THIRD DIVISION

[G.R. No. 99433. June 19, 2001.]

PROJECT BUILDERS, INC., GALICANO A. CALAPATIA, JR., and

LEANDRO ENRIQUEZ, petitioners, vs. THE COURT OF APPEALS
and INDUSTRIAL FINANCE CORPORATION, respondents.

Carlos M. Ortega for petitioners.

Eligio Narag, Jr. for private respondent.

SYNOPSIS

Petitioner corporation, developer-builder of Jovan Condominium, and

respondent corporation entered into an agreement whereby it was agreed that
respondent corporation would increase petitioner corporation's credit line to
P5,000,000.00 against which said petitioner would discount and assign twenty
contracts to sell with accounts receivable from its condominium unit buyers to
respondent corporation with recourse to assignor and on a non-collection basis.
To secure compliance with the terms and conditions of the agreement,
petitioners executed a Deed of Real Estate Mortgage in favor of respondent
corporation. When petitioners defaulted in the payment of installments, the real
estate mortgage was extrajudicially foreclosed and respondent was the highest
bidder at the auction sale. The foreclosed property was redeemed a year later,
but after application of the redemption payment, respondent corporation
claimed that there was still a deficiency in the amount of P1,323,053.08.
Hence, respondent corporation filed a collection suit against petitioners.
Petitioners denied liability. After the joinder of issues, the trial court dismissed
the complaint. On appeal, the Court of Appeals reversed the judgment of the
trial court and ordered petitioners to pay the deficiency with interest.
Hence, this petition for review on certiorari.
At the pith of the controversy lies the question of whether or not the
agreement forged by petitioners and respondent corporation was a simple loan
or a financing transaction governed by the provisions of Republic Act No. 5980,
otherwise known as the Financing Company Act. Petitioners insisted that the
transaction forged by them with respondent corporation should be considered a
simple loan since private respondent did not communicate with the debtors,
condominium unit buyers, to collect payment from them.

The Supreme Court held that private respondent is a financing company

as so defined by the Financing Company Act and that the assignment of the
contracts to sell falls within the purview of the Act.
Upon an assignment of a contract to sell, the assignee is effectively
subrogated in place of the assignor and in a position to enforce the contract to
sell to the same extent as the assignor could.
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 In an assignment of credit, the consent of the debtor is not essential for
its perfection, his knowledge thereof or lack of it affecting only the
efficaciousness or inefficaciousness of any payment he might make. In
Rodriguez vs. Court of Appeals (207 SCRA 553), the Court held that ". . .
consent is not necessary in order that 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. A creditor may, therefore, validly assign
his credit and its accessories without the debtor's consent. . . . ."
Petition was denied.

SYLLABUS

1. COMMERCIAL LAW; FINANCING COMPANY ACT; FINANCING

COMPANIES; DEFINED; ASSIGNMENT OF THE CONTRACTS TO SELL FALLS
WITHIN THE PURVIEW OF THE ACT. — Petitioner corporation, the developer-
builder of Jovan Condominium Building, in obtaining a credit line of
P5,000,000.00 from private respondent, assigned twenty (20) contracts to sell
with accounts receivable from its condominium unit buyers to the latter with
recourse to assignor and on a non-collection basis. Succinctly, private
respondent is a financing company as so defined by the Financing Company
Act. (a) "Financing companies, " . . . organized for the purpose of extending
credit facilities to consumers and to industrial, commercial, or agricultural
enterprises, either by discounting o r factoring commercial papers or accounts
receivable, or by buying and selling contracts, leases, chattel mortgages, or
other evidences of indebtedness or by leasing of motor vehicles, heavy
equipment and industrial machinery, business and office machines and
equipment, appliances and other movable property." The assignment of the
contracts to sell falls within the purview of the Act.
2. ID.; ID.; PURCHASE DISCOUNT; LIMITATION; 14% CEILING IS
EXCLUSIVE OF INTEREST AND OTHER CHARGES. — Petitioners' claim that
private respondent is proscribed from imposing interest and other charges
beyond the limits set out by the Financing Company Act lacks merit. The law
states: "SEC. 5. Limitation on purchase discount, fees, service and other
Charges. — In the case of assignments of credit or the buying of installment
papers, accounts receivables and other evidences of indebtedness by financing
companies, the purchase discount, exclusive of interest and other charges,
shall be limited to fourteen (14%) per cent of the value of the credit assigned or
the value of the installment papers, accounts receivable and other evidence of
indebtedness purchased based on a period of twelve (12) months or less, and
to one and one-sixth (1 1/6%) per cent for each additional month or fraction
thereof in excess of twelve months, regardless of the terms and conditions of
the assignment or purchase." Clearly, the 14% ceiling provided for purchase
discount is exclusive of interest and other charges.
3. ID.; ID.; ID.; DISTINCT FROM INTEREST. — A purchase discount is
distinct from interest. The term purchase discount refers to the difference
between the value of the receivable purchased or credit assigned, and the net
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 amount paid by the finance company for such purchase or assignment,
exclusive of fees, service charges, interests and other charges incident to the
extension of credit, and it is akin to "time price differential," or the increase in
price to cover the expense generally entailed by transactions on credit. There is
thus no impingement of the Usury Law even when the controversy might have
arisen prior to the adoption by the Central Bank Monetary Board on 03
December 1982 of its Resolution No. 224 on interest ceilings.
4. CIVIL CODE; OBLIGATIONS AND CONTRACTS; SALES; CREDIT;
DEFINED; ASSIGNMENT OF CREDIT; EXPLAINED. — The term credit has been
defined to —"(c) . . . mean any loan, mortgage, deed of trust, advance, or
discount; any conditional sales contract, any contract to sell, or sale or contract
of sale of property or service, either for present or future delivery, under which,
part or all of the price is payable subsequent to the making of such sale or
contract; any rental-purchase contract; any option, demand, lien, pledge, or
other claim against, or for the delivery of, property or money, any purchase, or
other acquisition of or any credit upon the security of, any obligation or claim
arising out of the foregoing; and any transaction or series of transactions
having a similar purpose or effect"; An assignment of credit is an act of
transferring, either onerously or gratuitously, the right of an assignor to an
assignee who would then be capable of proceeding against the debtor for
enforcement or satisfaction of the credit. The transfer of rights takes place
upon perfection of the contract, and ownership of the right, including all
appurtenant accessory rights, is thereupon acquired by the assignee. The
assignment binds the debtor only upon acquiring knowledge of the assignment
but he is entitled, even then, to raise against the assignee the same defenses
he could set up against the assignor. Where the assignment is on account of
pure liberality on the part of the assignor, the rules on donation would likewise
be pertinent; where valuable consideration is involved, the assignment
partakes of the nature of a contract of sale or purchase. Upon an assignment of
a contract to sell, the assignee is effectively subrogated in place of the assignor
and in a position to enforce the contract to sell to the same extent as the
assignor could.
5. ID.; ID.; ID.; ASSIGNMENT OF CREDIT; CONSENT OF DEBTOR NOT
ESSENTIAL FOR PERFECTION THEREOF. — In an assignment of credit, the
consent of the debtor is not essential for its perfection, his knowledge thereof
or lack of it affecting only the efficaciousness or inefficaciousness of any
payment he might make. In Rodriguez vs. Court of Appeals, the Court has said:
"We have ruled in Sison & Sison v. Yap Tico and Avanceña , 37 Phil. 587 [1918]
that definitely, consent is not necessary in order that assignment may fully
produce legal effects. Hence, the duty to pay does not depend on the consent
of the debtor. Otherwise, all creditors would be prevented from assigning their
credits because of the possibility of the debtors' refusal to give consent. What
the law requires in an assignment of credit is not the consent of the debtor but
merely notice to him. A creditor may, therefore, validly assign his credit and its
accessories without the debtor's consent (National Investment and
Development Co. v. De los Angeles , 40 SCRA 489 [1971]). The purpose of the
notice is only to inform the debtor that from the date of the assignment,
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 payment should be made to the assignee and not to the original creditor."

DECISION

VITUG, J : p

This case has been re-raffled to herein ponente pursuant to the Court's
Resolution in A.M. No. 00-9-03-SC of 27 February 2001. The petition for review
o n certiorari oppugns the decision of the Court of Appeals in CA-G.R. CV No.
08582, entitled "Industrial Finance Corporation vs. Project Builders, Inc., et al.,"
reversing the decision of Branch XX of the Regional Trial Court of Manila in Civil
Case No. 141774.

The antecedents of the case were capsulized by the trial court and cited
by the appellate court; viz:
"'This collection suit was filed on July 17, 1981 by Industrial
Finance Corporation (IFC for short) against defendant Project Builders,
Inc. (PBI for short), Galicano Calapatia, Jr., Pablo Malasarte, Teodoro
Banas and Leandro Enriquez, arising from an alleged deficiency of
P1,323,053.08, after the extrajudicial foreclosure of the real estate
mortgage.

'The defendants deny liability and in their answer they

allege that plaintiff has no cause or right of action because the
obligation is already fully paid out of the proceeds of foreclosure
sale of defendants' property. Further, defendants alleged that a
proper accounting of the transaction between the parties will
show that it is the plaintiff who is liable to the defendants.
'The facts, which led to the filing of the case, are as follows:

'On August 21, 1975, plaintiff and defendant PBI entered

into an agreement (Exh. 'A') whereby it was agreed that plaintiff
would provide a maximum amount of P2,000,000.00 against
which said defendant would discount and assign to plaintiff on a
'with recourse non-collection basis' its (PBI's) accounts receivable
under the contracts to sell specified in said agreement. And on
June 15, 1976, the same parties entered into an agreement (Exh.
'B') whereby it was agreed that PBI's credit line with plaintiff be
increased to P5,000,000.00. It was stipulated that the credit line
of P5,000,000.00 granted includes the amount already
assigned/discounted.

'Against the above-mentioned 'credit line,' defendant PBI

discounted with plaintiff on different dates accounts receivables
with different maturity dates from different condominium-unit
buyers. And each time a certain account receivable was
discounted, the covering Contract to Sell (Exh. 'C-1' to 'O-1') was
assigned by defendant to plaintiff.
'The total amount of receivables discounted by defendant
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 PBI is P7,986,815.38 and consists of twenty accounts. Of such
receivables amounting to P7,986,815.38 plaintiff released to
defendant PBI the amount of P4,549,132.72 and the difference of
P3,437,682.66 represents the discounting fee or finance fee.
'To secure compliance with the terms and conditions of the
agreement dated June 15, 1976 (Exh. 'B'), defendants on the
same date executed a Deed of Real Estate Mortgage (Exh. 'Q') in
favor of plaintiff. When defendants allegedly defaulted in the
payment of the subject account, plaintiff foreclosed the mortgage
and plaintiff was the highest bidder in the amount of
P3,500,000.00.'
'The foreclosed property was redeemed a year later (Exh.
'T'), but after application of the redemption payment, plaintiff
claims that there is still a deficiency in the amount of
P1,323,053.08, hence, this complaint.'
"The terms and conditions of the Agreement dated June 15, 1976
(Exh. 'B') which are material to the present appeal state as follows:
"'1. That the Assignor assigned all its rights and
interests on several Contracts to Sell executed by Assignor and
the latter's customers.
'2. That the Assignor requested the Assignee to
increase the former's credit line to FIVE MILLION (P5,000,000.00)
PESOS, Phil. Currency, which was granted by the Assignee
subject to the following terms and conditions:
'a. It is hereby agreed that the credit line of
P5,000,000.00 granted includes the amount already
assigned/discounted by Assignor to Assignee as stated in
paragraph 1 of this Agreement.

'b. This assignment/discounting of the Contracts

to Sell shall be with recourse to Assignor and on a non-
collection basis.
aDHCEA

'c. That Assignee will execute a Real Estate

Mortgage on 3 lots described as Transfer Certificate of Title
Nos. 491702, 491703 and 491704 of the Registry of Deeds
of Rizal to secure the faithful performance of the terms and
conditions of this agreement and the Contracts to Sell
assigned or which may be assigned to Assignee.

'd. Should there be a default on the part of the

Assignor to pay Assignee or should Assignor fail to pay
Assignee the amount or amounts due to Assignee arising
from the assignment of the accounts receivables or remit
to Assignee a lesser amount, the Assignor and/or PABLO
MALASARTE, ROLANDO L. JUSTO, LEANDRO D. ENRIQUEZ,
TEODORO G. BANAS, GALICANO A. CALAPATIA, JR. shall
jointly and severally in their personal capacities upon
demand by the Assignee, repurchase the Contracts to Sell
or installment papers assigned and/or discounted by
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 Assignor in favor of Assignee and/or pay Assignee the
remaining balance of the amount of the receivables
discounted and/or assigned by Assignor to Assignee.
'e. That the Performance Bond covering the
condominium building 'Jovan' located in Mandaluyong,
Rizal shall be endorsed and delivered by Assignor to
Assignee.
'f. That the Assignor shall comply with all the
terms and conditions specified on the said Contracts to
Sell, executed by the assignor and its individual purchaser
or customers, and assigned/discounted to Assignee
whether the assignment is on a with or without recourse
basis.
'g. Should it become necessary for the assignee
to take any legal action, the Assignor shall pay to the
Assignee as attorney's fee allowed by the Rules of Court in
the sum equivalent to Twenty (20%) per cent of the total
indebtedness then unpaid, plus whatever legal costs
incurred, and that any legal action arising out of this
agreement may be instituted in the courts of the City of
Manila." 1

After the joinder of issues, the trial court dismissed the complaint and
ruled on the counterclaim in this wise —
"1. Ordering plaintiff to return to the defendants the amount of
P3,705.91 which plaintiff charged on the account of Dr. Ricardo
Ortiz and Olympic Engineering Sales Corporation which had
already been paid;
"2. Ordering plaintiff to pay to defendants the amount of
P238,052.53, representing the amount of the promissory note
which was (sic) not been compensated or applied to the account
of defendants;

"3. Ordering plaintiff to return to defendants the amount of

P425,833.33, representing the interest collected by plaintiff from
defendants from foreclosure to redemption of the real estate
mortgage;
"4. Ordering plaintiff to return to defendants the amount of
P344,302.18, representing the prepaid interests collected by
plaintiff, since defendants were not allowed to use the period of
such prepaid interests;
"5. Ordering plaintiff to pay attorney's fees in the amount of
P20,000.00.
Costs is adjudged against the plaintiff." 2

The Court of Appeals, in its decision of 14 May 1991, overturned the

judgment of the trial court and ruled thusly:
"WHEREFORE, the decision appealed from is REVERSED.
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 Defendants are hereby ordered to pay, jointly and severally, to the
plaintiff the deficiency in the amount of P1,237,802.48 with interest
thereon at the rate of 12% per annum computed from August 13, 1981
minus the amount of the promissory note in the sum of P238,052.53
with interest thereon at the rate of 12% per annum computed from
September 14, 1976, the respective computation of the interest to end
upon execution of this decision. No special pronouncement as to costs
of suit." 3

Feeling aggrieved, Public Builders, Inc., and its officers, namely, Galicano
Calapatia, Jr., Teodoro Banas and Leandro Enriquez, have come to this Court via
a petition for review on certiorari, proffering the following issues:
1.) Whether Republic Act No. 5980 (Financing Company Act) is
intended for the benefit of financing companies or for the
protection of public interests;
2.) Whether or not the above-mentioned Act should be made to
apply even when the design or scheme to make it appear that
there was a purchase of receivables or credit is only a subterfuge
to evade Republic Act No. 3765 (Truth in Lending Act),
particularly Section 4 thereof, and compound exorbitant interests
under the guise of 'purchase discount;'
3.) Whether or not said Republic Act No. 5980 should govern the
transaction between petitioners and private respondent which in
reality was bilateral, not trilateral, and respondent financing
company was not really subrogated in the place of the supposed
seller or assignor; and
4.) If said Republic Act No. 5980 should govern the transaction of
the parties, should petitioners still answer for any deficiency after
the mortgage with which they guaranty the collection of the
assigned credit, had been foreclosed?" 4

At the pith of the controversy lies the question of whether or not the
agreement forged by petitioners and private respondent is a simple loan or a
financing transaction governed by the provisions of Republic Act No. 5980. 5
Petitioners would have us convinced that the transaction forged by them with
private respondent is a simple loan. It is a contention difficult to accept.
Petitioner corporation, the developer-builder of Jovan Condominium
Building, in obtaining a credit line of P5,000,000.00 from private respondent,
assigned twenty (20) contracts to sell with accounts receivable from its
condominium unit buyers to the latter with recourse to assignor and on a non-
collection basis.
Succinctly, private respondent is a financing company as so defined by
the Financing Company Act.
(a) "Financing companies," . . . organized for the purpose of
extending credit facilities to consumers and to industrial, commercial,
or agricultural enterprises, either by discounting or factoring
commercial papers or accounts receivable, or by buying and selling
contracts, leases, chattel mortgages, or other evidences of
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 indebtedness or by leasing of motor vehicles, heavy equipment and
industrial machinery, business and office machines and equipment,
appliances and other movable property." 6

The assignment of the contracts to sell falls within the purview of the Act.
The term credit has been defined to —
"(c) . . . mean any loan, mortgage, deed of trust, advance, or
discount; any conditional sales contract, any contract to sell, or sale or
contract of sale of property or service, either for present or future
delivery, under which, part or all of the price is payable subsequent to
the making of such sale or contract; any rental-purchase contract; any
option, demand, lien, pledge, or other claim against, or for the delivery
of, property or money, any purchase, or other acquisition of or any
credit upon the security of, any obligation or claim arising out of the
foregoing; and any transaction or series of transactions having a similar
purpose or effect;" 7

An assignment of credit is an act of transferring, either onerously or

gratuitously, the right of an assignor to an assignee who would then be capable
of proceeding against the debtor for enforcement or satisfaction of the credit.
The transfer of rights takes place upon perfection of the contract, 8 and
ownership of the right, including all appurtenant accessory rights, is thereupon
acquired by the assignee. The assignment binds the debtor only upon acquiring
knowledge of the assignment but he is entitled, even then, to raise against the
assignee the same defenses he could set up against the assignor. Where the
assignment is on account of pure liberality on the part of the assignor, the rules
on donation would likewise be pertinent; where valuable consideration is
involved, the assignment partakes of the nature of a contract of sale or
purchase. 9

Upon an assignment of a contract to sell, the assignee is effectively

subrogated in place of the assignor and in a position to enforce the contract to
sell to the same extent as the assignor could.

An insistence of petitioners that the subject transaction should be

considered a simple loan since private respondent did not communicate with
the debtors, condominium unit buyers, to collect payment from them, is
untenable. In an assignment of credit, the consent of the debtor is not essential
for its perfection, 10 his knowledge thereof or lack of it affecting only the
efficaciousness or inefficaciousness of any payment he might make. 11 In
Rodriguez vs. Court of Appeals, 12 the Court has said:
"We have ruled in Sison & Sison v. Yap Tico and Avanceña , 37
Phil. 587 [1918] that definitely, consent is not necessary in order that
assignment may fully produce legal effects. Hence, the duty to pay
does not depend on the consent of the debtor. Otherwise, all creditors
would be prevented from assigning their credits because of the
possibility of the debtors' refusal to give consent.
"What the law requires in an assignment of credit is not the
consent of the debtor but merely notice to him. A creditor may,
therefore, validly assign his credit and its accessories without the
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 debtor's consent (National Investment and Development Co. v. De los
Angeles, 40 SCRA 489 [1971]). The purpose of the notice is only to
inform the debtor that from the date of the assignment, payment
should be made to the assignee and not to the original creditor." 13

The assignment, it might be pointed out, was "with recourse," and default
in the payment of installments had been duly established when petitioner
corporation foreclosed on the mortgaged parcels of land. The resort to
foreclosure of the mortgaged properties did not preclude private respondent
from collecting interest from the assigned Contracts To Sell from the time of
foreclosure to the redemption of the foreclosed property. The imposition of
interest was a mere enforcement or exercise of the right to the ownership of
the credit or receivables which the parties stipulated in the 1976 financing
agreement. Thus —
"f. That the Assignor shall comply with all the terms and
conditions specified on the said Contracts to Sell, executed by the
assignor and its individual purchaser or customers, and
assigned/discounted to Assignee." 14

One of the provisions in the contracts to sell, subject matter of the

assignment agreement, related to the imposition of interest in the event of
default by the debtor in the payment of installments, to wit:
"All payments shall be made on or before their respective due
dates without necessity of demand therefor, and failure to make such
payments on time shall entitle the Developer to charge interest at the
rate of one percent (1 %) per month without prejudice to the other
remedies available to the Developer." 15

As owner of the account receivables, private respondent was impressed with

the entitlement over such interest payment.
Petitioners' claim that private respondent is proscribed from imposing
interest and other charges beyond the limits set out by the Financing Company
Act lacks merit. The law states: SETAcC

"SECTION 5. Limitation on purchase discount, fees, service

and other Charges. — In the case of assignments of credit or the
buying of installment papers, accounts receivables and other
evidences of indebtedness by financing companies, the purchase
discount, exclusive of interest and other charges , shall be limited to
fourteen (14%) per cent of the value of the credit assigned or the value
of the installment papers, accounts receivable and other evidence of
indebtedness purchased based on a period of twelve (12) months or
less, and to one and one-sixth (1 1/6%) per cent for each additional
month or fraction thereof in excess of twelve months, regardless of the
terms and conditions of the assignment or purchase."

Clearly, the 14% ceiling provided for purchase discount is exclusive of

interest and other charges. A purchase discount is distinct from interest. The
term purchase discount refers to the difference between the value of the
receivable purchased or credit assigned, and the net amount paid by the
finance company for such purchase or assignment, exclusive of fees, service
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 charges, interests and other charges incident to the extension of credit, 16
and it is akin to "time price differential," or the increase in price to cover the
expense generally entailed by transactions on credit. 17 There is thus no
impingement of the Usury Law even when the controversy might have arisen
prior to the adoption by the Central Bank Monetary Board on 03 December
1982 of its Resolution No. 224 on interest ceilings.
WHEREFORE, the petition is DENIED. The challenged decision of the Court
of Appeals reversing the decision of the trial court is AFFIRMED.
No costs. cEDIAa

SO ORDERED.

Melo, Panganiban, Gonzaga-Reyes and Sandoval-Gutierrez, JJ., concur.

Footnotes
1. Rollo , pp. 57-60.
2. Rollo , p. 80.
3. Rollo , pp. 71-72.
4. Rollo , pp. 29-30.
5. Also known as the Financing Company Act.
6. Sec. 3, R.A. No. 5980.

7. Ibid.
8. Art. 1624, in relation to 1475, New Civil Code.
ART. 1624. An assignment of credits and other incorporeal rights shall be
perfected in accordance with the provisions of article 1475.
ART. 1475. The contract of sale is perfected at the moment there is a
meeting of minds upon the thing which is the object of the contract and upon
the price.

From that moment, the parties may reciprocally demand performance,

subject to the provisions of the law governing the form of contracts.

9. Nyco Sales Corporation vs. BA Finance Corporation, 200 SCRA 637;

Rodriguez vs. CA, 207 SCRA 553.
10. See Art. 1624, New Civil Code.

11. Art. 1626. The debtor who, before having knowledge of the assignment,
pays his creditor shall be released from the obligation. (New Civil Code.)

12. 207 SCRA 553.

13. At p. 559.
14. Rollo , p. 59.
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 15. Rollo , p. 66.
16. par. (d), Section 2, R.A. 5980.
17. Emata vs. Intermediate Appellate Court, 174 SCRA 465.

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