The Supreme Court, in Sonny Lo v. KJS Eco-Formwork System Phil., Inc., clarified the responsibilities of a party assigning a credit to another. The Court ruled that when a debtor refuses to honor the assigned credit due to a pre-existing claim against the assignor, the assignor breaches their warranty and remains liable for the debt. This decision emphasizes the importance of ensuring the existence and legality of assigned credits and fulfilling contractual obligations to enable collection.

From Scaffolding Supplies to Uncollectible Debts: Who Pays When Assignments Fail?

This case revolves around a construction contractor, Sonny Lo, who purchased scaffolding equipment from KJS Eco-Formwork System, Inc. To settle an outstanding balance, Lo assigned his receivables from Jomero Realty Corporation to KJS. However, Jomero refused to honor the assignment, claiming that Lo was also indebted to them. This refusal led KJS to sue Lo for the unpaid balance, arguing that the assignment did not extinguish the original debt. The central legal question is whether Lo remained liable for the debt despite the assignment, particularly when the assigned credit proved uncollectible due to Jomero’s counter-claim.

An assignment of credit is a legal mechanism where the owner of a credit (the assignor) transfers their right to collect a debt to another party (the assignee). This transfer occurs through a legal cause, such as a sale or dacion en pago, without requiring the debtor’s consent. In this context, dacion en pago is a special mode of payment where the debtor offers something else to the creditor, which the creditor accepts as equivalent to the payment of the debt. The Supreme Court in Filinvest Credit Corporation v. Philippine Acetylene, Co., Inc., G.R. No. L-50449, January 30, 1982, defined it as when the debtor offers another thing to the creditor, and the latter receives it as equivalent to the performance of the obligation. This is critical to understanding the intention of parties in assigning a debt.

For a valid dacion en pago to exist, three requisites must be met: the performance of a prestation in lieu of payment (animo solvendi), a difference between the prestation due and the one substituted (aliud pro alio), and an agreement that the obligation is immediately extinguished by the substituted performance. In essence, the creditor is purchasing the debtor’s property, with the debt serving as payment. As the vendor in good faith, the assignor warrants the existence and legality of the credit at the time of sale but not the debtor’s solvency, unless expressly stipulated.

The Civil Code addresses the obligations of a vendor in good faith, specifically Article 1628:

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 this case, when Jomero refused to pay KJS, citing Lo’s outstanding obligations to them, it directly challenged the existence of the credit assigned. This triggered Lo’s warranty as the assignor, obligating him to ensure the credit’s validity. The Supreme Court emphasized that Lo’s agreement in the Deed of Assignment further solidified his responsibility. The deed explicitly stated that Lo would execute and perform all necessary actions to enable KJS to recover the collectibles. This clause underscores Lo’s commitment to ensuring the successful collection of the assigned credit.

The Court also underscored that the petitioner had further obligations based on the Deed of Assignment:

And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors or assigns, at his cost and expense, 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.

The Court of Appeals correctly reversed the trial court’s decision, holding Lo liable for the debt. The Supreme Court affirmed this decision, finding that Lo breached his warranty and failed to fulfill his obligations under the Deed of Assignment. However, the Supreme Court deleted the award of attorney’s fees because there was no factual basis. The obligation, in effect, became equivalent to a forbearance of credit.

This ruling highlights the importance of due diligence in assignment of credit transactions. Assignors must verify the existence and legality of the credit they are assigning. Assignees must also carefully examine the terms of the assignment and the financial stability of the underlying debtor. The case reinforces the principle that contractual obligations must be honored, and parties cannot escape liability by assigning credits that are subsequently proven to be invalid or uncollectible. Building on this principle, assignors must understand they are not only transferring a right but also warranting its validity. Therefore, they must stand ready to make good on the debt if the assigned credit fails.

FAQs

What is an assignment of credit?	It is a legal agreement where one party (assignor) transfers their right to collect a debt from a third party to another party (assignee). The assignee then has the right to collect the debt.
What is dacion en pago?	Dacion en pago is a special form of payment where a debtor offers something different to the creditor, which the creditor accepts as equivalent to the payment of an outstanding debt. It requires consent from the creditor.
What warranty does an assignor give in an assignment of credit?	The assignor warrants the existence and legality of the credit at the time of the assignment. This means the debt is valid and legally enforceable.
Is an assignor responsible for the debtor’s solvency?	Generally, no, unless it is expressly stipulated in the agreement or the debtor’s insolvency was known prior to the assignment. The assignor is only responsible for the existence and legality of credit.
What happens if the debtor refuses to honor the assigned credit?	If the debtor has a valid reason for refusing to pay (e.g., the assignor also owes them money), the assignor may be held liable for the debt due to breach of warranty. The assignee can seek legal recourse from the assignor.
What was the specific breach in this case?	Sonny Lo breached his warranty because Jomero Realty claimed they did not owe him money due to his own debt to them. He also failed to fulfill his promise to do all necessary actions to allow KJS to recover the collectibles.
What was the ruling of the Supreme Court?	The Supreme Court affirmed the Court of Appeals’ decision, holding Sonny Lo liable for the debt. It found that he breached his warranty and obligations under the Deed of Assignment.
What is the practical implication of this case for businesses?	Businesses assigning credits must ensure the validity and enforceability of those credits. They should also be prepared to make good on the debt if the assigned credit proves uncollectible due to issues existing at the time of assignment.

The Sonny Lo v. KJS Eco-Formwork System Phil., Inc. case serves as a reminder of the importance of fulfilling contractual obligations and ensuring the validity of assigned credits. This case highlights the assignor’s responsibility in an assignment of credit. It gives guidance on how this responsibility is legally grounded.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Sonny Lo v. KJS Eco-Formwork System Phil., Inc., G.R. No. 149420, October 08, 2003