40 SCRA 487 [1971].)
———— ———— ————
2. Plaintiff in a case, who had previously assigned in favor of his
creditor his litigated credit in said case by a deed of assignment which
was duly submitted to the court, entered into a compromise
agreement thereafter releasing the defendant therein from his claim
without notice to his assignee.
Facts: T brought an action against M for the collection of a
sum of money. While the case was pending resolution, T as-
signed in favor of L by way of securing or guaranteeing T’s
obligation to L his litigated credit against M duly submitted to
the court with notice to the parties. The lower court ruled in favor
of T. Subsequently, pending resolution of the appeal of M to the
Court of Appeals, M entered into a compromise agree- ment
with T wherein T acknowledged that all his claims against M had
been settled.
After the Court of Appeals rendered a decision affirming in
toto the decision of the lower court, M filed a motion for recon-
sideration praying that said decision be set aside, principally an-
chored upon the ground that a compromise agreement was en-
tered into between him and T which, in effect, released M from
liability. The validity of the guarantee or the pledge in favor of L
has not been questioned and it appears that the deed of as-
signment fulfills the requisites of a valid pledge or mortgage.
Issue: Is the compromise agreement valid?
Held: No. Although T (assignor) may validly alienate the
litigated credit under Article 1634, said provision should not
be taken to mean as a grant of an absolute right on the part of T
to indiscriminately dispose of the thing or the right given as
security. It should be read in consonance with Article 2097.3
3
Art. 2097. With the consent of the pledgee, the thing pledged may be alienated by
the pledgor or owner, subject to the pledge. The ownership of the thing pledged is trans-
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484 SALES Art. 1635

Although the pledgee or assignee (L) did not ipso facto be-
come the creditor of M, the pledge being valid, the incorporeal
right assigned by T in favor of L can only be alienated by T
with due notice to and consent of L or his duly authorized rep-
resentative. To allow the assignor to dispose or alienate the se-
curity without notice to and consent of the assignee will render
nugatory the very purpose of a pledge or an assignment of
credit.
Moreover, under Article 1634, the debtor (M) has a corre-
sponding obligation to reimburse the assignee (L) for the price
the latter paid or for the value given in consideration for the
deed of assignment. Failing in this, the alienation of the liti-
gated credit made by T in favor of M by way of a compromise
agreement does not bind L.
Furthermore, having knowledge of the assignment, M was
estopped from entering into a compromise agreement without
notice to and consent of L. More so, in the light of the fact that
no reimbursement has even made in favor of L as required un-
der Article 1634. M acted in bad faith and in connivance with T
so as to defraud L in entering into the compromise agreement.
(Estate of G. Litton vs. Mendoza, 163 SCRA 246 [1988].)

Purpose of grant of right to debtor.

The above provision gives an advantage to the debtor because
he will pay less than the value of the credit assigned if he exer-
cises his right to redeem the same.
The object of the law in allowing the redemption by the debtor
is to avoid the purchase by the third person of credits in litiga-
tions merely for speculation.

ART. 1635. From the provisions of the preceding

article shall be excepted the assignments or sales
made:
(1) To a co-heir or co-owner of the right assigned;
(2) To a creditor in payment of his credit;

mitted to the vendee or transferee as soon as the pledgee consents to the alienation, but
the latter shall continue in possession. (n)
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Art. 1635 ASSIGNMENT OF CREDITS AND OTHER 485

INCORPOREAL RIGHTS

(3) To the possessor of a tenement or piece of land

which is subject to the right in litigation assigned.
(1536)

Exceptions to debtor’s right to legal

redemption.
Article 1635 enumerates three instances of assignments or
sales as exceptions to the provisions of Article 1634. (see Art.
1491[5].)
It must be emphasized that under both Articles 1634 and 1635,
the debtor cannot redeem if the credit or other incorporeal right
is not in litigation when the same is sold.
(1) Sale to a co-heir or co-owner. — This exception is based on
the desire to do away with co-ownership or pro-indivision.
Moreover, if the right of redemption is granted to the debtor, it
would not terminate litigation which is the purpose of this arti- cle
because the co-owner or co-heir may still sue the debtor for the
share that corresponds to the former in the credit. (10 Manresa
419.)

EXAMPLE:
D is indebted to B and C in the amount of P10,000.00. For
failure to pay his debt, B sues D.
If B transfers his credit to C during the pendency of the
litigation, D cannot redeem.

(2) Sale to a creditor. — There is a lawful basis for the assign-

ment as the assignee cannot be considered as a vendee of a right
in litigation and as a speculator. It really refers to a dation in pay-
ment. (see Art. 1245; 10 Manresa 419.)

EXAMPLE:
A owes B the sum of P10,000.00 and B owes C P8,000.00.
If B assigns his credit against A to C then the subject of
litigation (between A and B), A has also no right of legal re-
demption.
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486 SALES Art. 1635

(3) Sale to the possessor of property in question. — The reason for

this exception is that the assignee is moved by a desire to preserve
the property and not to speculate at the expense of the debtor.
The example usually given is that where a vendee (assignee)
of a property subject to a mortgage acquires the mortgage credit
of the assignor (mortgage-creditor) against the vendor (mortgage-
debtor). It may also refer to a purchaser of property under attach-
ment who subsequently acquires the credit giving rise to the at-
tachment. (Ibid., 419-420.)

EXAMPLE:
A owes B P10,000.00 which is secured by a mortgage on a
land owned by A.
If A sells the land to C and B assigns his credit in litigation
against A to C, A is not entitled to redeem.

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