ESTATE OF GEORGE LITTON, petitioner,

vs.
CIRIACO B. MENDOZA and COURT OF APPEALS, respondents.
An action for the collection of a sum of money representing the value of two (2) checks which plaintiff Tan claims to
have been delivered to him by defendant Mendoza, private respondent herein, by way of guaranty with a
commission.
the Bernal spouses 2 are engaged in the manufacture of embroidery, garments and cotton materials. Sometime in
September 1963, C.B.M. Products, 3 with Mendoza as president, offered to sell to the Bernals textile cotton materials
and, for this purpose, Mendoza introduced the Bernals to Alfonso Tan. Thus, the Bernals purchased on credit from
Tan some cotton materials worth P 80,796.62, payment of which was guaranteed by Mendoza.
Thereupon, Tan delivered the said cotton materials to the Bernals. In view of the said arrangement, on November
1963, C.B.M. Products, through Mendoza, asked and received from the Bernals PBTC Check No. 626405 for P
80,796.62 dated February 20, 1964 with the understanding that the said check will remain in the possession of
Mendoza until the cotton materials are finally manufactured into garments after which time Mendoza will sell the
finished products for the Bernals. Meanwhile, the said check matured without having been cashed and Mendoza
demanded the issuance of another check 4 in the same amount without a date.
On the other hand, on February 28, 1964, defendant Mendoza issued two (2) PNB checks 5 in favor of Tan in the total
amount of P 80,796.62. He informed the Bernals of the same and told them that they are indebted to him and asked
the latter to sign an instrument whereby Mendoza assigned the said amount to Insular Products Inc. Tan had the two
checks issued by Mendoza discounted in a bank. However, the said checks were later returned to Tan with the words
stamped "stop payment" which appears to have been ordered by Mendoza for failure of the Bernals to deposit
sufficient funds for the check that the Bernals issued in favor of Mendoza.
Tan brought an action against Mendoza docketed as Civil Case No. Q-8303 6 while the Bernals brought an action for
interpleader docketed as Civil Case No. 56850 7 for not knowing whom to pay. While both actions were pending
resolution by the trial court, on March 20, 1966, Tan assigned in favor of George Litton, Sr. his litigatious credit
After due trial, the lower court ruled that the said PNB checks were issued by Mendoza in favor of Tan for a
commission in the sum of P 4,847.79 and held Mendoza liable as a drawer whose liability is primary and not merely
as an indorser and thus directed Mendoza to pay Tan the sum of P 76,000.00, the sum still due, plus damages and
attorney's fees. 10
Mendoza seasonably filed an appeal with the Court of Appeals, dockted as C.A. G.R. No. 41900-R, arguing in the
main that his liability is one of an accommodation party and not as a drawer.
On January 27, 1977, the Court of Appeals rendered a decision affirming in toto the decision of the lower court. 11
Meanwhile, on February 2, 1971, pending the resolution of the said appeal, Mendoza entered into a compromise
agreement with Tan wherein the latter acknowledged that all his claims against Mendoza had been settled and that
by reason of said settlement both parties mutually waive, release and quit whatever claim, right or cause of action
one may have against the other, with a provision that the said compromise agreement shall not in any way affect the
right of Tan to enforce by appropriate action his claims against the Bernal spouses. 12
On February 25, 1977, Mendoza filed a motion for reconsideration praying that the decision of January 27, 1977 be
set aside, principally anchored upon the ground that a compromise agreement was entered into between him and Tan
which in effect released Mendoza from liability. Tan filed an opposition to this motion claiming that the compromise
agreement is null and void as he was not properly represented by his counsel of record Atty. Quiogue, and was

instead represented by a certain Atty. Laberinto, and principally because of the deed of assignment that he executed
in favor of George Litton, Sr. alleging that with such, he has no more right to alienate said credit.
While the case was still pending reconsideration by the respondent court, Tan, the assignor, died leaving no
properties whatever to satisfy the claim of the estate of the late George Litton, Sr.
In its Resolution dated August 30, 1977, 13 the respondent court set aside its decision and approved the compromise
agreement.
As to the first ground invoked by Tan, now deceased, the respondent court ruled that the non-intervention of Tan's
counsel of record in the compromise agreement does not affect the validity of the settlement on the ground that the
client had an undoubted right to compromise a suit without the intervention of his lawyer, citing Aro vs. Nanawa. 14
ISSUE:

1) Can a 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, validly enter into a compromise agreement thereafter
releasing the defendant therein from his claim without notice to his assignee?
(2) Will such previous knowledge on the part of the defendant of the assignment made by the plaintiff estop said
defendant from invoking said compromise as a ground for dismissal of the action against him?

HELD:
As to the second ground, respondent court ruled as follows:
... it is relevant to note that Paragraph 1of the deed of assignment states that the
cession,assignment, transfer, bond conveyance by Alfonso Tan was only by way of securing, or
guaranteeing his obligation to GEORGE LITTON, SR.
Hence, Alfonso Tan retained possession and dominion of the credit (Par. 2, Art. 2085, Civil Code).
"Even considered as a litigations credit," which indeed characterized the claims herein of Alfonso
Tan, such credit may be validly alienated by Tan (Art. 1634. Civil Code).
Such alienation is subject to the remedies of Litton under Article 6 of the Civil Code, whereby the
waiver, release, or quit-claim made by plaintiff-appellee Alfonso Tan in favor of defendant-appellant
Ciriaco B. Mendoza, if proven prejudicial to George Litton, Sr. as assignee under the deed of
assignment, may entitle Litton to pursue his remedies against Tan.
The alienation of a litigatious credit is further subject to the debtor's right of redemption under
Article 1634 of the Civil Code.
The purpose of a compromise being to replace and terminate controverted claims, 20 courts encourage the same. A
compromise once approved by final order of the court has the force of res judicata between parties and should not be
disturbed except for vices of consent or forgery. 21
In this case, petitioner seeks to set aside the said compromise on the ground that previous thereto, Tan executed a
deed of assignment in favor of George Litton, Sr. involving the same litigated credit.

We rule for the petitioner. The fact that the deed of assignment was done by way of securing or guaranteeing Tan's
obligation in favor of George Litton, Sr., as observed by the appellate court, will not in any way alter the resolution on
the matter. The validity of the guaranty or pledge in favor of Litton has not been questioned. Our examination of the
deed of assignment shows that it fulfills the requisites of a valid pledge or mortgage. 22 Although it is true that Tan
may validly alienate the litigatious credit as ruled by the appellate court, citing Article 1634 of the Civil Code, said
provision should not be taken to mean as a grant of an absolute right on the part of the assignor Tan to
indiscriminately dispose of the thing or the right given as security. The Court rules that the said provision should be
read in consonance with Article 2097 of the same code. 23 Although the pledgee or the assignee, Litton, Sr. did not
ipso facto become the creditor of private respondent Mendoza, the pledge being valid, the incorporeal right assigned
by Tan in favor of the former can only be alienated by the latter with due notice to and consent of Litton, Sr. or his duly
authorized representative. To allow the assignor to dispose of or alienate the security without notice and consent of
the assignee will render nugatory the very purpose of a pledge or an assignment of credit.
Moreover, under Article 1634, 24 the debtor has a corresponding obligation to reimburse the assignee, Litton,
Sr. for the price he paid or for the value given as consideration for the deed of assignment. Failing in this, the
alienation of the litigated credit made by Tan in favor of private respondent by way of a compromise
agreement does not bind the assignee, petitioner herein.
Indeed, a painstaking review of the record of the case reveals that private respondent has, from the very beginning,
been fully aware of the deed of assignment executed by Tan in favor of Litton, Sr. as said deed was duly submitted to
Branch XI of the then Court of First Instance of Manila in Civil Case No. 56850 (in relation to Civil Case No. Q-8303)
where C.B.M. Products is one of the defendants and the parties were notified through their counsel. 25
As earlier mentioned, private respondent herein is the president of C.B.M. Products, hence, his contention that he is
not aware of the said deed of assignment deserves scant consideration from the Court. Petitioner pointed out at the
same time that private respondent together with his counsel were served with a copy of the deed of assignment
which allegation remains uncontroverted. Having such knowledge thereof, private respondent is estopped from
entering into a compromise agreement involving the same litigated credit without notice to and consent of
the assignee, petitioner herein. More so, in the light of the fact that no reimbursement has ever been made in
favor of the assignee as required under Article 1634. Private respondent acted in bad faith and in connivance
with assignor Tan so as to defraud the petitioner in entering into the compromise agreement.
WHEREFORE, the petition is GRANTED. The assailed resolution of the respondent court dated August 30,1977 is
hereby SET ASIDE, the said compromise agreement being null and void, and a new one is hereby rendered
reinstating its decision dated January 27, 1977, affirming in toto the decision of the lower court. This decision is
immediately executory. No motion for extension of time to file a motion for reconsideration will be granted.
SO ORDERED.