FACTS:

The Anglo-Asean is a private bank registered and organized to do business under the laws of the Republic of Vanuatu but not in the Philippines. Its business consists primarily in receiving fund placements by way of deposits from investors and investing such deposits in money market placements and potentially profitable capital ventures in Hongkong, Europe and the United States for the purpose of maximizing the returns on those investments.

Enticed by the lucrative prospects of doing business with Anglo-Asean, Abelardo Licaros, a Filipino businessman, decided to invest with said bank.

However, Licaros thereafter, encountered tremendous and unexplained difficulties in retrieving, not only the interest or profits, but even the very investments he had put in Anglo-Asean.

Licaros then decided to seek the counsel of Antonio P. Gatmaitan, a reputable banker and investment manager who had been extending managerial, financial and investment consultancy services to various firms and corporations both here and abroad. To Licaros’ relief, Gatmaitan gave him assistance and voluntarily offered to assume the payment of Anglo-Asean’s indebtedness to Licaros subject to certain terms and conditions. 

In order to effectuate and formalize the parties’ respective commitments, the two executed a notarized MEMORANDUM OF AGREEMENT on July 29, 1988.

Gatmaitan executed in favor of Licaros a NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH DIVIDENDS which was appended as Annex “A” to the same Memorandum of Agreement.

Thereafter, Gatmaitan presented to Anglo-Asean the Memorandum of Agreement earlier executed by him and Licaros for the purpose of collecting the latter’s placement thereat of U.S. $150,000.00.

However, to date, Anglo-Asean has not acted on Gatmaitan’s monetary claims.

Because of his inability to collect from Anglo-Asean, Gatmaitan did not bother anymore to make good his promise to pay Licaros the amount stated in his promissory note. Licaros, however, believes that he had a right to collect on the basis of the promissory note regardless of the outcome of Gatmaitan’s recovery efforts. 

Thus, Licaros, thru counsel, addressed successive demand letters to Gatmaitan, demanding payment of the later’s obligations under the promissory note. Gatmaitan, however, did not accede to these demands.

Hence, Licaros filed the complaint praying for a judgment ordering Gatmaitan to pay him the principal with legal interest, attorney’s fees and costs.

The court a quo rendered judgment in favor of petitioner Licaros and found respondent Gatmaitan liable under the Memorandum of Agreement and Promissory Note for P3,150,000.00 plus 12% interest per annum, and attorney’s fees.

On appeal, the appellate court reversed the decision of the trial court and held that respondent Gatmaitan did not at any point become obligated to pay to petitioner Licaros the amount stated in the promissory note.

Hence this petition for review on certiorari.

ISSUE:

Whether or not respondent became liable to petitioner under the promissory note considering that its efficacy is dependent on the Memorandum of Agreement, the note being merely an annex to the said memorandum.

RULING:

An assignment of credit has been defined as the process of transferring the right of the assignor to the assignee who would then have the right to proceed against the debtor. The assignment may be done gratuitously or onerously, in which case, the assignment has an effect similar to that of a sale.

On the other hand, subrogation has been defined as the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. It may either be legal or convention. 

Legal subrogation is that which takes place without agreement but by operation of law because of certain acts. Conventional subrogation is that which takes place by agreement of parties.

The general tenor of the foregoing definitions of the terms “subrogation” and “assignment of credit” may make it seem that they are one and the same which they are not. A noted expert in civil law notes their distinctions thus:

“Under our Code, however, conventional subrogation is not identical to assignment of credit. In the former, the debtor’s consent is necessary; in the latter it is not required. Subrogation extinguishes the obligation and gives rise to a new one; assignment refers to the same right which passes from one person to another. The nullity of an old obligation may be cured by subrogation, such that a new obligation will be perfectly valid; but the nullity of an obligation is not remedied by the assignment of the creditor’s right to another.”

For our purposes, the crucial distinction deals with the necessity of the consent of the debtor in the original transaction. In an assignment of credit, the consent of the debtor is not necessary in order that the assignment may fully produce legal effects. 

What the law requires in an assignment of credit is not the consent of the debtor but merely notice to him as the assignment takes effect only from the time he has knowledge thereof. A creditor may, therefore, validly assign his credit and its accessories without the debtor’s consent. 

On the other hand, conventional subrogation requires an agreement among the three parties concerned – the original creditor, the debtor, and the new creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties. Thus, Article 1301 of the Civil Code explicitly states that “(C)onventional subrogation of a third person requires the consent of the original parties and of the third person.”

We agree with the finding of the Court of Appeals that the Memorandum of Agreement dated July 29, 1988 was in the nature of a conventional subrogation which requires the consent of the debtor, Anglo-Asean Bank, for its validity.

The intention of the parties to treat the Memorandum of Agreement as embodying a conventional subrogation is shown not only by the “whereas clause” but also by the signature space captioned “WITH OUR CONFORME” reserved for the signature of a representative of Anglo-Asean Bank. These provisions in the aforementioned Memorandum of Agreement may not simply be disregarded or dismissed as superfluous.

The Memorandum of Agreement embodies a contract for conventional subrogation and in such a case, the consent of the original parties and the third person is required. The absence of such conformity by Anglo-Asean Bank prevented the Memorandum of Agreement from becoming valid and effective. Accordingly, the Court of Appeals did not err when it ruled that the Memorandum of Agreement was never perfected.

The instant petition is DENIED and the Decision of the Court of Appeals is hereby AFFIRMED.