DOCTRINES:

In pledge, the incorporeal right assigned by the assignor in favor of the assignee can
only be alienated by the assignor with due notice to and consent of assignee or his duly
authorized representative.
The debtor has a corresponding obligation to reimburse the assignee for the price he
paid or for the value given as consideration for the deed of assignment
FACTS:
CBM Products, through its president, Mendoza, offered to sell textile cotton materials to
the spouses Bernal who were involved in textile manufacture. To assist in financing the
purchase, Mendoza introduced them to Alfonso Tan.
The Bernals purchased cotton materials on credit from Tan, payment of which was
guaranteed by Mendoza.
The Bernals issued a PBTC check to CBM. On the other hand, Mendoza issued 2 PNB
checks in favor of Tan.
Tan had the 2 PNB checks discounted in a bank. However, they were returned with a
"stop payment" stamp which was ordered by Mendoza due to the failure of the Bernals
to deposit sufficient funds for the check they issued.
Tan brought an action against Mendoza while the Bernals interpleaded for not knowing
whom to pay.
While both cases were pending, Tan assigned in favor of George Litton, Sr. his litigious
credit.
The RTC ruled that Mendoza liable as a drawer whose liability is primary and not merely
as an indorser. The court also directed Mendoza to pay Tan.
On appeal, Mendoza argued that his liability is one of an accommodation party and not
as a drawer.
Pending resolution of the appeal, Mendoza entered into a compromise agreement with
Tan wherein Tan acknowledged that all his claims against Mendoza had been settled
and that both parties mutually waive any cause of action one may have against the
other.
The CA affirmed the decision of the RTC. Mendoza filed an MR alleging that the
compromise agreement was entered into between him and Tan which in effect released
him from liability.
Tan opposed alleging that the compromise agreement is null and void because of the
deed of assignment that he executed in favor of Litton, alleging that he has no more
right to alienate the credit.

Tan died during the pendency of the MR. He left no properties to satisfy the claim of the
estate of Litton.
The CA set aside its decision and approved the compromise agreement.
Litton appealed to the SC as assignee and successor-in-interest of Tan. He alleges that
the compromise agreement should be set aside because Tan had previously executed a
deed of assignment in favor of him over the same litigated credit.
ISSUES:
I. W/N there was a guaranty/pledge between Tan and Litton? Yes
II. W/N the compromise agreement is valid? No
III.W/N prior knowledge by Mendoza of the assignment made by Tan estop him from
invoking the compromise as a ground for dismissal of the action against him? Yes
HELD:
I and II. The validity of the guaranty or pledge in favor of Litton has not been questioned.
The deed of assignment fulfills the requisites of a valid pledge or mortgage.
While Tan may validly alienate the litigous credit under Article 1634, such 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.
Such provision should be read in consonance with Article 2097. Although the pledgee or
the assignee (Litton) did not ipso facto become the creditor of Mendoza, the incorporeal
right assigned by Tan in favor of the assignee can only be alienated by the assignor with
due notice to and consent of assignee 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.
Under Article 1634, the debtor has a corresponding obligation to reimburse the assignee
(Litton) for the price he paid or for the value given as consideration for the deed of
assignment.
Because Tan failed to do this, the alienation of the litigated credit made by him in favor
of Mendoza by way of a compromise agreement did not bind the assignee.
III. Mendoza has, from the very beginning, been fully aware of the deed of assignment
executed by Tan in favor of Litton.
Mendoza is estopped from entering into a compromise agreement involving the same
litigated credit without notice to and consent of the assignee (Litton).

In the light of the fact that no reimbursement has ever been made in favor of the
assignee, as required under Article 1634, Mendoza acted in bad faith and in connivance
with Tan so as to defraud Litton.