Sales Part 10

COVERAGE OF DISCUSSION:
• ASSIGNMENT OF CREDIT AND OTHER INCORPOREAL RIGHTS
ASSIGNMENT OF CREDIT AND OTHER
INCORPOREAL RIGHTS

 Assignment of credits, concept

 Assignment of credits is a contract whereby a person (assignor) transfers his credit, right or
action against a third person to another person (assignee) for a consideration which is certain in
money or its equivalent.
 An assignment of credit not only entitles the assignee to the credit itself, but also gives him the
power to enforce it as against the debtor of the assignor. (Sps. Serfino vs. Far East Bank and
Trust Co., Inc., G.R. No. 171845, October 10, 2012)
 Example: D owes C P5,000.00. C assigns his credit right to T for a consideration with notice to
D. C is the assignor. T is the assignee. D will have to make his payment to T and no longer to C.
Nature of assignment of credits and other
incorporeal rights

 It partakes of the nature of a contract of sale; hence, it is perfected at the moment there is
a meeting of minds upon the credit or right which is the object of the contract and upon
the price. (See Arts. 1475, 1624.)
 Assignment of credit may also constitute exchange, donation or dation in payment
(dacion en pago). In case of dation in payment, the assignment of credit operates as a
mode of extinguishing the obligation; the delivery and transmission of ownership of a
thing in this case, the credit due from a third person) by the debtor to the creditor is
accepted as the equivalent of the performance of the obligation. (Sps, Serfino vs. Far East
Bank and Trust Co., supra)
Form of assignment of credits

1. Between the parties

 It may be in any form. It may be oral or written, or partly oral and partly written.
2. For binding effect against third persons
A. If personal property is involved public instrument
B. If real property is involved - public instrument recorded in the Registry of Property (Art. 1625)
Effect of payment by debtor to creditor

 Before knowledge of the assignment

 The debtor is released from his obligation if he pays his creditor without his knowledge that his
debt has been assigned. (Art. 1626)
 After knowledge of the assignment
 The debtor is not released from his obligation to pay the assignee.
 Note: An assignment does not require the consent of the debtor. However, actual notice
must be given to him of the assignment so that he could make his payment to the assignee.
This notice is a form of protection in favor of the assignee.
Accessory rights included in the assignment
(Art. 1627)

 Guaranty
 Mortgage
 Pledge
 Preference
 This inclusion of accessory rights in the assignment is based on the rule that the accessory follows
the principal. (See Art. 1537.) However, the parties may stipulate that the accessory rights shall be
excluded from the assignment.
 Example: D obtained a loan from C amounting to P200,000.00. The loan is secured by a mortgage
of D's lot. If assigns his credit right to X, the mortgage right is also considered assigned unless C
and X agree otherwise. Thus, if D defaults in his payment of the loan, X can ask for the foreclosure
of the mortgage where the property will be sold and the proceeds applied in payment of the loan.
Warranties of assignor (Art. 1628)

 The legality and existence of the credit at the time of sale.

 However, there is no such warranty if the credit was sold as doubtful.
 Example: D owes C P10,000.00 The debt is evidenced by a promissory note. Thereafter, C assigns his credit
right to X. If X cannot collect later from D because the note was issued for an illegal gambling debt, C will
be liable to X because he warranted that the credit was legal when he assigned it to X.
 As regards the debtor's solvency, he does not warrant the same, except:
A. When there is a stipulation.
B. When the insolvency already existed prior to the sale and of public knowledge.
 Example: D obtained a loan of P50,000.00 from Thereafter, C assigned his credit right to X. On due
date, X demanded payment from D but D could not pay because he is insolvent. In this case, X.
cannot not go after C except in the said two cases.
Liability of the assignor when warranties are
violated

 If he was in good faith - He shall be liable for the following:

A. Price received
B. Expenses of the contract.
C. Other legitimate payments by reason of the assignment. (Arts. 1628, 1616)
 If he was in bad faith - He shall be liable for the following:
A. Price received
B. Expenses of the contract.
C. Other legitimate expenses by reason of the assignment.
D. Damages. (Arts. 1628, 1616)
Duration of assignor's warranty of the debtor's solvency
If assignor was in good faith

1. The period stipulated.

2. If no period was stipulated -
A. If the assignment was made before maturity – 1 year from maturity.
B. If the assignment was made after maturity - 1 year from the time of the assignment:
 (Therefore, the one-year period shall be counted from the date of maturity or the date of
the assignment, whichever comes later.)
Sale of present inheritance

 Warranty of person selling an existing inheritance or present

 He shall only be answerable for his character as heir but not of the things composing the inheritance, unless such things
were enumerated. (Art. 1630) This is known as the warranty of heirship.
 Example: A, B and C are heirs of X. Pending the partition of the estate of X, A sold his share in the inheritance to y for
P200,000.00. After partition, A received only P180,000.00. In this case, A will not be liable to y for the difference because
what he warranted was that he was an heir of X.
 Liabilities of vendor of inheritance sold
 If the vendor has profited from the fruits or received anything from the inheritance sold (except as to the price thereof), he
shall be obligated to pay them to the vendee unless the contrary has been stipulated. (Art. 1632)
 Liabilities of vendee of inheritance
 The vendee must reimburse the vendor for the debts and charges on the estate paid by the vendor, unless there is a
stipulation to the contrary. (Art. 1633) Vendor's warranty for lump sum sale of the whole of certain rights, tents or products
(Art. 1631)
Vendor's warranty for lump sum sale of the whole of
certain rights, tents or products (Art. 1631)

 The vendor warrants the legitimacy of the whole in general, and shall not be obliged to
warrant each of the various parts of which it may be composed, except when he is
evicted:
1. From the whole of the thing;
2. From a part of the greater value.
 Example: S sold his receivables from more than 50 customers to B for P1,000,000.00. B was
deprived of the amount of P20,000.00 representing an alleged receivable from D. Here, S shall
not be liable because the warranty of S is on the legitimacy of the whole of the receivables. If B,
however, is deprived of the whole amount of the receivables or more than 50% thereof, S shall
be liable to B.
Sale of credit or other incorporeal right in
litigation (Art.1634)

 When right considered in litigation

 The credit or other incorporeal right shall be considered in litigation from the time the complaint concerning the
same is answered.
 Right of legal redemption of debtor when credit or other incorporeal right in litigation is sold
 The debtor shall have the right to extinguish the same by reimbursing the assignee the following:
A. Price paid by the assignee for the right purchased.
B. The judicial costs incurred by him.
C. Interest on the price from the day on which the
D. same was paid.
 Period within which debtor may be exercise the right
 Within 30 days from the date the assignee demands payment from him.
 Purpose of the legal redemption
A. To enable the debtor to pay less than the value of the credit.
B. To prevent speculation on the part of the assignee.
C. To put an end to the litigation.
 Example: D borrowed P50,000.00 from C. When D did not pay the debt upon demand by
C, C filed a complaint against him to collect the debt. D answered the complaint. The
credit right is considered in litigation. Suppose C sold the credit right to X for P40,000.00.
D may exercise his right of legal redemption (within 30 days from demand by X) by
paying X the amount of P40,000.00 plus judicial costs incurred by X and the interest on
the P40,000.00 from the day that the same was paid by X to C.
 Exceptions to legal redemption by debtor (Art. 1635)
 The debtor's right of legal redemption shall not be available when the assignment of the right in litigation is made:
A. To a co-heir or co-owner of the right assigned. The prohibition is intended to do away with co-ownership. If redemption by the
debtor is allowed, the number of co-owners will again increase.
 Example: D owes X and Y. X and Y sue D for collection. D files his answer to the complaint. While the case is pending, X sells his share of the
credit to Y. D cannot redeem the share of X from Y.

B. To a creditor in payment of his credit. Redemption is not allowed because the assignment is meant as a payment to the
assignee. There is therefore no speculation on the part of the assignee whose only desire is to be paid.
 Example: D owes X P100,000.00. For failure to pay, X sues D. D files his answer. While the case is pending, X assigns his credit right to Y
whom he owes P80,000.00. D cannot redeem against Y.

C. To the possessor of a tenement or piece of land which is subject to the right in litigation assigned. Redemption is not likewise
allowed since the intention of the assignee in taking the credit is to preserve the property and not to speculate.
 Example: D obtained a loan from C. To secure the debt, D mortgaged his lot. Later, D sold his lot to X. When D could not pay, C sued D. While
the case was pending, C assigned his credit D has no right of legal redemption against X.
 END OF SALES ;)