TIRSO GARCIA, in his capacity as receiver of the Mercantile Bank of China, plaintiff-

appellee, vs. LIM CHU SING, defendant-appellant. G.R. No. L-39427 February 24, 1934
VILLA-REAL, J.:

This is an appeal taken by the defendant Lim Chu Sing from the judgment rendered by the Court of
First Instance of Manila, the dispositive part of which reads as follows:

Wherefore, judgment is rendered sentencing the defendant to pay the sum of P9,105.17 with
interest thereon at the rate of six per cent per annum from September 1, 1932, until fully paid,
plus the sum of P910.51, as attorney's fees, with the costs of this suit.

In conformity with the stipulation, this judgment shall be subject to execution after ninety (90)
days. So ordered.

In support of his appeal, the appellant assigns the following alleged errors as committed by the
court a quo in its decision, to wit:

1. In denying the motion dated December 27, 1932, praying for the inclusion of Lim Cuan Sy,
being the principal debtor, as party to this suit.

2. In holding as improper the compensation of the defendant's debt of P9,106.17, claimed in

the complaint, with his credit amounting to P10,000 with the Mercantile Bank of China.

3. In not ordering that after the compensation the plaintiff-appellee, as receiver of the
Mercantile Bank of China, should liquidate the dividends of the defendant-appellant's shares.

4. In sentencing the defendant-appellant to pay to the plaintiff-appellee the sum of P910.51 as

attorney's fees, plus interest at 6 per cent per annum on the sum of P9,105.17, with costs.

5. In denying the motion for a new trial.

When the case was called for hearing, the parties submitted the following stipulation of facts for the
consideration of the trial court, to wit:

Come now both parties and to this Honorable Court respectfully submit the following
stipulation:

1. The defendant admits the facts alleged in the complaint.

2. The plaintiff admits the allegations in the answer, particularly with reference to the fact that
the defendant is the owner of two hundred shares at a par value of fifty pesos (P50) each, that
is (Pl0,000).

3. The court may render judgment in accordance with this stipulation, but the same shall be
subject to execution after ninety (90) days.

Wherefore, they respectfully submit this stipulation and pray that judgment be rendered in
accordance therewith.

The facts alleged in the complaint and admitted by both parties under the above quoted stipulation of
facts are as follows:
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On June 20, 1930, the defendant-appellant Lim Chu Sing executed and delivered to the Mercantile
Bank of China promissory note for the sum of P19,605.17 with interest thereon at 6 per cent per
annum, payable monthly as follows: P1,000 on July 1, 1930; P500 on August 1, 1930; and P500 on
the first of every month thereafter until the amount of the promissory note together with the interest
thereon is fully paid (Exhibit A). One of the conditions stipulated in said promissory note is that in
case of defendant's default in the payment of any of the monthly installments, as they become due,
the entire amount or the unpaid balance thereof together with interest thereon at 6 per cent per
annum, shall become due and payable on demand. The defendant had been, making several partial
payments thereon, leaving an unpaid balance of P9,105.17. However, he defaulted in the payment of
several installments by reason of which the unpaid balance of P9,105.17 on the promissory note
has ipso facto become due and demandable.

The facts alleged in the answer and admitted by both parties under the same stipulation of facts are
as follows:

The debt which is the subject matter of the complaint was not really an indebtedness of the defendant
but of Lim Cuan Sy, who had an account with the plaintiff bank in the form of "trust receipts"
guaranteed by the defendant as surety and with chattel mortgage securities. The plaintiff bank,
without the knowledge and consent of the defendant, foreclosed the chattel mortgage and privately
sold the property covered thereby. Inasmuch as Lim Cuan Sy failed to comply with his obligations,
the plaintiff required the defendant, as surety, to sign a promissory note for the sum of P19,105.17
payable in the manner hereinbefore stated (Exhibit A). The defendant had been paying the
corresponding installments until the debt was reduced to the sum of P9,105.17 claimed in the
complaint. The defendant is the owner of shares of stock of the plaintiff Mercantile Bank of China
amounting to P10,000. The plaintiff bank is now under liquidation.

On December 27, 1932, the defendant-appellant Lim Chu Sing filed a motion praying for the inclusion
of the principal debtor Lim Cuan Sy as party defendant so that he could avail himself of the benefit of
the exhaustion of the property of said Lim Cuan Sy. Said motion was denied in open court by the
presiding judge without the defendant-appellant having excepted to such order of denial.

The proceeds of the sale of the mortgaged chattels together with other payments made were applied
to the amount of the promissory note in question, leaving the balance which the plaintiff now seeks to
collect.

The first question to be decided in this appeal is whether or not the court a quo erred in denying the
motion for inclusion of a party a defendant, filed by the defendant-appellant.

According to the provisions of section 141 of the Code of Civil Procedure, ". . . Rulings of the court
upon minor matters, such as adjournments, postponements of trials, the extension of time for filing
pleadings or motions, and other matters addressed to the discretion of the court in the performance
of its duty, shall not be subject to exception. But exception may be taken to any other ruling, order, or
judgment of the court made during the pendency of the action in the Court of First Instance." "An
`exception' has been defined as an objection taken to the decision of the trial court upon a matter of
law, and is a notice that the party taking it preserves for the consideration of the appellate court a
ruling deemed erroneous. (8 Am. Enc. P. and P., 157.)" " `Errors in a judgment or decree will not be
noticed on appeal in the absence of objections and exceptions taken below, and they should be
sufficiently specific to direct the attention of the court to the alleged defects.' (8 Enc. Pl and Pr., 289.)"
(Garcia de Lara vs. Gonzales de Lara, 2 Phil., 297.) Inasmuch as an exception is an objection taken
to the decision of the trial court upon a matter of law and is a notice that the party taking it will submit
2
for the consideration of the appellate court the ruling deemed erroneous, failure to interpose it
deprived the appellant of the right to raise the question whether or not the court a quo committed the
alleged error attributed to it in its ruling which had not been excepted to by the said appellant. The
inclusion in, or exclusion from an action of a certain party is a question of law. The herein defendant-
appellant, not having excepted to the order of the Court of First Instance of Manila denying his motion
for the inclusion of Lim Cuan Sy as party defendant, is estopped from raising such question upon
appeal (Roman Catholic Bishop of Lipa vs. Municipality of San Jose, 27 Phil., 571; Vergara vs.
Laciapag, 28 Phil., 439; Andrews vs. Morente Rosario, 9 Phil., 634). The second question to be
decided is whether or not it is proper to compensate the defendant-appellant's indebtedness of
P9,105.17, which is claimed in the complaint, with the sum of P10,000 representing the value of his
shares of stock with the plaintiff entity, the Mercantile Bank of China.

According to the weight of authority, a share of stock or the certificate thereof is not an indebtedness
to the owner nor evidence of indebtedness and, therefore, it is not a credit (14 Corpus Juris, p. 388,
see. 511). Stockholders, as such, are not creditors of the corporation (14 Corpus Juris, p. 848, Sec.
1289). It is the prevailing doctrine of the American courts, repeatedly asserted in the broadest terms,
that the capital stock of a corporation is a trust fund to be used more particularly for the security of
creditors of the corporation, who presumably deal with it on the credit of its capital stock (14 Corpus
Juris, p. 383, sec. 505). Therefore, the defendant-appellant Lim Chu Sing not being a creditor of the
Mercantile Bank of China, although the latter is a creditor of the former, there is no sufficient ground
to justify a compensation (art. 1195, Civil Code; Acuña Co Chongco vs. Dievas, 12 Phil., 250).

The third question to be decided in this appeal is whether or not the court a quo erred in sentencing
the said defendant-appellant to pay the sum of P910.51 as attorney's fees in addition to interest at 6
per cent per annum on the amount sought in the complaint. The pertinent clause of the promissory
note Exhibit A reads as follows: "In case of default of any of the above installments, the total amount
of the balance still unpaid of this note will become due and payable on demand plus interest thereon
at the rate of 6 per cent per annum from date of this note until payment is made. And I further agree
to pay an additional sum equivalent to 10 per cent of the said note to cover cost and attorney's fees
for collection." The stipulation relative to the payment of interest at the rate of 6 per cent per annum
on the unpaid balance of the promissory note Exhibit A refers to the capital and the 10 per cent
stipulated for costs and attorney's fees cannot be considered as interest but an indemnity for
damages occasioned by the collection of the indebtedness through judicial process. Therefore the
two rates in question cannot be combined and considered usurious interest. With reference to the
costs, the 10 per cent stipulated in the promissory note is for costs and attorney's fees which may be
incurred in the collection of the indebtedness through judicial process. Therefore, the defendant-
appellant should not again be made to pay for them (Bank of the Philippine Islands vs. Yulo, 31 Phil.,
476).

In view of the foregoing, this court is of the opinion and so holds: (1) That failure to file an exception
to a ruling rendered in open court denying a motion for the inclusion of a party as defendant deprives
the petitioner, upon appeal of the right to raise the question whether such denial proper or improper;
(2) that the shares of a banking corporation do not constitute an indebtedness of the corporation to
the stockholder and, therefore, the latter is not a creditor of the former for such shares; (3) that the
indebtedness of a shareholder to a banking corporation cannot be compensated with the amount of
his shares therein, there being no relation of creditor and debtor with respect to such shares; and (4)
that the percentage stipulated in a contract, for costs and attorney's fees for the collection of an
indebtedness, includes judicial costs. Wherefore, with the sole modification that the costs be
eliminated from the appealed judgment, the same is hereby affirmed, without special pronouncement
as to costs of this instance. So ordered.
3
SOFRONIO T. BAYLA, ET AL., petitioners, vs. SILANG TRAFFIC CO., INC., respondent.
SILANG TRAFFIC CO., petitioner, vs. SOFRONIO BAYLA, ET AL., respondents.
G.R. Nos. L-48195 and 48196 May 1, 1942 OZAETA, J.:

Petitioners in G.R. No. 48195 instituted this action in the Court of First Instance of Cavite against the
respondent Silang Traffic Co., Inc. (cross-petitioner in G.R. No. 48196), to recover certain sums of
money which they had paid severally to the corporation on account of shares of stock they
individually agreed to take and pay for under certain specified terms and conditions, of which the
following referring to the petitioner Josefa Naval, is typical:

AGREEMENT FOR INSTALLMENT SALE OF SHARES IN THE "SILANG TRAFFIC

COMPANY, INC.,"

Silang, Cavite, P. I.

THIS AGREEMENT, made and entered into between Mrs. Josefa Naval, of legal age, married
and resident of the Municipality of Silang, Province of Cavite, Philippine Islands, party of the
First Part, hereinafter called the subscriber, and the "Silang Traffic Company, Inc.," a
corporation duly organized and existing by virtue of and under the laws of the Philippine
Islands, with its principal office in the Municipality of Silang, Province of Cavite, Philippine
Islands, party of the Second Part, hereinafter called the seller,

WITNESSETH:

That the subscriber promises to pay personally or by his duly authorized agent to the seller at
the Municipality of Silang, Province of Cavite, Philippine Islands, the sum of one thousand five
hundred pesos (P1,500), Philippine currency, as purchase price of FIFTEEN (15) shares of
capital stock, said purchase price to be paid as follows, to wit: five (5%) per cent upon the
execution of the contract, the receipt whereof is hereby acknowledged and confessed, and the
remainder in installments of five per cent, payable within the first month of each and every
quarter thereafter, commencing on the 1st day of July, 1935, with interest on deferred
payments at the rate of SIX (6%) per cent per annum until paid.

That the said subscriber further agrees that if he fails to pay any of said installment when due,
or to perform any of the aforesaid conditions, or if said shares shall be attached or levied upon
by creditors of the said subscriber, then the said shares are to revert to the seller and the
payments already made are to be forfeited in favor of said seller, and the latter may then take
possession, without resorting to court proceedings.

The said seller upon receiving full payment, at the time and manner hereinbefore specified,
agrees to execute and deliver to said subscriber, or to his heirs and assigns, the certificate of
title of said shares, free and clear of all encumbrances.

In testimony whereof, the parties have hereunto set their hands in the Municipality of Silang,
Province of Cavite, Philippine Islands, this 30th day of March, 1935.

(Sgd.) JOSEFA NAVAL

SILANG TRAFFIC COMPANY, INC.

4
 Subscriber

By (Sgd.) LINO GOMEZ

President.

(Exhibit 1. Notarial acknowledgment omitted.)

The agreements signed by the other petitioners were of the same date (March 30, 1935) and in
identical terms as the foregoing except as to the number of shares and the corresponding purchase
price. The petitioners agreed to purchase the following number of shares and, up to April 30, 1937,
had paid the following sums on account thereof:

Sofronio T. 8 P360
Bayla....... shares
Venancio 8 375
Toledo........ shares
Josefa 15 675
Naval.............. shares
Paz 15 675
Toledo................ shares

Petitioners' action for the recovery of the sums above mentioned is based on a resolution by the
board of directors of the respondent corporation on August 1, 1937, of the following tenor:

A mocion sel Sr. Marcos Caparas y secundado por el Sr. Alejandro Bayla, que para el bien de
la corporacion y la pronta terminacion del asunto civil No. 3125 titulado "Vicente F. Villanueva
et al. vs. Lino Gomez et al.," en el Juzgado de Primera Instancia de Cavite, donde se gasto y
se gastara no poca cantidad de la Corporacion, se resolvio y se aprobo por la Junta Directiva
los siguientes:

(a) Que se dejara sin efecto lo aprobado por la Junta Directiva el 3 de marzo, 1935, art. 11,
sec. 162, sobre las cobranzas que se haran por el Secretario Tesorero de la Corporacion a los
accionistas que habian tomado o suscrito nuevas acciones y que se permitia a estos pagar
20% del valor de las acciones suscritas en un año, con interes de 6% y el pago o jornal que se
hara por trimestre.

(b) Se dejara sin efecto, en vista de que aun no esta pagado todo el valor de las 123 acciones,
tomadas de las acciones no expedidas (unissued stock) de la Corporacion y que fueron
suscritas por los siguienes:

Lino 10
Gomez..................... Acciones
Venancio 8
Toledo............. Acciones
Melchor P. 17
5
 Benitez........ Acciones
Isaias 14
Videña................. Acciones
Esteban 10
Velasco............ Acciones
Numeriano S. 15
Aldaba.... Acciones
Inocencio 8
Cruz................. Acciones
Josefa Naval 15
.................. Acciones
Sofronio 8
Bayla................. Acciones
Dionisio 3
Dungca............. Acciones

y devolver a las personas arriba descritas toda la cantidad que estas habian pagado por las 123
acciones.

(c) Que se dejara sin efecto lo aprobado por la Junta Directiva el 3 marzo, 1935, art. V. sec.
165, sobre el cambio o trueque de las 31 acciones del Treasury Stock, contra las 32 acciones
del Sr. Numeriano Aldaba, en la corporacion Northern Luzon Transportation Co. y que se
devuelva al Sr. Numeriano Aldaba las 32 acciones mencionadas despues que el haya
devuelto el certificado de las 31 acciones de la Silang Traffic Co., Inc.

(d) Permitir al Tesorero de la Corporacion para que devuelva a las personas arriba indicadas,
las cantidades pagadas por las 123 acciones. (Exhibit A-1.)

The respondent corporation set up the following defenses: (1) That the above-quoted resolution is not
applicable to the petitioners Sofronio T. Bayla, Josefa Naval, and Paz Toledo because on the date
thereof "their subscribed shares of stock had already automatically reverted to the defendant, and the
installments paid by them had already been forfeited"; and (2) that said resolution of August 1, 1937,
was revoked and cancelled by a subsequent resolution of the board of directors of the defendant
corporation dated August 22, 1937.

The trial court absolved the defendant from the complaint and declared canceled (forfeited) in favor of
the defendant the shares of stock in question. It held that the resolution of August 1, 1937, was null
and void, citing Velasco vs. Poizat (37 Phil., 802), wherein this Court held that "a corporation has no
legal capacity to release an original subscriber to its capital stock from the obligation to pay for
shares; and any agreement to this effect is invalid" Plaintiffs below appealed to the Court of Appeals,
which modified of the trial court as follows:

That part of the judgment dismissing plaintiff's complaint is affirmed, but that part thereof
declaring their subscription canceled is reversed. Defendant is directed to grant plaintiffs 30

6
 days after final judgment within which to pay the arrears on their subscription. Without
pronouncement as to costs.

Both parties appealed to this Court by petition and cross-petition for certiorari. Petitioners insist that
they have the right to recover the amounts involved under the resolution of August 1, 1937, while the
respondent and cross-petitioner on its part contends that said amounts have been automatically
forfeited and the shares of stock have reverted to the corporation under the agreement hereinabove
quoted.

The parties litigant, the trial court, and the Court of Appeals have interpreted or considered the said
agreement as a contract of subscription to the capital stock of the respondent corporation. It should
be noted, however, that said agreement is entitled "Agreement for Installment Sale of Shares in the
Silang Traffic Company, Inc.,"; that while the purchaser is designated as "subscriber," the corporation
is described as "seller"; that the agreement was entered into on March 30, 1935, long after the
incorporation and organization of the corporation, which took place in 1927; and that the price of the
stock was payable in quarterly installments spread over a period of five years. It also appears that in
civil case No. 3125 of the Court of First Instance of Cavite mentioned in the resolution of August 1,
1937, the right of the corporation to sell the shares of stock to the person named in said resolution
(including herein petitioners) was impugned by the plaintiffs in said case, who claimed a preferred
right to buy said shares.

Whether a particular contract is a subscription or a sale of stock is a matter of construction and

depends upon its terms and the intention of the parties (4 Fletcher, Cyclopedia of Corporation
[permanent edition], 29, cited in Salmon, Dexter & Co. vs. Unson (47 Phil. 649, 652). In the Unson
case just cited, this Court held that a subscription to stock in an existing corporation is, as between
the subscriber and the corporation, simply a contract of purchase and sale.

It seems clear from the terms of the contracts in question that they are contracts of sale and not of
subscription. The lower courts erred in overlooking the distinction between subscription and purchase
"A subscription, properly speaking, is the mutual agreement of the subscribers to take and pay for the
stock of a corporation, while a purchase is an independent agreement between the individual and the
corporation to buy shares of stock from it at stipulated price." (18 C. J. S., 760.) In some particulars
the rules governing subscriptions and sales of shares are different. For instance, the provisions of our
Corporation Law regarding calls for unpaid subscription and assessment of stock (sections 37-50) do
not apply to a purchase of stock. Likewise the rule that corporation has no legal capacity to release
an original subscriber to its capital stock from the obligation to pay for his shares, is inapplicable to a
contract of purchase of shares.

The next question to determine is whether under the contract between the parties the failure of the
purchaser to pay any of the quarterly installments on the purchase price automatically gave rise to
the forfeiture of the amounts already paid and the reversion of the shares to the corporation. The
contract provides for interest of the rate of six per centum per annum on deferred payments. It is also
provides that if the purchaser fails to pay any of said installments when due, the said shares are to
revert to the seller and the payments already made are to be forfeited in favor of said seller. The
respondent corporation contends that when the petitioners failed to pay the installment which fell due
on or before July 31, 1937, forfeiture automatically took place, that is to say, without the necessity of
any demand from the corporation, and that therefore the resolution of August 1, 1937, authorizing the
refund of the installments already paid was inapplicable to the petitioners, who had already lost any
and all rights under said contract. The contention is, we think, untenable. The provision regarding
interest on deferred payments would not have been inserted if it had been the intention of the parties
7
to provide for automatic forfeiture and cancelation of the contract. Moreover, the contract did not
expressly provide that the failure of the purchaser to pay any installment would give rise to forfeiture
and cancelation without the necessity of any demand from the seller; and under article 1100 of the
Civil Code persons obliged to deliver or do something are not in default until the moment the creditor
demands of them judicially or extrajudicially the fulfillment of their obligation, unless (1) the obligation
or the law expressly provides that demand shall not be necessary in order that default may arise, (2)
by reason of the nature and circumstances of the obligation it shall appear that the designation of the
time at which that thing was to be delivered or the service rendered was the principal inducement to
the creation of the obligation.

Is the resolution of August 1, 1937, valid? The contract in question being one of purchase and not
subscription as we have heretofore pointed out, we see no legal impediment to its rescission by
agreement of the parties. According to the resolution of August 1, 1937, the recission was made for
the good of the corporation and in order to terminate the then pending civil case involving the validity
of the sale of the shares in question among others. To that rescission the herein petitioners
apparently agreed, as shown by their demand for the refund of the amounts they had paid as
provided in said resolution. It appears from the record that said civil case was subsequently
dismissed, and that the purchasers of shares of stock, other than the herein petitioners, who were
mentioned in said resolution were able to benefit by said resolution. It would be an unjust
discrimination to deny the same benefit to the herein petitioners.

We may add that there is no intimation in this case that the corporation was insolvent, or that the right
of any creditor of the same was in any way prejudiced by the rescission.

The attempted revocation of said rescission by the resolution of August 22, 1937, was invalid, it not
having been agreed to by the petitioners.

Wherefore, the judgment of the court of appeals is hereby reversed and another judgment will be
entered against the defendant Silang Traffic Co., Inc., ordering it to pay to the plaintiffs Sofronio T.
Bayla, Venancio Toledo, Josefa Naval, and Paz Toledo, the sums of P360, P375, P675, and P675,
respectively, with legal interest on each of said sums from May 28, 1938, the date of the filing of the
complaint, until the date of payment, and with costs in the three instances. So ordered.

8
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T.
ONG, And JULIE ONG ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU, MOLY YU GAW,
BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, INTRALAND RESOURCES
DEVELOPMENT CORP., MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY
CITY, And the SECURITIES AND EXCHANGE COMMISSION, respondents.
G.R. No. 144476 February 1, 2002

DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU,
LOURDES C. TIU, And INTRALAND RESOURCES DEVELOPMENT CORP., petitioners, vs. ONG
YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG
And JULIA ONG ALONZO, respondents. G.R. No. 144629 BUENA, J.:

Consolidated Petitions for Review of 1.) the Decision of the Court of Appeals1 in CA-G.R. SP No.
49056 dated October 5, 1999, which affirmed with modifications the Order dated September 11,
1998, issued by the SEC En Banc in SEC Case No. 598 and 601, confirming the rescission of the
Pre-Subscription Agreement; and 2.) the Resolution of the Court of Appeals dated August 17, 2000
which denied the motions for reconsideration filed by the private parties herein, except Masagana
Telamart, Inc.

The antecedent facts of the case, as summarized by the Court of Appeals are as follows:

"As one traverses Taft Avenue in Pasay City, one will see the Masagana Citimall, a commercial
complex owned and managed by the First Landlink Asia Development Corporation (FLADC) (p. 127,
520 and 211, Rollo). It was not long ago when this commercial complex, then unfinished, was
threatened with incompletion when its owner found it in financial distress in the amount of
₱190,000,000.00 for being indebted to the Philippine National Bank (PNB), (pp. 520 and 212, Rollo).
That was in 1994 (Ibid.)

"FLADC was then fully owned by the Tiu Group composed of David S. Tiu, Cely Y. Tiu, Moly Yu
Gaw, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (p. 211, Rollo). In order to
recover from its floundering finances, the Ong Group composed of Ong Yong, Juanita Tan Ong,
Wilson T. Ong, Anna L. Ong, William T. Ong and Julie Ong Alonzo, were invited by the Tius to invest
in FLADC (pp. 211 and 520, Rollo). Hence, the execution of a Pre-Subscription Agreement by and
between the Tiu and Ong Groups on August 15, 1994 (pp. 211-216, Rollo).

"By the Pre-Subscription Agreement, both parties agreed to maintain equal shareholdings in FLADC
with the Ongs investing cash while the Tius contributing property (pp. 213-214, Rollo). Specifically,
the Ongs were to subscribe to 1 million shares of FLADC at a par value of ₱100.00 per share while
the Tius were to subscribe to 549,800 shares more of FLADC at a par value of ₱100.00 per share
over and above their previous subscription of 450,200 shares in order to complete a subscription of 1
million shares (Ibid.). Commensurate to their proposed subscriptions, the Ongs were to pay
₱100,000,000.00 in cash (p.213, Rollo), while the Tius were to contribute the following properties by
way of separate Deeds of Assignments:

"1. A four-storey building described in Transfer Certificate of Title No. 15587 registered in the name
of Intraland Resources and Development Corporation (a corporation wholly owned by the Tius) and
valued at ₱20,000,000.00;

9
"2. A 1,902.30 square meter parcel of land covered by Transfer Certificate of Title No. 15587 in the
name of Masagana Telamart, Inc. (also a corporation owned by the Tius) and valued at
₱30,000,000.00; and

"3. A 151 square meter parcel of land adjacent to the properties covered by Transfer Certificate of
Title Nos. 132493 and 132494 and valued at ₱4,980,000.00 (pp. 212 and 214, Rollo).

"Also for purposes of equality, the parties agreed that 6 directors of FLADC were to be nominated
from the Ong Group, while 5 directors thereof were to be nominated from the Tiu Group (p. 213,
Rollo). It was also agreed that the positions of President and Secretary of FLADC shall be held by the
Ongs, while the positions of Vice-President and Treasurer thereof shall be held by the Tius (Ibid.).

"In order to liquidate FLADC's outstanding ₱190,000,000.00 loan from the PNB, the parties to the
Pre-Subscription Agreement proposed payment thereof with the ₱100,000,000.00 cash to be
invested by the Ongs to FLADC and with the available funds of FLADC derived from:

"1. Reimbursement of costs of improvements received from tenants on the spaces leased to them;

"2. Receipts from reservations to lease; and

"3. Receipts for deposit or advance rentals from tenants (pp. 213-214, Rollo).

"In order to comply with the Pre-Subscription Agreement, the necessary increase in capital stock of
FLADC was applied for and duly approved (pp. 184-187, Rollo). The Ongs subscribed to 1 million
shares thereof at a par value of ₱100.00 per share, or ₱100,000,000.00 (p. 185, Rollo). Intraland
Resources and Development Corporation executed the requisite Deed of Assignment over a 4-storey
building it owned in favor of FLADC and was duly credited with 200,000 shares therefor in FLADC
(Ibid; pp. 837-838, Rollo).

"Masagana Telamart, Inc. executed a Deed of Assignment over the 1,902.30 square meter property
in favor of FLADC and delivered the owner's copy of the transfer certificate of title of the same as well
as the possession thereof to the latter (pp. 221-226, Rollo). Title over the 151 square meter property
was also transferred in the name of FLADC (pp. 1062-1063, Rollo).

"FLADC's articles of incorporation were also duly amended increasing the number of its directors
from seven (7) to eleven (11), six (6) of which were nominated by the Ong Group, while the rest were
nominated by the Tiu Group (pp. 188-189, Rollo). Later, Wilson T. Ong and Juanita Tan Ong were
elected President and Secretary, respectively, while David S. Tiu and Cely Yao Tiu were elected
Vice-President and Treasurer, respectively (pp. 191-192, Rollo)

"The ₱190,000,000.00 loan from the PNB was also settled, but not quite in accord with the provisions
of the Pre-Subscription Agreement (pp.437-441, Rollo). In lieu of the FLADC funds which were
supposed to be used as partial payment for said loan per Pre-Subscription Agreement, the Ongs had
to pay ₱70,000,000.00 more aside from their ₱100,000,000.00 subscription payment, and the Tius
had to advance ₱20,000,000.00 in cash, which amount was loaned to them by the former (Ibid.).

"The controversy between the two parties arose when the Ongs refused to credit the number of
FLADC shares in the name of Masagana Telamart, Inc. commensurate to its 1,902.30 square meter
property contribution; also when they refused to credit the number of FLADC shares in favor of the
Tius commensurate to their 151 square meter property contribution; and when David S. Tiu and Cely

10
Y. Tiu were proscribed from assuming and performing their duties as Vice-President and Treasurer,
respectively of FLADC (pp. 132-136, Rollo). These became the basis of the Tius' unilateral rescission
of the Pre-Subscription Agreement on February 23, 1996 (p. 867, rollo)."2

On February 27, 1996, the Tius sought the Securities and Exchange Commission (SEC) confirmation
of their rescission of the Pre-Subscription Agreement. Their complaint was docketed as SEC Case
No. 02-96-5269.

On May 19, 1997, after the Tiu Group, Masagana Telamart, Inc., Intraland Resources and
Development Corporation, the Ong Group and FLADC were heard on their respective claims
regarding the propriety of the Pre-Subscription Agreement's rescission, SEC Hearing Officer Rolando
G. Andaya, Jr., rendered a decision thereon confirming the rescission as follows:

"WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-Subscription

Agreement, and consequently ordering:

"(a) The cancellation of the 1,000,000 shares subscription of the individual defendants in
FLADC;

"(b) FLADC to pay the amount of ₱170,000,000.00 to the individual defendants representing
the return of their contribution for 1,000,000 shares of FLADC;

"(c) The plaintiffs to submit with the Securities and Exchange Commission amended articles of
incorporation of FLADC to conform with this decision;

"(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066 (formerly
15587), 135325 and 134204 and any other title or deed in the name of FLADC, failing in which
said titles are declared void;

"(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to
cancel the annotation of the Pre-Subscription Agreement dated 15 August 1994 on TCT No.
134066 (formerly 15587).

"(f) The individual defendants, individually and collectively, their agents and representatives, to
desist from exercising or performing any and all acts pertaining to stockholder, director or
officer of FLADC or in any manner intervene in the management and affairs of FLADC;

"(g) The individual defendants, jointly and severally, to return to FLADC interest payment in the
amount of ₱8,866,669.00 and all interest payments as well as any payments on principal
received from the ₱70,000,000.00 inexistent loan, plus the legal rate of interest thereon from
the date of their receipt of such payment, until fully paid;

"(h) The plaintiff David Tiu to pay individual defendants the sum of ₱20,000,000.00
representing his loan from said defendants plus legal interest from the date of receipt of such
amount. "SO ORDERED."3

On motion of the Ong Group, the aforequoted decision was later partially reconsidered in an omnibus
order issued by SEC Hearing Officer Manolito S. Soller on November 24, 1997, the decretal portion
of which in part reads:

"WHEREFORE, premises considered, judgment is hereby rendered as follows:

11
"1. The Decision of this Commission dated May 19, 1997 is partially reconsidered only insofar as the
investment amounting to P70 million which is hereby declared not as premium on capital stock but a
liability of FLADC or advances of the defendants made in favor of FLADC, and that the interest paid
on account thereof is hereby declared legal and valid; "SO ORDERED."4

Both the Ong and Tiu Groups appealed the aforequoted Omnibus Order to the SEC en banc. Their
respective appeals were docketed as SEC Case Nos. 598 and 601. On September 11, 1998, the
SEC en banc issued an order, the decretal portion of which reads:

"WHEREFORE, judgment is hereby rendered CONFIRMING the omnibus Order dated 24 November
1997 insofar as it confirms the rescission of the Pre-Subscription Agreement and REVERSING the
same insofar as it held that the seventy million (P70 M) paid by the Ong Group over and above the
par value of the one million (1,000,000) shares of stocks of FLADC which they had subscribed as
loan and not premium.

"Accordingly,

"1. The subscription contract entered into by the Ong group and the corporation is hereby
declared rescinded, the latter is ordered to cancel the one million (1,000,000) shares
subscription of the Ong Group in FLADC, and FLADC shall return the amount of one hundred
and seventy million pesos (₱170 M) to the Ong Group;

"2. The Tiu Group shall pay the twenty million pesos (₱20 M) to the Ong group which was
loaned to them by the latter;

"3. The Ong Group, individually and collectively, their agents and representatives, are hereby
ordered to desist from exercising or performing any and all acts pertaining to stockholders,
directors or officers of FLADC or in any manner intervening in the management and affairs of
FLADC;

"4. The Ong Group, jointly and severally, are hereby ordered to return to FLADC the interest
payment on the seventy million pesos (₱70 M) in the amount of eight million and eight hundred
sixty-six thousand, and six hundred sixty-nine pesos (₱8,866,669.00) and all additional interest
payments thereafter, as well as any payments on the principal received for the seventy million
pesos (₱70M) inexistent loan. "No pronouncement as to cost and damages. "SO ORDERED."5

From the said Order of the SEC En Banc, the Ongs appealed to the Court of Appeals, by way of a
petition for review under Rule 43 of the 1997 Rules of Civil Procedure.

On October 5, 1999, the Court of Appeals issued the Decision subject of these petitions for review,
the decretal portion of which reads:

"WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange
Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the Pre-
Subscription Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the following
MODIFICATIONS:

"1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development Corporation in
accordance with the following cash and property contributions of the parties therein.

12
a. Ong Group - ₱100,000,000.00 cash contribution for one (1) million shares in First Landlink Asia
Development Corporation at a par value of ₱100.00 per share;

b. Tiu Group:

1.) ₱45,020,000.00 original cash contribution for 450,200 shares in First Landlink Asia
Development Corporation at a par value of ₱100.00 per share;

2.) A four-storey building described in Transfer Certificate of Title No. 15587 in the name of
Intraland Resources and Development Corporation valued at ₱20,000,000.00 for 200,000
shares in First Landlink Asia Development Corporation at a par value of ₱100.00 per share.

3.) A 1,902.30 square meter parcel of land covered by Transfer Certificate of Title No. 15587 in
the name of Masagana Telamart, Inc. valued at ₱30,000,000.00 for 300,000 shares in First
Landlink Asia Development Corporation at a par value of ₱100.00 per share.

"2. Whatever remains of the assets of the First Landlink Asia Development Corporation
and the management thereof is hereby ordered transferred to the Tiu Group.

"3. First Landlink Asia Development Corporation is hereby ordered to pay the amount of
₱70,000,000.00 that was advanced to it by the Ong Group upon the finality of this
decision. Should the former incur in delay in the payment thereof, it shall pay the legal
interest thereon pursuant to Article 2209 of the New Civil Code.

"4. The Tius are hereby ordered to pay the amount of ₱20,000,000.00 loaned them by
the Ongs upon the finality of this decision. Should the former incur in delay in the
payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the
New Civil Code.

"SO ORDERED."6

The Court of Appeals arrived at the said decision after finding that rescission and specific
performance as provided in Art. 1191 of the New Civil Code, may alternatively be availed of in this
case. The question is who between the contending parties may avail of the alternative remedies
when both of them violated the provisions of the contract, their Pre-Subscription Agreement. The
Court of Appeals also found that the Ongs were indeed preventing the Tius from assuming the duties
and responsibilities of the position of Vice-President and Treasurer of FLADC. The Ongs also
violated the Pre-subscription agreement when they did not credit to Masagana Telamart, Inc. the
number of shares in FLADC commensurate to its property contribution (1,902.30 sq. m.), despite the
execution by the Tius of the Deed of Assignment over said property. The Court of Appeals also
stated that the records also reveal the following violations on the Tius' part: 1.) While there is, on
record, a Deed of Assignment over the 151 sq. m. parcel of land in favor of FLADC, said Deed was
not executed by the Tius in favor of FLADC but by the Lichaucos; and 2.) the Tius did not turn over to
the Ong Group the entire amount of FLADC's funds in violation of the Pre-Subscription Agreement
which stipulated that the former grants to the latter, the management and administration of the
regular business of FLADC upon the agreement's execution. The Court of Appeals also found that
the Tius were diverting rentals due to FLADC into their own MATTERCO account which rentals
appear to have not been remitted to FLADC up to now. Considering the foregoing, the Court of
Appeals concluded that the two groups can no longer work harmoniously together and deemed it
proper to confirm the rescission and for the Ongs and the Tius to liquidate FLADC in accordance with
13
their respective cash and property contribution. The Court of Appeals also resolved the question of
the nature of the ₱70 M paid by the Ongs in excess of 1 million shares they acquired from FLADC,
ruling that the same is an advance made by the Ongs in favor of FLADC, and not a premium or paid-
in surplus on the actual value of 1 million shares, and that no interest thereon may be awarded as
there is no evidence on record which shows that at the time the ₱70M was advanced to FLADC, the
parties agreed that the same shall earn interest.

On August 17, 2000, the Court of Appeals issued a Resolution which denied the private parties'
motions for reconsideration.

The Ong Group and the Tiu Group both filed their respective petitions for review subject of these
consolidated cases.

Except for the fourth assigned error in the Ongs' petition (G.R. No. 144476) and sub-paragraphs (vi)
and (vii) of the second assigned error in the Tius’ petition (G.R. No. 144629), which are well taken,
We find both petitions to be without merit.

In their Petition, docketed as G.R. No. 144476, the Ongs raise the following assignment of errors:

"I

"The Court of Appeals erred in ruling that the ‘Pre-Subscription Agreement’ of the parties dated
August 15, 1994 may be rescinded under Article 1191 of the New Civil Code.

"a. Rescission is applicable only to reciprocal obligations and the ‘Pre-Subscription Agreement’
does not provide for reciprocity; hence, the remedy of rescission is not available.

"b. Rescission is not applicable when ‘rights’ over the subject matter of the rescission have
been acquired by third persons.

"c. Rescission is only applicable in case of substantial and fundamental breach.

"II

"The Court of Appeals erred in finding that the Ongs violated the ‘Pre-Subscription Agreement’ in the
following manner:

"a. The Ongs prevented the Tius from assuming the duties and responsibilities of the Vice-President
and Treasurer of FLADC by not providing them with adequate offices.

"b. By not crediting Masagana Telamart, Inc. with 300,000 shares corresponding to the value of the
1,902.30 square meters property covered by TCT No. 15587.

"III

"The Court of Appeals erred in confirming rescission of the ‘Pre-Subscription Agreement’ dated
August 15, 1994 and the ‘liquidation’ of FLADC ‘for practical reasons,’ and to prevent ‘further
squabbles and numerous litigations,’ reasons unknown in law.

"IV

14
"The Court of Appeals erred in not awarding interest on the loan of respondent David S. Tiu from
petitioner Ong Yong in the amount of P20 million and the P70 million advanced by the Ongs to
FLADC.

"V

"The Court of Appeals erred in not awarding costs and damages to the Ongs."

On the first issue, the Court of Appeals did not err in ruling that the "Pre-Subscription Agreement" of
the parties dated August 15, 1994 may be rescinded under Article 1191 of the New Civil Code.

In paragraph (a) of the first assigned error, the Ongs allege that rescission is applicable only to
reciprocal obligations and the "Pre-Subscription Agreement" does not provide for reciprocity, hence,
the remedy of rescission is not available. The Ongs cited the case of Songcuan vs. IAC, (191 SCRA
28) to illustrate their point that "As in the Songcuan case, there are here two (2) separate and distinct
obligations each independent of the other – i.) the obligation to subscribe to, and to pay, 50% of the
increased capital stock of FLADC; and ii.) the obligation to install the Ongs and the Tius as members
of the Board of Directors and to certain corporate positions, but only after the Ongs and the Tius have
subscribed each to 50% of the increased capital stock of FLADC."

In this petition, in lieu of Art. 1191,7 the Ongs invoke Articles 1156 and 1159 of the New Civil Code
which state –

"Art. 1156. An obligation is a juridical necessity to give, to do or not to do.

"Art. 1159. Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith."

and that should there be any violation, those who failed to fulfill their obligations should be required to
perform their obligations under the agreement.

Contrary to the Ongs' assertion, the Songcuan case does not apply squarely to this case. In the
Songcuan case, this Court ruled that Art. 1191 to rescind the right of the Alviars to repurchase does
not apply because their corresponding obligations can hardly be called reciprocal because the
obligation of the Alviars to lease to Songcuan the subject premise arises only after the latter had
reconveyed the realties to them. On the other hand, in the instant case, the obligations of the two (2)
groups to pay 50% of the increased capital stock of FLADC and to install them as members of the
Board of Directors and to certain corporate positions are simultaneous and arise upon the execution
of the pre-subscription agreement.

The Ongs illustrate reciprocity in the following manner: In a contract of sale, the correlative duty of the
obligation of the seller to deliver the property is the obligation of the buyer to pay the agreed price. 8

In the case at bar, the correlative obligation of the Tius to let the Ongs have and exercise the
functions of the positions of President and Secretary is the obligation of the Ongs to let the Tius have
and exercise the functions of Vice-President and Treasurer. In this regard, the Court of Appeals aptly
stated, and we quote:

"It cannot be denied that the Pre-Subscription Agreement contains reciprocal obligations owing to the
fact that the parties thereto agreed to maintain parity not only in their shareholdings in FLADC but

15
also with regard to their standing in FLADC (pp. 214, 662, 708-710, 715-716, 1914, Rollo). In fine,
each party has the obligation to remain equal with the other on every matter pertaining to FLADC.
Herein lies the reciprocity in the Pre-Subscription Agreement."9

Moreover, the Ongs are now estopped from denying the applicability of Art. 1191 to the present
controversy. As correctly observed by the Court of Appeals in its Resolution dated August 17, 2000,
which denied the Ongs' motion for reconsideration:

"Petitioners keep on harping for the Pre-Subscription Agreement's specific performance yet they also
actually failed to give a legal basis therefor. Why then must they deny that the Tiu Group has a right
to ask for rescission of their agreement per Article 1191 of the Civil Code (pp. 1141-1145, Rollo)
when they themselves invoke the same law as basis for asking the specific performance of the same
agreement (pp.1156-1159, Rollo)"10

In paragraph (b) of the first assigned error, the Ongs allege that rescission is not applicable when
"rights" over the subject matter of the rescission have been acquired by third persons. The Ongs refer
to Arts. 1191 and 1385.11

The Ongs argue that the payment on subscription of ₱100 million by the Ongs is not to the Tius and
the payment of ₱54.98 million by the Tius is not to the Ongs, but to FLADC, the corporation, which is
distinct and separate from the Ongs and the Tius notwithstanding the fact that they may be the only
stockholders. Pursuant to Arts. 1191 and 1385, continue the Ongs, the payment made by the two (2)
groups have come to be legally owned and possessed by FLADC, the corporation, a third person,
who did not act in bad faith. So that any alleged violation of the Pre-Subscription Agreement would
have no consequence on the respective amounts paid by the two (2) groups on their subscription to
FLADC, a third party.

We are not convinced.

The reliance of the Ongs on Article 1385 is misplaced. We agree with the Tius that the things which
are the object of the Pre-Subscription Agreement – one million shares of stock subscribed to by the
Ong Group, the additional 549,800 shares subscribed to by the Tius, and the corporate positions
mentioned above – are not in the possession of third persons, but are in the possession of the parties
to the Pre-Subscription Agreement. In any case, FLADC is not a third person in relation to the Pre-
Subscription Agreement though not named as a party. FLADC is deemed a party to the agreement
by virtue of stipulations pour autrie clearly and deliberately conferring on it a favor or benefit which it
subsequently accepted. (Art. 1311, Civil Code)12 Such benefit was in the form of the payments made
by the parties for their subscription to shares of stock in FLADC, which FLADC accepted.

In paragraph (c) of the first assigned error, the Ongs allege that rescission is only applicable in case
of substantial and fundamental breach. The Ongs contend that the substantial and fundamental
aspects of the Pre-Subscription Agreement between the two (2) groups are their commitment to
subscribe to their respective numbers of shares and to pay corresponding amount thereof. The Ongs
say that they have accomplished their part but not the Tius; and that their alleged breach of the
agreement in their alleged failure to provide adequate offices to David Tiu as Vice-President and Cely
Yao Tiu, as Treasurer, is hardly substantial and fundamental because stockholders become Vice-
President or Treasurer of a corporation by election, not by virtue of office facilities he/she may have
been provided.

16
The Ongs' contention is without merit. Suffice it to state that what makes a stockholder an officer of a
corporation is not simply the fact of his election but, more important, his ability to perform the powers
and functions of that office. As will be discussed in the next assigned error, the Ongs indeed
prevented the Tius from exercising the powers and functions of their office. We rule, therefore, that
such breach of the agreement on the part of the Ongs is substantial and fundamental.

On the second assigned error, the Court of Appeals did not err in finding that the Ongs violated the
"Pre-Subscription Agreement" (a.) when it prevented the Tius from assuming the duties and
responsibilities of the Vice-President and Treasurer of FLADC by not providing them with adequate
offices, and (b.) when it did not credit Masagana with 300,000 shares corresponding to the value of
its 1,902.30 sq. m. property contribution.

On paragraph (a), this Court takes exception to the phrase "by not providing them with adequate
offices." This is not the only reason but only one of the reasons cited by the Court of Appeals in
concluding that the Ongs violated the pre-subscription agreement when they prevented the Tius from
assuming the duties and responsibilities of the Vice-President and Treasurer of FLADC. The
discussion made by the Court of Appeals on this point is correct, very clear and enlightening, and we
quote:

"A reading of the records, which to date comprises more than 2,100 pages, reveal that the Ongs
were indeed preventing the Tius from assuming the duties and responsibilities of the position of Vice-
President and Treasurer of FLADC. This is highlighted by the fact that the Ongs' attempt to provide
David S. Tiu and Cely Y. Tiu with executive offices before the filing of the complaint a quo, was
merely half-hearted as evidenced by the delay in providing for said offices despite repeated demands
therefor (pp. 844-845, 862-868, 877-878, 895-896, 999-1000, Rollo), and by the need to pass a
board resolution when none is necessary in order to provide executive offices for the FLADC
President and his staff (pp. 936-937, Rollo). Another fact which shows that the Tius were being
prevented from assuming their responsibilities is the criminal case for theft filed by the Ongs against
David S. Tiu (pp. 856-859, Rollo). Why must there be a need for the Tius to act surreptitiously in
order to have a copy of FLADC's records made if they were not actively being prevented from
inspecting the same? Anyway, for all intents and purposes, the Ongs admit that they were preventing
the Tius from assuming the responsibilities of Vice-President and Treasurer of FLADC. This was
made via their reply to the Tiu's letter rescinding the Pre-Subscription Agreement, which in part
reads:

'As to your contention that the ONG GROUP has failed to accord you, the elected Vice-President of
FLADC, and your wife, the elected treasurer of FLADC, the powers vested in you by the by-laws,
allow me to remind you that in accordance with the Pre-Subscription Agreement, ‘the First Party (TIU
GROUP) hereby grants to the Second Part (ONG GROUP) the management and administration of
the regular business of the corporation upon the execution of this documents (sic).’ Notwithstanding
this fact, the ONG GROUP has always made you a co-signatory to the bank accounts of the
corporation; however, to the great prejudice and damage of the corporation you have, more often
than not, either purposely delayed or refused to affix your signature to checks in payment for the valid
obligations of the corporation. Moreover, from the start, the corporation has given your wife, who is
the Treasurer of FLADC, a space in our office but she has seldom come to hold office there. Despite
this, we have already acceded to your demand that your wife be given a room in lieu of the space
provided for her. Furthermore, pursuant to the by-laws, both the Vice-President and the Treasurer
are to perform duties which may be assigned to them by the Board of Directors and/or the President.
(p. 2049, Rollo; underscoring supplied)'

17
"The Pre-Subscription Agreement provides that the position of Vice-President and Treasurer of
FLADC shall be nominated from the Tiu Group (p. 213, Rollo). Despite the provision in the agreement
turning over the management and administration of FLADC to the Ong Group (p. 215, Rollo), there is
nothing in the agreement which states that the elected Vice-President and Treasurer of FLADC
cannot or must not be allowed to assume the responsibilities of their respective office. From the tenor
of the aforequoted reply to the Tius' letter of rescission, it is evident that the Ongs have reduced the
positions of Vice-President and Treasurer of FLADC to mere figure heads."13

The Court of Appeals did not err in arriving at the same conclusion like the three (3) tribunals below
(Hearing Officer Andaya, Hearing Officer Soller and the SEC En Banc), that the Ongs excluded the
Tius from the corporation by preventing them from participating in its operation and financial affairs.

In paragraph (b) of the second assigned error, the Ongs maintain that their group cannot be faulted
for not crediting Masagana with 300,000 shares corresponding to the value of its 1,902.30 sq. m.
property contribution, because the Deed of Assignment over the said property executed by
Masagana in favor of FLADC was patently incomplete (not dated, no instrumental witness signed the
Deed and the Acknowledgement was not executed, because the Tius asked that the execution of the
document be not completed) and that the necessary documentary stamp taxes, and capital gains and
transfer taxes had not been paid, such that FLADC could not process with the SEC the application
regarding the exchange of the said property for shares of stock in the corporation.

The issue boils down to the question of "Who has the obligation to pay the taxes incident to the
assignment?"

We rule that FLADC, the assignee, has the obligation to pay the taxes incident to the assignment.
The Court of Appeals did not err in holding that:

"xxx The provisions on this matter in the Pre-Subscription Agreement is clear that upon the execution
of the Deed of Assignment thereon in favor of FLADC, Masagana Telamart, Inc. shall be credited
with the number of shares in FLADC commensurate to the value thereof of ₱30,000,000.00 (see
paragraphs 14-15, 17 of the Pre-Subscription Agreement, p. 214, Rollo). Since the Deed of
Assignment over this property has already been executed in favor of FLADC, and the owner's
duplicate of the title and possession thereof have already been delivered to FLADC (pp. 221-226,
563, Rollo), the Ongs should have credited 300,000 shares of FLADC at a par value of ₱100.00 per
share in the name of Masagana Telamart, Inc. The transfer of the title to said property in FLADC's
name is another matter which is governed by the Deed of Assignment itself and not the Pre-
Subscription Agreement (pp. 221-222, Rollo)."14

The Deed of Assignment stipulates:

"The ASSIGNEE (FLADC) hereby accepts said assignment and assumes all the obligations of
performing all the terms and conditions including but not limited to, the transfer of the said parcel of
land in the name of First Landlink Asia Development Corporation within a reasonable time."
(Emphasis supplied)

Said stipulation does not enumerate nor exclude any obligation on the part of the assignee for
purposes of transferring the property in its name. Instead, the Deed stipulates in simple language "all
the obligations of performing all the terms and conditions including, but not limited to, the transfer of
the said parcel of land in the name of (FLADC)." It imposes no obligation at all on the part of the
assignor for purposes of transferring the parcel of land in the name of FLADC.
18
In the interpretation of contracts, "if the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the liberal meaning of its stipulation shall control." (Art. 1370, Civil
Code). Thus, the FLADC should shoulder all obligations, such as taxes, legal fees, notarial fees and
expenses of registration, for the conveyance to be registered and the title to the property placed in
the name of FLADC.

If the Ongs find ambiguity in the said stipulation in that the same allegedly does not provide that
FLADC would pay for the taxes arising from the assignment, and that it should have been expressly
provided in the deed of assignment, such alleged ambiguity can only be resolved against the Ongs
for it was their lawyer, the late Atty. John Uy, who prepared the Deed of Assignment.15 Where the
provisions of a contract are ambiguous, such ambiguity must be construed against the party who
drafted the same.16

At any rate, the intention of the parties could not have been to impose on Masagana the obligation to
pay said taxes. As explained by the Tius in their Comment –

"xxx for such imposition is not consistent with the fundamental concept of 'equality' on which the Pre-
Subscription Agreement is based. If Masagana were to pay the taxes and other expenses for the
transfer of its 1,902.30 sq. m. property contribution to FLADC, Masagana would, in effect, be paying
more than ₱30 million, the agreed valuation of the said property contribution, for 300,000 shares of
stock in FLADC. Thus, assuming the Ong Group's computation of Masagana's net gain on the
assignment is correct, i.e., P14 million, and Masagana were to pay 35% of P14 million (P4.9 million)
in taxes for such assignment, in addition to the amount of ₱570,690.00 in documentary stamp taxes,
Masagana would be paying ₱35,470,690.00 for 300,000 shares of stock in FLADC, instead of only
₱30 million. This could not have been the intention of the parties."17

The Ongs presented as proof that the Tius acknowledged their liability for the payment of the taxes,
the following letter-reply dated April 27, 1995 of Mr. David Tiu to Mr. Wilson T. Ong's request for him
to remit payment for documentary stamp tax:

"With respect to your request for the remittance of ₱570,690.00 representing 1-1/2% of documentary
stamps on the assignment of the land with an area of 1,902.30 sq. m. described in TCT No. 134066,
we are willing to remit the same after our proposed meeting, together with Atty. John Uy and Atty. A.
Santos regarding the possible tax liability which we have earlier discussed with you."18

The contents of the said letter were satisfactorily explained by Mr. Tiu as simply a diplomatic way of
denying any tax liability on the transfer, precisely the reason behind the need for a meeting between
the lawyers of the two (2) groups:

"Hearing Officer:

"Okay, you may explain that.

"A In this letter that I mentioned, April 27, this is only my diplomatic way of denying or telling the Ong
Group that it is not part of our agreement that I will pay this amount. Because it's clearly written in the
Deed of Assignment that it is the assignee (that) who will pay the documentary stamps and other
taxes to be able to transfer the parcel of land in the name of FLADC. That is why it is a meeting with
both our lawyers." (TSN, 15 April 1996, p. 34)

"Atty. Santos:

19
"Q In that letter, you made mention of a meeting to be held between Atty. Santos and Atty. Uy. The
Atty. Santos being referred there, is this Atty. Santos, this representation?

"A Yes, Sir, you are the lawyer I'm referring. (TSN, 15 April 1996, pp. 43-44)19

Sub-paragraph (c) of the second assigned error, that the Tius, not the Ongs, violated the Pre-
Subscription Agreement, shall be discussed together with the Tius' Assignment of Errors in G.R. No.
144629.

On the third assigned error, the Ongs allege that "the Court of Appeals erred in confirming rescission
of the Pre-Subscription Agreement and the liquidation of FLADC 'for practical reasons,' and to
prevent 'further squabbles and numerous litigations,' reasons unknown in law." Allegedly, it is an
error for the Court of Appeals to order the transfer to the Tiu Group whatever remains of the assets of
the FLADC and the management thereof, upon the return to each group of their respective cash and
property contribution. The Ongs maintain that the two (2) groups' payment for the shares of stocks
belong to the corporation, no longer to the Ongs or Tius; and even if the Ongs and Tius were the only
stockholders, they do not have the authority to transfer cash or properties of FLADC to themselves,
for that would be misappropriation. The Ongs further cite Sec. 122 of the Corporation Code to
support their claim that the order of the Court of Appeals for the return of the parties' contribution
(distribution of FLADC assets, in the words of the Ongs) is prohibited, thus:

"Sec. 122. Corporate Liquidation. - xxx

"Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its
debts and liabilities."

The Ongs also question the order of the Court of Appeals to transfer to the Tius the Masagana
Citimall (the asset which would remain after moving out cash and property to the Ongs and Tius),
"the corporation's priceless jewel," when it was they who caused the venture to flourish because of
their P190 million contribution and their management thereof.

We find the Ongs' contentions to be without merit.

The Tius counter, among others, that: "When the Ong Group invested their ₱170 million for 50% of
the shares of FLADC, and loaned Mr. Tiu ₱20 million to enable FLADC to pay the ₱190 million PNB
loan, the mall leasing business was already in place, and all the Ong Group had to do was continue
the administration of the mall already started by the Tiu Group, and oversee the collection of rentals
which were supposed to be remitted to the Treasurer, but which the Ong Group refused to do. For
the Ong Group to disregard the valuable contributions of the Tiu Group and monopolize the credit for
FLADC's success is plain arrogance."

As discussed in the first assigned error, the Court of Appeals correctly confirmed the rescission of the
Pre-Subscription Agreement on the basis of Art. 1191 of the Civil Code. It could have relied on the
said provision and nonetheless stood on valid ground. It, however, judiciously took into account the
special circumstances of the case and further justified its decision confirming the rescission of the
Pre-Subscription Agreement on the basis of its perception that the two groups "can no longer work
harmoniously together" and that "to pit them together in the management of FLADC will only result to
further squabbles and numerous litigation."

20
Moreover, what the Court of Appeals ordered was not corporate liquidation upon lawful dissolution
under Sec. 122 of the Corporation Code, as cited by the Ong Group. The Court of Appeals clarified in
its Resolution promulgated on August 17, 2000 that "in ordering liquidation, the Court does not mean
its dissolution as provided in the Corporation Code."20 The prohibition, therefore, under Section 122
against distribution of assets or properties of the corporation does not apply.

As a legal consequence of rescission, the order of the Court of Appeals to return the cash and
property contribution of the parties is based on law, hence, cannot be considered an act of
misappropriation. For how can the rescission of the Pre-Subscription Agreement be implemented
without returning to the two groups whatever they delivered to the corporation in accordance with the
Agreement?

With regard to the order of the Court of Appeals transferring to the Tiu Group whatever remains of the
assets of FLADC and the management thereof, the same is but an inevitable consequence of the
rescission of the Pre-Subscription Agreement. Restoration of the parties to status quo ante dictates
that the building constructed on the two (2) existing lots of FLADC, the remaining asset of FLADC, be
transferred to the Tiu Group. The status quo ante immediately prior to the execution of the Pre-
Subscription Agreement was that the Tius, then wholly owning FLADC, had control and custody over
this remaining asset.

On the fourth assignment of error, we find the same to be well taken. Indeed, the Court of Appeals
erred in ruling that: "Since no period was stipulated for the return thereof (the P20 million loan
extended to the Tius and the P70 million the Ongs advanced to FLADC), the Court resolves to fix the
same upon the finality of this Decision (See Article 1197, Civil Code21 ). Failure of the Tius to pay the
same upon the finality of this decision shall make them liable for legal interests thereon pursuant to
Article 2209 of the New Civil Code."

We agree with the Ongs that since no period was stipulated for the return of the ₱20 million loan they
extended to the Tius, the same should earn 12% interest per annum and the period of payment of
interest thereon should reckon from the time of judicial (or extrajudicial) demand, which was, from
April 23, 1996, when the Ongs filed their Answer, and not upon the finality of this Decision.

In Eastern Shipping Lines, Inc. vs. Court of Appeals22 and affirmed in Gomez vs. Court of
Appeals (Sept. 21, 2000, G.R. No. 120747) and Catungal vs. Hao, (March 22, 2001, G.R. No.
134972), among other cases, this Court discussed at length the rate of interest, as well as the accrual
thereof in awarding interest in the concept of actual and compensatory damages and held that:

"1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in
writing.23 Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article
116924 of the Civil Code."

However, we do not deem it fit that the ruling in Eastern Shipping Lines, Inc. should also apply to the
₱70 million that the Ongs advanced to FLADC. This is because the Ongs themselves, in the Board
Resolution (Exhibit "16") that was approved in the meeting of the Board of Directors of FLADC held
on June 19, 1996 (during which the Tiu group was absent), authorized payment of 10% interest per
annum on the said ₱70 million. Thus, as to the ₱70 million, the FLADC should be made to pay only
10% interest per annum and not 12%, the period to be reckoned from June 19, 1996.
21
The matter of why the ₱70 million paid by the Ongs should be adjudged as an advance and not a
premium or paid-in surplus shall be taken up in G.R. No. 144629, the petition filed by the Tius.

On the fifth assigned error, the Ongs allege that the Court of Appeals erred in not ordering the Tius to
pay costs and damages to the Ongs for the filing of this baseless and unwarranted suit. Considering
all the foregoing which shows that the case filed by the Tius for confirmation of the rescission of the
pre-subscription agreement, is meritorious, it is obviously no longer necessary to discuss this issue.

In their Petition, docketed as G.R. No. 144629, the Tius raise the following Assignment of Errors:

"I

"The Court of Appeals erred in ordering the liquidation of FLADC instead of merely ordering the
restitution of the parties' respective investments.

"II

"The Court of Appeals erred in relaxing the application of the laws and jurisprudence on rescission of
reciprocal obligations and in ordering the liquidation of FLADC obviously on the basis of its mistaken
perception:

"i) That in 1994, prior to the entry of the Ong Group in FLADC, the Masagana Citimall was
threatened with incompletion;

"ii) That at that time, FLADC was in financial distress in the amount of ₱190 million for being
indebted to PNB;

"iii) That the Tiu Group invited the Ong Group to come in as stockholders for FLADC to recover
from its floundering finances;

"iv) That the Pre-Subscription Agreement was entered into by the parties in order to rescue
FLADC from financial distress, i.e., for the purpose of settling its ₱190 million indebtedness to
PNB;

"v) That under the circumstances, Masagana Citimall will not be what it is today were it not for
the money that the Ong Group invested;

"vi) That the Tiu Group violated the Pre-Subscription Agreement since the deed of assignment
over the 151 sq. m. lot was not executed by the Tiu Group but by the Lichaucos in favor of
FLADC, hence, the Tiu Group cannot be credited with the number of shares commensurate to
the value of said lot and will not, therefore, be able to equal the Ong Group's one million
subscription in FLADC;

"vii) That the Tiu Group were pulling a fast one on the Ong Group by their 'alleged' 151 sq. m.
property contribution in exchange for 49,800 shares in FLADC;

"viii) That the Tiu Group did not turn over to the Ong Group the entire amount of FLADC funds;

"ix) That the Tiu Group, by unilaterally rescinding the Pre-Subscription Agreement, are now
trying to oust the Ong Group from enjoying the fruits of their P190 million investment in FLADC,
and that this is ingratitude at its height;
22
 "x) That the Tiu Group were diverting rentals due to FLADC into their own MATERRCO
account which rentals appear to have not been remitted to FLADC up to now; and

"xi) That the ₱70 million paid by the Ong Group was an advance and not a premium on
capital."

On their first assigned error, the Tius allege that the Court of Appeals erred in ordering the liquidation
of FLADC instead of merely ordering the restitution of the parties' respective investments. The Tius
continue: "To rescind is 'to declare a contract as though it never were.' It is not merely to terminate it
and release the parties from further obligations to each other but to abrogate it from the beginning
and restore parties to their relative position which they would have occupied had no contract ever
been made (Ocampo vs. Court of Appeals, 233 SCRA 551)."25The Tius also contend that the
liquidation of the profits of FLADC and the distribution thereof to the parties offend the very essence
of rescission which merely requires mutual restoration in consonance with the basic principle that
when an obligation has been extinguished, it is the duty of the court to require the parties to
surrender whatever they may have received from the other so that they may be restored, as far as
practicable, to their original situation. In support thereof, the Tius cite the following cases: Floro
Enterprises, Inc. vs. Court of Appeals, 249 SCRA 354 [1995], citing Agustin vs. Court of
Appeals, 186 SCRA 375 [1990]; Magdalena Estate, Inc. vs. Myrich, 71 Phil., 344 [1941]; Po
Pauco vs. Siguenza, et al., 49 Phil. 404 [1926].

On the other hand, the Ongs, in their Comment also question the order of the Court of Appeals in its
Decision for the rescission and liquidation of FLADC and for the return to the Ongs of their ₱190
million, and nothing more. The Ongs ask what became of the profits earned and the additional assets
acquired by FLADC through the efforts of the Ongs, and the ₱190 million they invested in FLADC.

To the above queries of the Ongs, it is precisely for those reasons that the Court of Appeals in its
Resolution of August 17, 2000, clarified thus:

"xxx. While the Court in the case at bench ordered the rescission of the Pre-Subscription Agreement,
it did not, however, order restitution of what the parties contributed pursuant thereto. What the Court
ordered was the liquidation of FLADC in accordance with the actual amount of investment each party
made in FLADC (pp. 18-19 and 24 of Decision; pp. 1045-1046 and 1050, Rollo). Restitution and
liquidation are two different things. Liquidation includes both the profits and losses each party derived
within the duration of their respective investment (see Sibal, Philippine Legal Encyclopedia, p. 531;
Black's Law Dictionary, p. 839; De Leon, The Corporation Code of the Philippines Annotated, 1997
ed., p. 705, citing 16 Fletcher, p. 658). Contrary therefore to Willie Ong's contention that the Ongs will
simply receive a return of their money without any fruits or interest, the decision assures them that
they (the Ong and Tiu Groups) will have a bountiful return of their respective investments derived
from the profits of the corporation."26

With regard to the Tius' allegations, the same are without merit. As cited by the Tius themselves, "it is
the duty of the court to require the parties to surrender whatever they may have received from the
other so that they may be restored, as far as practicable, to their original situation." Restoration of the
parties to their relative position which they would have occupied had no contract ever been made is
not practicable nor possible because we cannot turn back the hands of time when the mall was only
"nearing completion" in 1994, when the mall was not fully tenanted yet and they had an existing loan
of ₱190 million with PNB with an interest of 19% per annum. But the Masagana Citimall is now
completely constructed/finished, the ₱190 million loan fully paid without their having to pay enormous
interest, and the Tius cannot deny that the Ongs are partly to be credited for the success of the
23
venture. What the Tius want the Court to order would have been fair and just had there been no fault
on their part as would be discussed in the second assigned error, and had they come to Court with
clean hands because he who comes to Court must come with clean hands.27 If, as the Tius espouse,
the Court would simply order the return of the ₱190 million of the Ongs, then, the Tius would be
unjustly enriched at the expense of the Ongs. Under the law, no one shall unjustly enrich himself at
the expense of another. "Niguno non deue enriquecerse tortizamente condaño de otro."

On their second assigned error, the Tius allege that the Court of Appeals erred in relaxing the
application of the laws and jurisprudence on rescission of reciprocal obligations and ordering the
liquidation of FLADC on the basis of its mistaken perception.

Subparagraphs i-iv, and ix, being interrelated, shall be discussed jointly. The Tius allege that contrary
to the Court of Appeals' findings:

i.) In 1994, prior to the entry of the Ong Group in FLADC, the Masagana Citimall was never
threatened with incompletion;

ii.) Prior to the execution of the Pre-Subscription Agreement, FLADC was not in financial
distress;

iii.) The Tiu Group invited the Ong Group to come in as stockholders of FLADC to expand the
company's leasing business;

iv.) It is not true that the Pre-Subscription Agreement was entered into by the parties in order to
rescue FLADC from financial distress, i.e., for the purpose of settling its ₱190 million
indebtedness to PNB;

ix.) It is the Tiu Group, not the Ong Group, who were ousted from enjoying the fruits of their
investment in FLADC, hence, it is the Tiu Group who are the victims of ingratitude;

We are not persuaded. The Court of Appeals did not have any mistaken perception.

Granting that the Masagana Citimall was not threatened with incompletion in 1994, it would have
gone off to a bad start had not the Ongs come in with ₱190 million which was used to pay the Tius'
loan with the PNB. The said loan would have meant payment of 19% interest per annum. As
presented by the Ongs in their Comment:28

"d. As of July 18, 1994, FLADC had already drawn a total amount of ₱188,254,599.77 from the credit
line and was paying interest thereon at the rate of 19.00% per annum or close to ₱3 Million every
month.

"From the above-mentioned facts, assuming that FLADC would no longer draw on its remaining
credit line to complete the building, the following indisputable conclusions may be reached:

"a. At 19% interest per annum, the interest payments alone for the ₱188,254,599.77 existing loan of
FLADC with the PNB would be equivalent to the following amount:

₱35,768,373.96 on an annual basis;

₱ 8,942,093.49 on a quarterly basis; and

24
₱ 2,980,697.03 on a monthly basis.

"c. For the same ₱190 Million loan, and in addition to the above-mentioned interest payments, the
semi-annual amortization for the PNB loan would have been ₱18,825,459.97 per payment and
should have been payable as follows:

April 29, 1996 - initial payment

October 29, 1996 - 2nd payment
April 29, 1997 - 3rd payment
October 29, 1997 - 4th payment
April 29, 1998 - 5th payment
October 29, 1998 - 6th payment
April 29, 1999 - 7th payment
October 29, 1999 - 8th payment
April 29, 2000 - 9th payment
October 29, 2000 - final payment

"d. Again, had the Ongs not invested in FLADC in August 1994, then by the time FLADC would have
made its initial amortization payment of ₱18,825,459.97 on April 29, 1996, it would have been paying
interest in the total amount of ₱59,613,940.60 (₱2,980,697.03/month x 20 months).

"Again, even assuming that the mall which FLADC was building was already completed, it was
impossible to generate these amounts from the mall operation for that short period of time.

"e. Clearly, the Tius were constrained to invite a partner to rescue FLADC from its inevitable
bankruptcy."

With the above illustration of the Ongs, it became incumbent upon the Tius to counter it by showing
how it would have been able to generate such income as would enable FLADC to pay interest and
loan amortization without ₱190 million infused by another group. This the Tius failed to do. All the
Tius made was their bare allegation that the Mall was already more than 50% tenanted at that time,
and was capable of paying the interests and amortization.

The Tius' claim – that they invited the Ongs to come in as stockholders of FLADC to expand the
company's leasing business – does not also appear to be true. Were this the case, they should have
used the new capital infusion of the Ongs to purchase adjoining properties and/or erect a new
building that could be connected with the existing structure of FLADC. The Ongs put it in the following
manner: "A close reading of the Pre-Subscription Agreement belies the claims of the Tius. The
reality, as clearly appearing in the said agreement, is that the parties intended to fully liquidate29 the
₱190 million loan of FLADC with PNB so that the company could continue to operate on a clean slate
without the need of paying enormous interests. The reason is simple. Since the Tius were not able to
attract enough lessees to occupy the Citimall, they knew that they would not be able to raise enough
funds to pay its loan with PNB. Thus, the Tius invited the Ongs primarily for two reasons: [1] to pay
off FLADC's obligation with PNB, and [2] to help the Tius fill up the Citimall with new lessees."

The Court also notes that while it was the Tius who started the corporation, they acquiesced to the
arrangement that the President should come from the Ong Group and the Board of Directors shall
comprise of six (6) members from the Ongs, and only five (5) from the Tius. If the Tius were not
desperate or in financial distress why should they agree to such an arrangement when, as claimed by
the Tius, (Petition, p. 74, Rollo, G.R. No. 144629, p. 171), the appraised value of the entire property
25
of FLADC as of 1994 was ₱420.3 million? If the FLADC had enough funds, why did it have to borrow
₱70 million from the Ongs to be used in paying the ₱190 million loan with PNB? Therefore, we also
agree with the Court of Appeals when it held that:

"The Tius, in unilaterally rescinding the Pre-subscription Agreement, are now trying to oust the Ongs
from enjoying the fruits of their ₱190 million investment in FLADC. This is ingratitude at its height,
xxx."30

As to sub-paragraph (v.) suffice it to say that none of the two groups may claim that their group's
business acumen, hard work, and dedication account for what Masagana Citimall is today because
both of the groups contributed money/property and labor thereto.

As to sub-paragraphs (vi) and (vii), the Court of Appeals indeed erred in finding that the Tiu Group
violated the Pre-Subscription Agreement since the deed of assignment over the 151 sq. m. lot was
not executed by the Tiu Group but by the Lichaucos in favor of FLADC. Hence, the Tiu Group cannot
be credited with the number of shares commensurate to the value of said lot and will not, therefore,
be able to equal the Ong Group's one million subscription in FLADC.

We do not agree with the following discussion of the Court of Appeals on this point:

"Under the Pre-Subscription Agreement, the Tius were obliged to execute a Deed of Assignment
over a 151 square meter parcel of land in favor of FLADC as payment of 49,800 shares thereof at a
par value of ₱100.00 per share (see paragraphs 14, 15 and 17 of the Pre-Subscription Agreement, p.
214, Rollo). While there is on record a Deed of Assignment thereon in favor of FLADC (pp. 308-312,
Rollo), said Deed of Assignment was not executed by the Tius in favor of FLADC. The Deed of
Assignment was executed by the Lichaucos in favor of FLADC (Ibid). If ever somebody has to be
credited with the number of shares commensurate to the value of the 151 square meter property, it
will not be the Tius but the Lichaucos.

"Per the Pre-Subscription Agreement, the 151 square meter property shall be used by the Tius to
acquire a number of shares in FLADC in order to equal the 1 million subscription of the Ongs in
FLADC (supra). It turned out, however, that the 151 square meter property was acquired by FLADC
for a consideration of ₱900,000.00 (see paragraph 5 of Deed of Assignment, p. 309, Rollo). It will
therefore be iniquitous were the Ongs to credit the Tius the number of shares in FLADC
commensurate to the value of the 151 square meter property when the Tius did not contribute the
same for the purpose of acquiring shares in FLADC. The deed assigning this property to FLADC was
executed by the Lichaucos for a consideration which FLADC itself paid. Said deed was executed
even before the Pre-Subscription Agreement was entered into between the parties. Consequently,
the Tius cannot be credited with the number of shares commensurate to the value of the 151 square
meter property and will not therefore be able to equal the Ongs' 1 million subscription in FLADC in
accordance with their undertaking in the Pre-Subscription Agreement (see paragraph 14 of Pre-
Subscription Agreement, p. 214, Rollo)."31

The Tius aver that the direct transfer of the property from the Lichaucos to FLADC did not prejudice
the Ongs or FLADC. According to the Tius, what is important is that they obtained title to the 151 sq.
m. property in the name of FLADC after the execution of the Pre-Subscription Agreement, and
possession thereof has already been turned over to the corporation. Per the Tius, they cannot be
denied full credit for such property contribution, without unjustly enriching the Ongs and FLADC
which are now exercising control over the said property.

26
The Tius make the following explanations:

"During the brief negotiations that culminated in the execution of the Pre-Subscription Agreement, the
Tiu Group informed the Ong Group that as early as March 1994 they had acquired from the Lichauco
family another adjoining property consisting of 151 sq. m. which was actually intended for the
expansion of the mall. They disclosed to the Ong Group that the Deed of Assignment over the said
property was placed in the name of FLADC and was to be directly transferred from the Lichauco
family to the corporation. This is precisely the reason why the property was described in the Pre-
Subscription Agreement as '[t]he lot under Transfer Certificate No. ______ with an area of 150 sq.
m., more or less xxx,' clearly indicating that all that the parties were waiting for, at the time they were
discussing the terms of the Pre-Subscription Agreement, was the issuance of the title to the said lot.

"The Ong Group were (sic) fully aware of the real status of the 151 sq. m. property when they agreed
to consider it as one of the property contributions of the Tiu Group in payment for their additional
subscription in FLADC."32

The Tius' contentions on this issue are well taken. We do not see why the Lichaucos, and not the
Tius, should be credited with the number of shares commensurate to the value of the 151 sq. m.
property. The Lichaucos are not parties to the Pre-Subscription Agreement and are not even
demanding that they be credited with such shares in exchange for the said property. Just like this
property, the 1,902.30 sq. m. parcel of land in the name of Masagana Telamart, Inc. (also a
corporation owned by the Tius), was also acquired by the Tius before the execution of the Pre-
Subscription Agreement. The fact that the 1,902.30 sq. m. property was acquired by the Tius
beforehand does not prejudice the Ongs, as shown by the Ongs' non-objection to crediting the
Masagana Telamart, Inc. with the commensurate number of shares, subject only to the Tius' payment
of the expenses for the transfer of the title in the name of FLADC. So, too, in the case of the 151 sq.
m. property, the fact that the Deed of Assignment between the Lichaucos and the FLADC was
executed prior to the execution of the Pre-Subscription Agreement does not prejudice the Ongs.
Therefore, the Tius should be credited with 49,800 shares in FLADC for this property contribution,
pursuant to the Pre-Subscription Agreement.

Sub-paragraph (viii) of the second assigned error states that the Tius turned over to the Ong Group
the entire amount of FLADC funds mentioned in paragraph 5 of the Pre-Subscription
Agreement33 The Tius have the following explanation: "xxx sometime in August 1994, the total
amount of these available funds had not yet been determined. Consequently, in lieu of these funds,
which amounted to ₱5,840,089.12, ₱1,.30,002.63(sic) of which had been earlier remitted to FLADC,
Mr. Tiu paid the same using the ₱20 million he borrowed from Mr. Ong Yong. Such payment
dispensed with the need to remit the said funds to FLADC."34 Why should Mr. Tiu pay ₱20 million if
he only needs to remit ₱5.8 million?

At any rate, assuming that the Tius' claim on this point, is true, the same is not reason enough to alter
the order of the Court of Appeals for the liquidation of FLADC.

On sub-paragraph (x), the Tius maintain that they never siphoned any rentals due to FLADC to their
MATERRCO account. In fact, the Tius continue, the trumped-up criminal charges filed by the Ongs
against Mr. and Mrs. Tiu regarding the aforesaid act of siphoning FLADC funds, filed during the
pendency of the rescission case with the SEC to harass the Tius, were dismissed by the DOJ in its
Resolution dated 15 Feb. 1999.

27
The argument fails to persuade. The dismissal of the said criminal case does not necessarily mean
that no act of siphoning FLADC funds was committed by the Tius. The following excerpts from the
testimony of Mr. David Tiu on cross-examination shows otherwise:

"Q Mr. Tiu, of course, you will admit that during the transition period, you were already operating
Masagana Superstore, is that not correct?

"A Yes, partly we are occupying a portion of the building.

"Q Of course, Masagana Superstore was operated by Matterco, Inc. of which you were the
president?

"A Yes, Ma'am.

"Q And I understand also that Matterco, Inc. is wholly owned or majority owned by the Tius?

"A Yes, Ma'am.

"Q Is it wholly owned by the Tius?

"A Majority owned.

"Q Mr. Tiu, I am showing to you a rental receipt no. 067 of Mercury Drug Corporation which is a
tenant of FLADC. This rental receipt is a receipt of Masagana Superstore operated by Matterco., Inc.
Do you affirm that this receipt was issued by Masagana Superstore operated by Matterco, Inc. and
that the rental here pertains to a rental due from Mercury Drugstore which is a tenant of FLADC?

"A This was mistakenly deposited at Masagana account.

"Q May I show you another receipt likewise issued by Masagana Superstore operated by Matterco,
Inc. dated October 5, 1994. Will you please tell me if this another account, another payment that was
mistakenly deposited to the account of Masagana?

"A This is also one of these . . . Because during the time . . . (TSN, March 5, 1997, pp. 88-91, a
certified true copy of which forms part of Annex "N" and marked as Annex "N-3")35

Finally, the Tius disagree with the Court of Appeals' characterization of the ₱70 million paid by the
Ongs to FLADC. The Tius allege that the ₱70 million paid by the Ongs in excess of the actual par
value of one million shares they acquired from FLADC was a premium on capital and not an
advance. The Tius contend that the receipt, Exh. "4," the Ongs' own exhibit, is quite clear that the
amount of ₱170 million was the agreed price for the Ong Group's subscription to one million shares
in FLADC representing 50% of the capital stock of the corporation. Exh. "4," reads:

"Received from Mr. Ong Yong the amount of TWENTY MILLION PESOS (₱20,000,000.00) in full
payment of the agreed price of ONE HUNDRED SEVENTY MILLION PESOS (₱170,000,000.00)
representing his group's FIFTY PERCENT (50%) share in First Landlink Asia Development
Corporation."

The Tius explain that the excess payment of ₱70 million, considering that the par value of the one
million shares subscribed by the Ongs was only ₱100 million, at ₱100 per share, in corporation law,
is called "paid-in surplus" or premium.
28
We are not convinced. This issue was very well discussed by the Court of Appeals, and we agree
and quote:

"But the available funds of FLADC were not enough to cover the ₱90,000,000.00 more needed to
pay the PNB loan because all there was of FLADC's funds at the time was ₱5,840,089.12 (pp. 734-
735, Rollo). It was then, therefore, that the Ongs advanced ₱70,000,000.00 in cash to FLADC while
the Tius advanced ₱20,000,000.00 in cash, an amount they also had to borrow from the Ongs (pp.
437-441, Rollo).

"The Pre-Subscription Agreement is explicit in its terms - that the Ongs agreed to pay
₱100,000,000.00 only for 1 million shares in FLADC at a par value of ₱100.00 per share (p. 211,
Rollo). FLADC's application for an increase in capital stock shows that the par value of each of its
shares is ₱100.00 only (pp. 185-186, Rollo). The same application also shows that the Ongs
subscribed to 1 million shares of FLADC at a par value of ₱100.00 per share (Ibid). There is nothing
in the application which shows that FLADC's shares are to be sold at a premium or at an amount
higher than the stated par value per share (Ibid).

"The receipt which states that the Ongs paid ₱170,000,000.00 for a 50% share in FLADC must not
be construed to mean that the Ongs paid ₱170,000,000.00 for one million shares in FLADC, thereby
making the ₱70,000,000.00 thereof a premium or paid-in-surplus on the actual par value of 1 million
shares (p. 182, Rollo). To treat the ₱70,000,000.00 as premium would not only have the effect of
modifying the Pre-Subscription Agreement, but would actually novate it (see Article 1291 (1), New
civil Code).

"To allow a novation of the Pre-Subscription Agreement in this manner would negate or contravene
the very intention of the parties in entering into the Pre-Subscription Agreement which is to maintain
EQUALITY between them.

"The Tius, in filing the complaint for rescission a quo, rely heavily on the Pre-Subscription Agreement
and even emphasized that it was entered into with the intention of maintaining EQUALITY as regards
the parties standing in FLADC (pp. 127-136, Rollo). If the Court were to allow the ₱70,000,000.00 to
be classified as premium or paid-in-surplus, then the Tius' theory will altogether crumble. The
respective valuation of the properties to be used as payment of the Tius' 1 million share in FLADC
which were presented in evidence to prove that said properties are worth more than the agreed value
thereof in the Pre-Subscription Agreement, and therefore when added to the ₱45,020,000.00 paid up
capital, are worth more than 1 million shares in FLADC, is of no consequence (pp. 1023-1047-A,
Rollo). The same valuations have been made AFTER the Pre-Subscription Agreement was entered
into and does not therefore reflect the actual value of the properties at the time the Pre-Subscription
Agreement was entered into (p. 1046, Rollo).

"The Tius also claim that the ₱70,000,000.00 cannot be treated as an advance because there was no
board resolution authorizing FLADC to incur such an obligation (pp. 764-767, Rollo). As pointed out
by SEC Hearing Official Soller, the fact that no board resolution was passed allowing FLADC to incur
such an obligation is immaterial, it appearing that there was also no board resolution authorizing
FLADC to secure a ₱20,000,000.00 advance from the Tius (p. 367, Rollo). What matters then and
now is that the ₱190,000,000.00 loan from PNB was finally settled in order for FLADC to resume its
business without fear of foreclosure of its properties.

"Besides, at the time the Ongs invested in FLADC, they knew that the same was in financial
distress.1âwphi1 Why would the Ongs buy the shares of FLADC for 70% more than their actual par
29
value of ₱100.00 per share, when to do so would not be in consonance with what a prudent man
would do under the same circumstances?"36

Except for the issue regarding the rate of interest and reckoning period for the payment thereof, and
that the Tius should be credited with 49,800 shares of FLADC for their 151 sq. m. lot property
contribution, we find no other error in the assailed Decision which was judiciously rendered by the
Court of Appeals.

WHEREFORE, the decision appealed from is hereby AFFIRMED with the following
MODIFICATIONS:

1. the ₱20 million loan extended by the Ongs to the Tius shall earn interest at twelve percent
(12%) per annum to be computed from the time of judicial demand which is from April 23,
1996;

2. the ₱70 million advanced by the Ongs to the FLADC shall earn interest at ten percent (10%)
per annum to be computed from the date of the FLADC Board Resolution which is June 19,
1996; and

3. The Tius shall be credited with 49,800 shares in FLADC for their property contribution,
specifically, the 151 sq. m. parcel of land. SO ORDERED.

30
ALFONSO S. TAN, Petitioner, vs. SECURITIES AND EXCHANGE COMMISSION, VISAYAN
EDUCATIONAL SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL S. TAN and
PATRICIA AGUILAR, Respondents. G.R. No. 95696 March 3, 1992 PARAS, J.:

Petitioner filed a petition for certiorari against the public respondent Securities and Exchange
Commission and its co-respondents, after the former in an en banc Order, overturned with
modification, the decision of its Cebu SEC Extension hearing officer, Felix Chan, in SEC Case No. C-
0096, dated May 23, 1989, on October 10, 1990, under SEC-AC No. 263. (Rollo, pp. 3 and 4)

Sought to be reversed by petitioner, is the ruling of the Commission, specifically declaring that:

1. Confirming the validity of the resolution of the board of directors of the Visayan
Educational Supply Corporation so far as it cancelled Stock Certificate No. 2 and split
the same into Stock Certificates No. 6 (for Angel S. Tan) and No. 8 (for Alfonso S. Tan);

2. Invalidating the sale of shares represented under Stock Certificate No. 8 between
Alfonso S. Tan and the respondent corporation which converted the said stocks into
treasury shares, as well as those transactions involved in the withdrawal of the
stockholders from the respondent corporation for being contrary to law, but ordering the
neither party may recover pursuant to Article 1412 (1) Civil Code of the Philippines; and

3. Revoking the Order of Hearing Officer Felix Chan to reinstate complainant's original
400 shares of stock in the books of the corporation in view of the validity of the sale of 50
shares represented under stock certificate No. 6; and the nullity of the sale 350 shares
represented under stock certificate No. 8, pursuant to the "in pari delicto" doctrine
aforecited. (Rollo, p. 4)

The antecedent facts of the case are as follows:

Respondent corporation was registered on October 1, 1979. As incorporator, petitioner had four
hundred (400) shares of the capital stock standing in his name at the par value of P100.00 per share,
evidenced by Certificate of Stock No. 2. He was elected as President and subsequently reelected,
holding the position as such until 1982 but remained in the Board of Directors until April 19, 1983 as
director. (Rollo, p. 5)

On January 31, 1981, while petitioner was still the president of the respondent corporation, two other
incorporators, namely, Antonia Y. Young and Teresita Y. Ong, assigned to the corporation their
shares, represented by certificate of stock No. 4 and 5 after which, they were paid the corresponding
40% corporate stock-in-trade. (Rollo, p. 43)

Petitioner's certificate of stock No. 2 was cancelled by the corporate secretary and respondent
Patricia Aguilar by virtue of Resolution No. 1981 (b), which was passed and approved while petitioner
was still a member of the Board of Directors of the respondent corporation. (Rollo, p. 6)

Due to the withdrawal of the aforesaid incorporators and in order to complete the membership of the
five (5) directors of the board, petitioner sold fifty (50) shares out of his 400 shares of capital stock to
his brother Angel S. Tan. Another incorporator, Alfredo B. Uy, also sold fifty (50) of his 400 shares of
capital stock to Teodora S. Tan and both new stockholders attended the special meeting, Angel Tan
was elected director and on March 27, 1981, the minutes of said meeting was filed with the SEC.
These facts stand unchallenged. (Rollo, p. 43)

31
Accordingly, as a result of the sale by petitioner of his fifty (50) shares of stock to Angel S. Tan on
April 16, 1981, Certificate of Stock No. 2 was cancelled and the corresponding Certificates Nos. 6
and 8 were issued, signed by the newly elected fifth member of the Board, Angel S. Tan as Vice-
president, upon instruction of Alfonso S. Tan who was then the president of the
Corporation.(Memorandum of the Private Respondent, p. 15)

With the cancellation of Certificate of stock No. 2 and the subsequent issuance of Stock Certificate
No. 6 in the name of Angel S. Tan and for the remaining 350 shares, Stock Certificate No. 8 was
issued in the name of petitioner Alfonso S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29), alleging
that:

9. That in view of his having taken 33 1/3 interest, I was personally requested by Mr. Tan
Su Ching to request Mr. Alfonso Tan to make proper endorsement in the cancelled
Certificate of Stock No. 2 and Certificate No. 8, but he did not endorse, instead he kept
the cancelled (1981) Certificate of Stock No. 2 and returned only to me Certificate of
Stock No. 8, which I delivered to Tan Su Ching.

10. That the cancellation of his stock (Stock No. 2) was known by him in 1981; that it
was Stock No. 8, that was delivered in March 1983 for his endorsement and
cancellation. (Ibid, p. 18)

From the same Affidavit, it was alleged that Atty. Ramirez prepared a Memorandum of Agreement
with respect to the transaction of the fifty (50) shares of stock part of the Stock Certificate No. 2 of
petitioner, which was submitted to its former owner, Alfonso Tan, but which the purposely did not
return. (Ibid., p. 18)

On January 29, 1983, during the annual meeting of the corporation, respondent Tan Su Ching was
elected as President while petitioner was elected as Vice-president. He, however, did not sign the
minutes of said meeting which was submitted to the SEC on March 30, 1983. (Rollo, p. 43)

When petitioner was dislodged from his position as president, he withdrew from the corporation on
February 27, 1983, on condition that he be paid with stocks-in-trade equivalent to 33.3% in lieu of the
stock value of his shares in the amount of P35,000.00. After the withdrawal of the stocks, the board
of the respondent corporation held a meeting on April 19, 1983, effecting the cancellation of Stock
Certificate Nos. 2 and 8 (Exh. 278-C) in the corporate stock and transfer book 1 (Exh. 1-1-A) and
submitted the minutes thereof to the SEC on May 18, 1983. (Rollo, p. 44)

Five (5) years and nine (9) months after the transfer of 50 shares to Angel S. Tan, brother of
petitioner Alfonso S. Tan, and three (3) years and seven (7) months after effecting the transfer of
Stock Certificate Nos. 2 and 8 from the original owner (Alfonso S. Tan) in the stock and transfer book
of the corporation, the latter filed the case before the Cebu SEC Extension Office under SEC Case
No. C-0096, more specifically on December 3, 1983, questioning for the first time, the cancellation of
his aforesaid Stock Certificates Nos. 2 and 8. (Rollo, p. 44)

The bone of centention raised by the petitioner is that the deprivation of his shares despite the non-
endorsement or surrender of his Stock Certificate Nos. 2 and 8, was without the process contrary to
the provision of Section 63 of the Corporation Code (Batas Pambansa Blg. 68), which requires that:

. . . No transfer, however, shall be valid, except as between the parties, until the transfer
is recorded to the books of the corporation so as to show the names of the parties to the
32
 transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred.

After hearing, the Cebu SEC Extension Office Hearing Officer, Felix Chan ruled, that:

a) The cancellation of the complainant's shares of stock with the Visayan Educational
Supply Corporation is null and void;

b) The earlier cancellation of stock certificate No. 2 and the subsequent issuance of
stock certificate No. 8 is also hereby declared null and void;

c) The Secretary of the Corporation is hereby ordered to make the necessary corrections
in the books of the corporation reinstating thereto complainant's original 400 shares of
stock. (Rollo, pp. 39-40)

Private respondent in the original complaint went to the Securities and Exchange and Commission on
appeal, and on October 10, 1990, the commission en banc unanimously overturned the Decision of
the Hearing Officer under SEC-AC No. 263. (Order, Rollo, pp. 42-49)

The petition for certiorari centered on three major issues, with other issues considered as subordinate
to them, to wit:

1. The meaning of shares of stock are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. (Rollo, p. 10)

The case of Nava vs. peers Marketing corporation (74 SCRA 65) was cited by petitioner making the
reference to commentaries taken from 18 C.J.S. 928-930, that the transfer by delivery to the
transferee of the certificate should be properly indorsed, and that "There should be compliance with
the mode of transfer prescribed by law." Using Section 35, now Section 63 of the Corporation Code,
the provision of the law, reads:

SEC. 63. Certificate of stock and transfer of shares. — The capital stock and stock and
corporations shall be divided into shares for which certificates signed by the president
and vice president, countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with the by-laws. Shares of
stocks so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation so as to
show the names of the parties to the transaction, the date of the transfer, the number of
the certificate or certificates and the number of shares transferred.

No shares of stocks against which the corporation holds any unpaid claim shall be
transferable in the books of the corporations.

There is no doubt that there was delivery of Stock Certificate No. 2 made by the petitioner to the
Corporation before its replacement with the Stock Certificate No. 6 for fifty (50) shares to Angel S.
Tan and Stock Certificate No. 8 for 350 shares to the petitioner, on March 16, 1981. The problem
arose when petitioner was given back Stock Certificate No. 2 for him to endorse and he deliberately

33
witheld it for reasons of his own. That the Stock Certificate in question was returned to him for his
purpose was attested to by Mr. Buzon in his Affidavit, the pertinent portion of which has been earlier
quoted.

The proof that Stock Certificate No. 2 was split into two (2) consisting of Stock Certificate No. 6 for
fifty (50) shares and Stock Certificate No. 8 for 350 shares, is the fact that petitioner surrendered the
latter stock (No. 8) in lieu of P2 million pesos 1 worth of stocks, which the board passed in a
resolution in its meeting on April 19, 1983. Thus, on February 27, 1983, petitioner indicated he was
withdrawing from the corporation on condition that he be paid with stock-in-trade corresponding to
33.3% (Exh. 294), which had only a par value of P35,000.00. In this same meeting, the transfer of
Stock Certificate Nos. 2 and 8 from the original owner, Alfonso S. Tan was ordered to be recorded in
the corporate stock and transfer book (Exh. "I-1-A") thereafter submitting the minutes of said meeting
to the SEC on May 18, 1983 (Exhs. 12 and I). (Order, Rollo, p. 44)

It is also doubtless that Stock Certificate No. 8 was exchanged by petitioner for stocks-in-trade since
he was operating his own enterprise engaged in the same business, otherwise, why would a
businessman be interested in acquiring P2,000,000.00 worth of goods which could possibly at that
time, fill up warehouse? In fact, he even padlocked the warehouse of the respondent corporation,
after withdrawing the thirty-three and one-third (33 1/3%) percent stocks. Accordingly, the
Memorandum of Agreement prepared by the respondents' counsel, Atty. Ramirez evidencing the
transaction, was also presented to petitioner for his signature, however, this document was never
returned by him to the corporate officer for the signature of the other officers concerned. (Rollo, p. 28)

At the time the warehouse was padlocked by the petitioner, the remaining stock inventory was valued
at P7,454,189.05 of which 66 2/3 percent thereof belonged to the private respondents. (Ibid., p. 28)

It was very obvious that petitioner devised the scheme of not returning the cancelled Stock Certificate
No. 2 which was returned to him for his endorsement, to skim off the largesse of the corporation as
shown by the trading of his Stock Certificate No. 8 for goods of the corporation valued at P2 million
when the par value of the same was only worth P35,000.00. (Ibid., p. 470) He also used this scheme
to renege on his indebtedness to respondent Tan Su Ching in the amount of P1 million. (Decision, p.
6)

It is not remote that if petitioner could have cashed in on Stock Certificate No. 2 with the remainder of
the goods that he padlocked, he would have done so, until the respondent corporation was bled
entirely.

Along this line, petitioner put up the argument that he was responsible for the growth of the
corporation by the alleging that during his incumbency, the corporation grew, prospered and
flourished in the court of business as evidenced by its audited financial statements, and grossed the
following incomes from: 1980 — P8,658,414.10, 1981 — P8,039,816.67, 1982 — P7,306,168.67,
1983 — P5,874,453.55, 1984 — P3,911,667.76. (Ibid., Rollo, p. 24)

Moreover, petitioner asserted that he was ousted from the corporation by reason of his efforts to
establish fiscal controls and to demand an accounting of corporate funds which were accordingly
being transferred and diverted to certain of private respondents' personal accounts which were
allegedly misapplied, misappropriated and converted to their own personal use and benefit. (Ibid., p.
125)

34
2. Petitioner further claims that "(T)he cancellation and transfer of petitioner's shares and Certificate
of Stock No. 2 (Exh. A) as well as the issuance and cancellation of Certificate of Stock No. 8 (Exh. M)
was patently and palpably unlawful, null and void, invalid and fraudulent." (Rollo, p. 9) And, that
Section 63 of the Corporation Code of the Philippines is "mandatory in nature", meaning that without
the actual delivery and endorsement of the certificate in question, there can be no transfer, or that
such transfer is null and void. (Rollo, p. 10)

These arguments are all motivated by self-interest, using foreign authorities that are slanted in his
favor and even misquoting local authorities to prop up his erroneous posture and all these attempts
are intended to stifle justice, truth and equity.

Contrary to the understanding of the petitioner with respect to the use of the word "may", in the case
of Shauf v. Court of Appeals, (191 SCRA 713, 27 November 1990), this Court held, that "Remedial
law statues are to be construed liberally." The term 'may' as used in adjective rules, is only
permissive and not mandatory. In several earlier cases, the usage of the word "may" was described
as follows:

The word "may"is an auxilliary verb showing among others, opportunity or possibility.
Under ordinary circumstances, the phrase "may be" implies the possible existence of
something. In this case, the "something" is a law governing sectoral representation. The
phrase in question should, therefore, be understood to mean as prescribed by such law
that governs the matter at the time . . . The phrase does not and cannot, by its very
wording, restrict itself to the uncertainly of future legislation. (Legaspi v. Estrella, 189
SCRA 58, 24 Aug. 1990, En Banc)

Years before the above rulings concerning the interpretation of the word "may", this Court held
in Chua v. Samahang Magsasaka, that "the word "may" indicates that the transfer may be effected in
a manner different from that provided for in the law." (62 Phil. 472)

Moreover, it is safe to infer from the facts deduced in the instant case that, there was already delivery
of the unendorsed Stock Certificate No. 2, which is essential to the issuance of Stock Certificate Nos.
6 and 8 to angel S. Tan and petitioner Alfonso S. Tan, respectively. What led to the problem was the
return of the cancelled certificate (No. 2) to Alfonso S. Tan for his endorsement and his deliberate
non-endorsement.

For all intents and purposes, however, since this was already cancelled which cancellation was also
reported to the respondent Commission, there was no necessity for the same certificate to be
endorsed by the petitioner. All the acts required for the transferee to exercise its rights over the
acquired stocks were attendant and even the corporation was protected from other parties,
considering that said transfer was earlier recorded or registered in the corporate stock and transfer
book.

Following the doctrine enunciated in the case of Tuazon v. La Provisora Filipina, where this Court
held, that:

But delivery is not essential where it appears that the persons sought to be held as
stockholders are officers of the corporation, and have the custody of the stock book . . .
(67 Phi. 36).

35
Furthermore, there is a necessity to delineate the function of the stock itself from the actual delivery
or endorsement of the certificate of stock itself as is the question in the instant case. A certificate of
stock is not necessary to render one a stockholder in corporation.

Nevertheless, a certificate of stock is the paper representative or tangible evidence of the stock itself
and of the various interests therein. The certificate is not stock in the corporation but is merely
evidence of the holder's interest and status in the corporation, his ownership of the share represented
thereby, but is not in law the equivalent of such ownership. It expresses the contract between the
corporation and the stockholder, but is not essential to the existence of a share in stock or the nation
of the relation of shareholder to the corporation. (13 Am. Jur. 2d, 769)

Under the instant case, the fact of the matter is, the new holder, Angel S. Tan has already exercised
his rights and prerogatives as stockholder and was even elected as member of the board of directors
in the respondent corporation with the full knowledge and acquiescence of petitioner. Due to the
transfer of fifty (50) shares, Angel S. Tan was clothed with rights and responsibilities in the board of
the respondent corporation when he was elected as officer thereof.

Besides, in Philippine jurisprudence, a certificate of stock is not a negotiable instrument. "Although it

is sometime regarded as quasi-negotiable, in the sense that it may be transferred by endorsement,
coupled with delivery, it is well-settled that it is non-negotiable, because the holder thereof takes it
without prejudice to such rights or defenses as the registered owner/s or transferror's creditor may
have under the law, except insofar as such rights or defenses are subject to the limitations imposed
by the principles governing estoppel." (De los Santos vs. McGrath, 96 Phil. 577)

To follow the argument put up by petitioner which was upheld by the Cebu SEC Extension Office
Hearing Officer, Felix Chan, that the cancellation of Stock Certificate Nos. 2 and 8 was null and void
for lack of delivery of the cancelled "mother" Certificate No. 2 whose endorsement was deliberately
withheld by petitioner, is to prescribe certain restrictions on the transfer of stock in violation of the
corporation law itself as the only law governing transfer of stocks. While Section 47(s) grants a stock
corporations the authority to determine in the by-laws "the manner of issuing certificates" of shares of
stock, however, the power to regulate is not the power to prohibit, or to impose unreasonable
restrictions of the right of stockholders to transfer their shares. (Emphasis supplied)

In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law which prohibits a transfer of stock
without the consent or approval of all the stockholders or of the president or board of directors is
illegal as constituting undue limitation on the right of ownership and in restraint of trade. (47 Phil. 583)

3. Attempt to mislead — Petitioner should be held guilty of manipulating the provision of Section 63 of
the Corporation Law for contumaciously withholding the endorsement of Stock Certificate No. 2 which
was returned to him for the purpose, wasting time and resources of the Court, even after he had
received the stocks-in-trade equivalent to P2,000,000.00 in lieu of his 350 shares of stock with a par
value of P35,000.00 only, and thereafter withdrawing from the respondent corporation.

Not content with the fantastic return of his investment in the corporation and bent on sucking out the
corporate resources by filing the instant case for damages and seeking the nullity of the cancellation
of his Certificate of Stock Nos. 2 and 8, petitioner even attempted to mislead the Court by
erroneously quoting the ruling of the Court in C. N. Hodges v. Lezama, which has some parallelism
with the instant case was the parties involved therein were also close relatives as in this case.

36
The quoted portion appearing on p. 11 of the petition, was cut short in such a way that relevant
portions thereof were purposely left out in order to impress upon the Court that the unendorsed and
uncancelled stock certificate No. 17, was unconditionally declared null and void, flagrantly omitting
the justifying circumstances regarding its acquisition and the reason given by the Court why it was
declared so. The history of certificate No. 17 is quoted below, showing the reason why the certificate
in question was considered null and void, as follows:

(P)etitioner Hodges did not cause to be entered in the books of the corporation as he
had his stock certificate No. 17 which, therefore had not been endorsed by him to
anybody or cancelled and which he considered still subsisting. On September 18, 1958,
petitioner Hodges again sold his aforesaid 2,230 shares of stock covered by his stock
certificate No. 17 on installment basis to his co-petitioner Ricardo Gurrea, but continued
keeping the stock certificate in his possession without endorsing it to Gurrea or causing
the sale to be entered in the books of the corporation, believing that said shares of stock
were his until fully paid for. Up to the present, petitioner Hodges has in his possession
and under his control his aforesaid stock certificate No. 17, unendorsed and uncancelled
(Exhs. A & A-1), a fact known to the respondents. (14 SCRA p. 1032)

The pertinent misquoted portion follows:

Before the stockholders' meeting of the La Paz ice Plant & Cold Storage Co., Inc., —
hereinafter referred to as the Corporation - which was scheduled to be held on August 6,
1959, petitioners C.N. Hodges and Ricardo Gurrea filed with the CFI of Iloilo, a petition
— docketed as Civil Case No. 5261 of said court — for a writ of prohibition with
preliminary injunction, to restrain respondents Jose Manuel Lezama, as president and
secretary, respectively, of said Corporation from allowing their brother-in-law and
brother, respectively, respondent Benjamin L. Borja, to vote in said meeting on the
aforementioned 2,230 shares of stock. Upon the filing of said petition and of a bond in
the sum of P1,000, the writ of preliminary injunction prayed for was issued. After due
trial, or on March 28, 1960, (start of petitioner's quotation) "The court of origin rendered a
decision holding that, in view of the provision in stock certificate no. 17, in the name of
Hodges, to the effect that he

. . . is the owner of Two Thousand Two Hundred Thirty shares of the capital
stock of La Paz Ice Plant & Cold Storage Co., Inc., transferrable only on the
books of the corporation by the holder hereof in person or by attorney upon
surrender of this certificate properly endorsed.

stock certificate no. 18, issued in favor of Borja and the entry thereof at his instance in
the books of the corporation without stock certificate no. 17 being first properly endorsed,
surrendered and cancelled, is null and void. . . . " (end of quotation by petitioner, but the
ruling, continues without the period after the word void.) "and that it would be
unconscionable and for Borja to vote on said shares of stock, knowing that he had
ceased to have actual interest therein since September 17, 1958, when Hodges bought
such interest at the public auction held in the proceedings for the foreclosure of his
chattel was rendered making said preliminary injunction permanent and declaring
Hodges as the one entitled to vote on the shares of stock in question.

37
Petitioner ought to have even included the following which was the reason for declaring the following
which was the reason for declaring the unedorsed, unsurrendered and uncancelled stock certificate,
null and void:

. . . It is, moreover, obvious that Hodges retained it (stock certificate no. 17) with Borja's
consent. It was evidently part of their agreement, or implied therein, that Hodges would
keep the stock certificate and thus remain in the records of the Corporation as owner of
the shares, despite the aforementioned sale thereof and the chattel mortgage thereon. In
other words, the parties thereto intended Hodges to continue, for all intents and
purposes, as owner of said share, until Borja shall have fully paid its stipulated price.
(Ibid, pp. 1033-1034)

Other issues raised by the petitioner, subordinate to the principal issues above, (except the ruling by
the respondent Commission with respect to the "pari delicto" doctrine which is not acceptable to this
Court) are of no moment.

Considering the circumstances of the case, it appearing that petitioner is guilty of manipulation, and
high-handedness, circumventing the clear provisions of law in shielding himself from his wrongdoing
contrary to the protective mantle that the law intended for innocent parties, the Court finds the
excuses of the petitioner as unworthy of belief.

WHEREFORE, in view of the foregoing, the Order of the Commission under SEC-AC No. 263 dated
October 10, 1990 is hereby AFFIRMED but modified with respect to the "nullity of the sale of 350
shares represented under stock certification No. 8, pursuant to the "in pari delicto" doctrine. The court
holds that the conversion of the 350 shares with a par value of only P35,000.00 at P100.00 per share
into treasury stocks after petitioner exchanged them with P2,000,000.00 worth of stocks-in-trade of
the corporation, is valid and lawful. With regard to the damages being claimed by the petitioner, the
respondent Commission is not empowered to award such, other than the imposition of fine and
imprisonment under Section 56 of the Corporation Code of the Philippines, as amended. SO
ORDERED.

38
APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO, plaintiffs-appellees, vs. J.
HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED STATES, SUCCESSOR TO THE
PHILIPPINE ALIEN PROPERTY ADMINISTRATION OF THE UNITED STATES, defendant-
appellant. REPUBLIC OF THE PHILIPPINES, intervenor-appellant.
G.R. No. L4818 February 28, 1955 CONCEPCION, J.:

This action involves the title to 1,600,000 shares of stock of the Lepanto Consolidated Mining Co.,
Inc., a corporation duly organized and existing under the laws of the Philippines, hereinafter referred
to, for the sake of brevity, as the Lepanto. Originally, one-half of said shares of stock were claimed by
plaintiff, Apolinario de los Santos, and the other half, by his co-plaintiff Isabelo Astraquillo. During the
pendency of this case, the latter has allegedly conveyed and assigned his interest in and to said half
claimed by him to the former. The shares of stock in question are covered by several stock
certificates issued in favor of Vicente Madrigal, who is registered in the books of the Lepanto as
owner of said stocks and whose indorsement in blank appears on the back of said certificates, all of
which, except certificates No. 2279 — marked Exhibit 2 — covering 55,000 shares, are in plaintiffs'
possession. So was said Exhibit 2, up to sometime in 1945 or 1946 when said possession was lost
under the conditions set forth in subsequent pages.

Briefly stated, plaintiffs contend that De los Santos bought 55,000 shares from Juan Campos, in
Manila, early in December, 1942; that he bought 300,000 shares from Carl Hess, in the same city,
several days later; and that, before Christmas of 1942, be bought 800,000 shares from Carl Hess,
this time for the account and benefit of Astraquillo. By virtue of vesting P-12, dated February 18,
1945, title to the 1,600,000 shares of stock in dispute was, however, vested in the Alien Property
Custodian of the U. S. (hereinafter referred to as the Property Custodian) as Japanese property.
Hence, plaintiffs filed their respective claims with the Property Custodian. In due course, the Vested
Property Claims Committee of the Philippine Alien Property Administration made a "determination,"
dated March 9, 1948, allowing said claims, which were considered and heard jointly as Claim No.
535, but, upon personal review, the Philippine Alien Property Administration made by said Committee
and decreed that "title to the shares in question shall remain in the name of the Philippine Alien
Property Administrator." Consequently, plaintiffs instituted the present action to establish title to the
aforementioned shares of stock. In their complaint, they pray that judgment be rendered declaring
them lawful owners of said shares of stock, with such dividends, profits and rights as may have
accrued thereto; requiring the defendant to render accounts and to transfer said shares of stock to
plaintiffs' names; and sentencing the former to pay the costs.

The defendant herein is the Attorney General of the U. S., successor to the "Administrator". He
contends, substantially, that, prior to the outbreak of the war in the Pacific, said shares of stock were
bought by Vicente Madrigal, in trust for, and for the benefit of, the Mitsui Bussan Kaisha (hereinafter
referred to as the "Mitsuis"), a corporation organized in accordance with the laws of Japan, the true
owner thereof, with branch office in the Philippines; that on or before March, 1942, Madrigal delivered
the corresponding stock certificates, with his blank indorsement thereon, to the Mitsuis, which kept
said certificates, in the files of its office in Manila, until the liberation of the latter by the American
forces early in 1945; that the Mitsuis had never sold, or otherwise disposed of, said shares of stock;
and that the stock certificates aforementioned must have been stolen or looted, therefore, during the
emergency resulting from said liberation.

Inasmuch as, pursuant to the Philippine Property Act, all property vested in the United States, or any
of its officials, under the Trading with the Enemy Act, as amended, located in the Philippines at the
time of such vesting, or the proceeds thereof, shall be transferred to the Republic of the Philippines,

39
the latter sought permission, and was allowed, to intervene in this case and filed an answer adopting
in substance the theory of the defendant.

After due hearing, the Court of First Instance of Manila, presided over by Honorable Higinio B.
Macadaeg, Judge, rendered a decision the dispositive part of which reads, as follows:

In view of the foregoing consideration, judgment is hereby rendered in favor of the plaintiffs and
against the defendant, declaring the former the absolute owners of the shares of stock of the
Lepanto consolidated Mining Company, covered by the certificates of stock, respectively, in
their (plaintiffs') possession. The transfer of said shares of stock in favor of the Alien Property
Custodian of the U. S. of America, now Philippine Alien Property Administration, is hereby
declared null and void and of no effect. Consequently, the Lepanto consolidated mining
Company is ordered to cancel the certificates of stock issued in the name of the Philippine
Alien Property Custodian or Philippine Alien Property Administrator, as the case may be.
Defendant shall pay the cost of the proceeding. (p. 67, R.A.)

The defendant and the intervenor have appealed from this decision. The main question for
determination in this appeal is whether or not plaintiffs had purchased the shares of stock in question.
In support of the negative answer, appellants have introduced the testimony of Vicente Madrigal,
Matsune Kitajima, Kingy Miwa, Miguel Simon, E. A. Perkins and Victor E. Lednicky, as well as
several pieces of documentary evidence.

Mr. Madrigal, whose testimony before the claims Committee of the Philippine Alien Property
Administration was admitted with plaintiffs' consent, stated that he purchased the shares of stock in
question, among others, for the Mitsuis and at their request; that he paid with his own funds the
corresponding price, which was later reimbursed to him by the Mitsuis; that he held the
corresponding stock certificates, which were issued in his name, with the understanding that he
would effect the necessary transfer, to the Mitsuis, upon demand; and that, shortly before the
outbreak of war, he delivered said stock certificates, with his blank endorsement thereon, to the
Mitsuis, to whom said stock belonged.

Matsune Kitajima declared that in June 1941 he relieved one Kobayashi, as manager of the branch
office of the Mitsuis in Manila; that he then receive from Kobayashi the stock certificates for about
1,900,000 shares of the Lepanto, belonging to the Mitsuis, but issued in favor of the Vicente
Madrigal, except the certificates for 200,000 shares, which were in the name of the Mitsuis; that all
these certificates were in kept in a steel safe in said office of the Mitsuis; that, in July 1941, he
returned the stock certificates to Madrigal, with the request that he buy for the Mitsuis, from time to
time, some more shares of stock, in small lots; that Madrigal bought 200,000 additional shares of the
Lepanto for the Mitsuis; that, late in November or early in December, 1941, the stock certificates of
the aforementioned 2,100,000 shares were returned to the Mitsuis, which had decided to stop buying,
in view of the strained international situation then prevailing; that, as branch manager of the Mitsuis,
he was the only official authorized to dispose of the shares in question, none of which was alienated
by him; and that he had the aforementioned stock certificates in his possession continuously until
early in April 1943, when he delivered the same to his successor in office, Kingy Miwa.

Apart from corroborating Kitajima's testimony relative to said delivery of stock certificates in April
1943, Kingy Miwa testified that he kept the latter in his possession, as branch manager of the Mitsuis;
that said shares of stock were never sold or otherwise disposed of by the Mitsuis; that, late in
September 1944, he bade his assistant, one Miyazawa, to transfer all important documents to their
residence and headquarters, at Taft Avenue, Manila, although he did not know personally whether or
40
not the transfer was actually carried out; and that in January 1945, when the Japanese were about to
evacuate Manila, he told his Assistant Manager, one Shinoda, to burn all important papers before
leaving the city.

Miguel Simon, brother of Carl Hess, from whom plaintiffs claim to have purchased 1,100,000 shares
of stock, affirmed that Hess lived in front of his (Simon's) house; that they were close to each other
and had long been associated in business; that he was the office manager of "Hess and Zeitling"
before the war; that Hess used to tell him his daily transactions during the occupation; that at that
time, Hess did not have in possession any certificates of stock of the Lepanto in the name of Vicente
Madrigal; that neither did Hess, during that period, operate as broker, for being American, he was
under Japanese surveillance, and that Hess had made, during the occupation, no transaction
involving mining shares, except when he sold 12,000 shares of the Benguet Consolidated, inherited
from his mother, sometime in 1943.

E. A. Perkins, a member of the law firm DeWitt, Perkins & Ponce Enrile testified substantially as
follows: On October 27, 1945, Leonardo Recio brought stock certificate no. 2279 (Exhibit 2) and
offered the same for sale to Clyde DeWitt, who in turn, asked Perkins, whose room adjoined that of
DeWitt, to join them. Recio showed Exhibit 2 to DeWitt stating that he (Recio) wanted P0.13 per
share. DeWitt handed Exhibit 2 over to Perkins, who, after examining the instrument, returned it to
DeWitt. The latter, thereafter, checked it with a communication of the Property Custodian and then
advised Recio that said Exhibit 2 was one of the stock certificates looted from the Mitsuis and that he
(DeWitt) would have to report the matter to said official. As DeWitt, thereupon, telephoned one Mr.
Erickson, of the Property Custodian's office, Recio stepped out of the room without Exhibit 2, which
neither he or plaintiffs had ever tried to recover.

Victor E. Lednicky, one of the organizers and prewar directors of the Lepanto, and present vice-
president and member of its board of director, asserted that, having learned from a soldier of the
existence of mining papers and securities of the Lepanto in the offices of the Mitsuis at the Ayala
Building, formerly known as the National city Bank Building in Manila, he went thereto in February
1945 and saw many documents scattered on the desks and floor of said premises. Among said
papers, he noticed two stock certificates of the Lepanto, one, in the name of either a Japanese or
Chinese, and the other, in the name of Vicente Madrigal, endorsed in blank. Soon, however, he
heard voices from the stairs, whereupon he departed hurriedly, for fear of being mistaken for a looter.

After analyzing the foregoing evidence for the defense, the lower court found the same "inherently
improbable" and seemingly concluded that, as a consequence, it should accept plaintiffs' version, for
which reason judgment was rendered as above stated. It is well settled, in this jurisdiction, that the
findings of fact — particularly those relating to the credibility of the opposing witnesses — made by
the Judge a quo, should not be disturbed on appeal, in the absence of strong and cogent reasons
therefor. This policy is predicated upon the circumstance that the trial court has had an opportunity,
denied to the appellate court to observe the behaviour of the witnesses during the hearing, a potent
factor in gauging their bias and veracity. In the case at bar, however, we notice that, rejecting the
theory of the defense, the court of origin was guided, not by the conduct of the witnesses in the name
course of their testimony, but by what His Honor, the trial Judge, regarded as the inherent weakness
thereof, in the evaluation of which court does not enjoy the advantage already adverted to.

Moreover, the decision appealed from appears to have assumed that plaintiffs' pretense must
necessarily be relied upon, owing to the infirmities said to have been found in the theory of the
defense. This view suffers from a fatal defect. It overlooks that fact that the burden of proof is upon
the plaintiffs, and that, accordingly, a decision in their favor is not in order unless a preponderance of
41
the evidence supports their claim. To put it differently, the alleged improbabilities in the testimony of
the witnesses for the defense will not justify a judgment against the latter, if the evidence for the
plaintiffs is more improbable than, or, at least, as improbable as, that of the defense. Such is the
situation obtaining in the case at bar. Indeed, upon careful examination of the record before us, we
find it impossible to share the conclusions, made in the decision appealed from, relative to the
alleged flaws in the version of the defense.

Let us, first, examine the evidence for the plaintiffs, consisting, mainly, of their own testimony and that
of Primitivo Javier and Leonardo Recio.

According to De los Santos, on or about December 8, 1942, he purchased from Juan Campos, in
Manila, 500,000 shares of stock of the Lepanto, for the aggregate sum of P30,000.00, or about P0.06
each share, paid in cash, in exchange for the corresponding stock certificates, which were delivered
to him. Several days later, he bought from Carl Hess, in Manila, 300,000 shares of the Lepanto, at
the same rate. Soon after, he visited his daughter in Baguio, where he, likewise, saw his co-plaintiff,
and former secretary, Isabelo Astraquillo. Before leaving Astraquillo's house, De los Santos
happened to mention his aforesaid purchases of Lepanto shares, at P0.06 each, whereupon,
Astraquillo expressed the wish to buy 800,000 shares at the same price, the amount of which he
delivered to De los Santos the next day. Upon his return to Manila, De los Santos purchased from
Hess said 800,000 shares, the certificates of which were turned over by the former to Astraquillo, in
Baguio, at about Christmas time. Over 3 years later, or in January 1946, De los Santos repaired to
the offices of the Lepanto in Manila to ascertain whether it accepted certificates of stock for
registration. He then received a negative answer. Upon further inquiry, he learned, in February 1946,
that the shares in the name of Madrigal were blocked. So engaged the services of Atty. A. Scheerer,
who secured an order of release from the Freezing Control Office of the United States Treasury
Department. As he brought a copy of this order to the offices of the Lepanto, on or about May 1,
1946, he was advised that no transfer could be affected without the authority of Clyde DeWitt, the
company president. Thereupon, De los Santos caused to be filed, with the offices of the Property
Custodian, the corresponding claim for the shares of stock in question, with the result already
adverted to.

Astraquillo tried to corroborate the testimony of De los Santos, concerning the purchase of 800,000
shares of stock on behalf of the former. Moreover, Astraquillo declared that, being in need of money,
he came to Manila in November or December 1945, and delivered to stock broker Leonardo Recio
stock certificate No. 2279 (Exhibit 2) for 55,000 shares, with a view to disposing of the same at a
price ranging from P0.13 to P0.15 each. He advised Recio that, in the absence of any buyer, hew
could see Mr. DeWitt, who, probably, would be interested in purchasing the shares. Sometime later,
Astraquillo learned that, according to Recio, upon seeing Exhibit 2, DeWitt retained it — upon the
ground that the shares represented therein had been blocked by the United States — and that he
(Recio) got therefor a receipt, which was subsequently lost in a fire that destroyed his (Recio's)
dwelling. As Astraquillo hurried to Manila, he was told that representatives of the CIC would go to
Baguio to investigate. So, he returned to Baguio, but he did not wait for the investigation in that city.
Late in February or early in March, 1946, he came back to Manila and asked the assistance of De los
Santos, whereupon both contacted Atty. Scheerer for the purpose already stated.

Primitivo Javier narrated that, late in 1945, he received Exhibit 2 from his uncle, Astraquillo, who
wanted to sell the 55,000 shares represented by said stock certificate (No. 2279) at a price ranging
from P0.12 to P0.15 each share. He, in turn, delivered the certificate to Recio, a licensed broker.
Subsequently, Recio reported to him that he (Recio) had brought Exhibit 2 to the office of Mr. DeWitt,
whom he did not see on his first visit; that he then left Exhibit 2 in the hands of a person who worked
42
in said office, one Atty. Orlina, who issued a receipt therefor; that, when Recio came back, later on,
DeWitt told him that Exhibit 2 was defective; and that, accordingly, Exhibit 2 was left in the
possession of Mr. DeWitt. Javier relayed this information to Astraquillo, who, thereupon, came to
Manila. Both went to the temporary residence of Recio in Sampaloc, his house in San Juan del
Monte, Rizal, having been destroyed by fire late in December 1945. Recio then advised them that
said receipt had been burned with his house.

Leonardo Recio said that sometime in 1945, Javier gave him Exhibit 2, stating that it belonged to his
uncle, who wanted to alienate the corresponding shares of stock at P0.15, more or less, each, and
suggesting that he offer the same to Mr. DeWitt: In the latter's office, Atty. Orlina told Recio that
DeWitt was busy and bade him (Recio) to return later. Recio delivered Exhibit 2 to Orlina, who gave
him a receipt, which, subsequently, he showed to Javier. When, soon after, he went back to Orlina,
the latter introduced him to Mr. DeWitt, who stated that the shares of stock covered by Exhibit 2 were
included in the list of questioned shares. DeWitt, also, asked him whether he would leave the
certificate, to which Recio replied affirmatively. While he was away, several months later, or shortly
before Christmas, his house at Blumentrit Street, San Juan del Monte, Rizal, and everything
contained therein, including the aforementioned receipt, which was in his wallet, were destroyed by
fire.

It thus appears that the only evidence on the alleged sale of the shares of stock in question to the
plaintiffs — the main issue in the case at bar — is the testimony of Apolinario de los Santos, who now
claims to be the sole owner thereof. Juan Campos and Carl Hess, the alleged vendors, could not
take the witness stand, for Hess was executed by the Japanese, and Campos died during the
liberation of Manila. Thus, death has sealed the lips of the only persons who could have positively
corroborated or contradicted the aforementioned testimony of De los Santos. Was this a mere
accident of fate, as plaintiffs would have us believe? Or were Campos and Hess named by the
plaintiffs as their immediate predecessors in interest precisely because, as contended by appellants,
said deceased persons could no longer said testimony?

For obvious reasons, the Court can not answer these questions with absolute certainty. It can only
explore the possibilities and probabilities of the case, in the light of human experience. And, viewed
from this angle, it can not be denied that the demise of Campos and Hess before the filing of plaintiffs
claim seriously impairs the weight thereof. That the Grim Reaper had chosen to strike at one of the
alleged predecessors of the plaintiffs is a matter that may be attributed to sheer fortuitousness.
When, as in the case at bar, not one, but both have thus been eliminated,, it is clear, however, that
this circumstances is most unusual, and most place the Court on guard.

The need for caution becomes more imperative when we bear in mind that an important piece of
documentary evidence, which allegedly existed after liberation, and could have effectively
corroborated one phase of the plaintiff's contention, had, according to their evidence, disappeared
through still another unfortunate turn of the wheel of fate. It will be recalled that late in 1945,
Leonardo Recio, allegedly acting on behalf of Astraquillo, offered to sell to Atty. DeWitt the 55,000
shares represented by stock certificate No. 2279 (Exhibit 2). Recio testified that, having been unable
to see DeWitt, when he (Recio) went to the latter's office, for the first time, said Exhibit 2 was left by
him (Recio) in the hands of Atty. Orlina who worked therein and gave him a receipt therefor. This
receipt, if produced, would have surely afforded us tangible proof of the veracity of, at least this part
of plaintiffs' story. Yet, we are now told that, one day in December, 1945, Recio's
house accidentally caught fire, and that the latter consumed, also, said receipt, kept in a wallet,
which, by accident, he had failed to bring with him. Aren't there too many accidents in plaintiffs'
version? At any rate, we have thus been deprived of all means to check with reasonable certainty the
43
truth of any of the controverted portions of their pretense. In other words, the same is based, and
must stand or fall, therefore, upon the uncorroborated testimony of plaintiff Apolinario de los Santos,
and the credence and weight that may be given thereto. Upon a review of the record, we find,
however, that said testimony is highly improbable and inherently weak, for, among other things:

(1) De los Santos declared that, in December, 1942, he purchased 300,000 shares from Juan
Campos and 1,300,000 shares from Carl Hess, at P0.06 each share. As an enterprise controlled by
Americans, the Lepanto had been seized by the Japanese who, accordingly, were operating it. At
that time, there were no clear, or, even, substantial, indications that changes would take place, either
in the local or in the international situation in the near of foreseeable future. In deed, the morale of the
population in democratic countries, particularly in the Philippines, was then at its lowest ebb. Both in
Europe and in the Pacific, the Axis powers had reached in enemy territories the highest degree of
penetration attained during the last war. Before the world had recovered from the shock produced by
the German blitzkrieg operations in the low countries and in France, the Nazis were already knocking
at the gates of Stalingrad entrenched in New Guinea and the Soloman Islands. The people had a
hazy notion about the facts pertinent to the Battle of Midway (June 3-6, 1942) and the implications
thereof were by and large unknown. In other words, the conditions were such as to warrant the
general belief that the Lepanto would remain under the authority and management of the Japanese
Imperial forces for an indefinite period of time. As a consequence, the Lepanto stock had not merely
a doubtful value, but — as admitted by Santos — even, no market value at all (p. 132, t.s.n). Indeed,
the stockholders could neither collect dividends nor exercise their voting power, or otherwise
participate in the operation of the enterprise. Moreover, there was a possibility of its assets being fully
confiscated, for all practical purposes, should Japan emerge victorious in the was in the Pacific,
which it appeared to be winning easily up to that time (December, 1942).

(2) Inasmuch as citizens of the United States held a majority of the shares of stock of the Lepanto,
the same had from the view point of the Japanese, an enemy character, and the purchase of said
stocks was, therefore, a hostile act. As a matter of fact, in the proceedings before the Vested
Property Claims Committee, the parties — including plaintiffs herein — had stipulated "that such
transfers and dealings in said stock were prohibited by the Japanese during the occupation and
hence were dangerous." (Record on Appeal, p. 110). Said transactions could jeopardize the life of
the parties thereto and De los Santos was aware of the "highly dangerous" or "very risky" nature of
the "mere possession" of the stock certificates in question. (pp. 141, 143, t. s. n.)

(3) Astraquillo is merely a former employee of De los Santos, who had, therefore, no reason to risk
his neck, not only by allegedly buying 800,000 shares of stock for Astraquillo, but, also, by avowedly
bringing with him (De los Santos) the corresponding stock certificates from Manila to Baguio, to make
delivery thereof to Astraquillo, as the defense would have us believe, notwithstanding the many
Japanese check points in the 250 kilometers highway connecting both cities and the absence of any
monetary or other gain he could have derived from the acts he professes to have performed.

(4) According to the Ballantyne schedule — the accuracy of which has not been impugned by
plaintiffs herein — the Japanese war notes in the Philippines had the same exchange of purchase
value as the currency of our legitimate government, in December, 1942 — and this was conceded by
De los Santos (p. 136, t. s. n.) — when they claim to have purchased the Lepanto stocks. The
P48,000 supposedly paid by the De los Santos, and the identical sum allegedly disbursed by
Astraquillo, for their respective stock, represented, therefore, the same amount in legal tender of the
Commonwealth of the Philippines. In fact, according to the evidence for the plaintiffs, part of the price
allegedly paid by Astraquillo, or P6,000, were in the genuine Philippine money, representing his
savings for 25 years. Said sum of P6,000 being insufficient to cover the cost of 800,000 shares of
44
stock, Astraquillo, it is urged, alienated other properties to raise the amount necessary thereof. It is
very difficult to believe that the plaintiffs would have parted with P48,000 each — precisely when,
owing to the abnormal conditions brought about by the occupation, said funds might be needed, at
any time, to meet unforeseen emergencies of the gravest and most vital nature — for shares of stock
of dubious value then and in the foreseeable future.

(5) We are not satisfied that either De los Santos or Astraquillo possessed enough resources to have
P48,000, in cash, each, in December 1942. Their evidence on this point is too general — apart from
being based exclusively upon their respective oral testimonies, which are absolutely uncorroborated
— to support their contention. At any rate, De los Santos admitted that he is "not yet" rich (p. 134, t.
s. n.), and his testimony suggests that he did not even own the house in which he lived.

(6) Campos offered to sell his stocks, according to De los Santos, at P0.06 each (although its par
value was P0.10), stating that "he (Campos) needed money" (p. 43, t.s.n.), and advised him that
Hess was, also, willing to dispose of his own stocks at the same price. Being, accordingly, aware that
Campos and Hess were in need of money and considering the risks attending the transaction, it is
but logical to expect De los Santos, an experienced trader in stocks, to bargain for a lower price. Yet,
the evidence for the plaintiffs shows that neither he nor Astraquillo tried to do so, contrary to the
normal course of events.

(7) De los Santos could not have purchased 1,300,000 shares of stock, from Hess, and received from
him the corresponding stock certificates, endorsed in blank by Vicente Madrigal, for Hess had never
had such stock certificates in his possession during the occupation. There is no plausible reason to
doubt the veracity of the testimony of Miguel Simon to this effect, for the latter had no possible motive
to commit perjury, and was in a position to know what he was talking about. Apart from being a
brother-in-law of Hess, Simon was manager of the firm Hess & Zeitling, of which Hess was the senior
partner, who used to inform him (Simon) of his (Hess) business transactions.

(8) Campos and Hess could not have delivered the stock certificates for the 1,600,000 shares of
stock in question, and, consequently, said shares of stock could not have been sold by them, to De
los Santos in December 1942, inasmuch as from December 1941 to April 1943, said stock
certificates were continuously in the custody of Matsume Kitajima, manager of the Mitsuis in Manila,
whose testimony was corroborated by his successor in office, Kingy Miwa, to whom Kitajima turned
over the stock certificates in April 1943. The sincerity of Matsume Kitajima and Kingy Miwa can not
doubted, for neither appears to have any possible reason to trifle with the facts. Indeed, their
testimony, if accepted as true, would ultimately result in the confiscation, by the Republic of the
Philippines, of the shares of stock in question and, thus, place the same beyond the reach of the
Mitsuis.

It has been intimated that Kitajima and Kingy may have testified as they did, either to protect
themselves, because they might have disposed of the shares of stock in question for their personal
benefit, or because there had been undue influence or pressure from the authorities — presumably
officers of the government of the United States. But these are mere speculations, without sufficient
basis. Besides, judicial notice may be taken of the circumstance that, during the occupation, even
minor Japanese officials could easily make money, in the Japanese properties. Again, in December,
1942, the Japanese in the Philippines appeared to have no doubts that, in effect, Japan had already
won the war. In short, Kitajima and Kingy must have thought that, sooner or later, Japan would own
the Lepanto and that, therefore, they would have to account for the shares of stock under
consideration. Consequently, it is most unlikely that neither would have misappropriated said shares
of stock as suggested by the plaintiffs.
45
The benefits which the Mitsuis and Japan may derive from a decision against the plaintiffs —
inasmuch as the value of the shares of stock in question would then be credited in payment of the
reparation which may be demanded by the Philippines and/or the United States — has been pointed
out, in the dissenting opinion, as a possible motive for the commission of perjury by Kitajima and
Kingy. Besides being purely conjectural in nature, this line of thought — which not even the plaintiffs
have taken would have no leg to stand on, unless we assume that the Mitsuis had sold or otherwise
disposed of said stocks during the year 1942, but before the alleged transactions between Campos
and Hess, on the one hand, and the plaintiffs on the other, in December of that year. It is
inconceivable, however, that the Mitsuis would part with the stocks in question, precisely when
Japanese was at the crest of its military and political victories. Indeed, even if its officers had already
foreseen, at the time, the eventual defeat of the axis powers — and everything then appeared to
indicate the contrary — the Mitsuis could not have disposed of said stocks without thereby revealing
their own lack of faith in the ability of Japan to achieve final victory. Thus, the Mitsuis would have
caused a grave injury upon the Japanese propaganda and thereby earned severe punishment from
the Imperial Government. Nothing, absolutely nothing, in the record, or in contemporary history,
warrants the belief that the Mitsuis, who were closely associated with the Japanese Government,
could be guilty of such folly.

Let us now turn our attention to the evidence for the defense, beginning with the testimony of Victor
E. Lednicky. It will be recalled that this witness claimed to have gone to the premises of the Mitsuis,
sometime in February 1945, including two (2) Lepanto certificates of stock, one of which was in the
name of Vicente Madrigal, whose blank indorsement appeared thereon. Thus, the defense sought to
prove that the certificates of the shares of stock involved in this case have probably been looted. The
lower court found Lednicky's story inherently improbable and then concluded that the theory of the
looting must, consequently, be "ruled out". To our mind, however, the testimony of Lednicky is not
inherently improbable. Besides, it is a matter of common knowledge, of which judicial notice may be
taken, that many offices and dwellings were looted during the liberation of Manila. The possibility that
possession of the stock certificates in question may have been secured by looting should not be
"ruled out," therefore, irrespective of the credence and weight given to the testimony of Lednicky.
Actually, said certificates are included in the list of stocks certificates of the Lepanto which, soon after
liberation, were reported and considered looted from the Mitsuis, and, accordingly, "blocked" or
"frozen" by the authorities. Irrespective of the foregoing, De los Santos could not have obtained those
certificates from Campos and Hess in December 1942, inasmuch, as, from December 1941 to April
1943, Kitajima had been continuously in possession of said documents, none of which had been held
by Hess during the occupation.

The lower court considered against the defense the circumstance that Lednicky, Simon and Perkins
had not testified before the Vested Property Claims Committee. There is no evidence, however, that
any of them knew of the proceedings before said committee. Furthermore, none of them has any
personal interest in the outcome of this action. Consequently, they have no possible motive to distort
the truth, unlike De los Santos, who, as the present claimant of all shares of stock in dispute, will de
directly affected by the outcome of the case at bar. His testimony, therefore, cannot be more weighty
than that of the aforementioned witnesses for the defense.

The decision appealed from criticizes the testimony of Perkins upon the following grounds:

(1) Having taken no part in the alleged looting of Exhibit 2, Recio had nothing to fear in connection
therewith and, so, he could not have left the office of Mr. DeWitt, while the latter was talking over the
telephone with a representative of the Alien Property Custodian; .

46
(2) Inasmuch as DeWitt had stated that Exhibit 2 was included in the list of looted stock certificates,
Perkins should have known that, as holder of the certificate, Recio is presumed to be the one who
stole the same. Why then — plaintiffs inquire — did Perkins fail to prevent Recio from leaving said
office?

As regards the first observation, suffice it to say that, as bearer of the Exhibit 2, Recio — who,
according to the lower court, is an intelligent man — must have realized the danger, probably
unforeseen by him, of being considered a privy to the looting of said stock certificates, of which he
might have been unaware before the conference with Mr. DeWitt. Hence, Recio's fright and virtual
flight. Verily, the testimony of Perkins on this point is borne out by the undisputed fact that Exhibit 2
was left by Recio in the hands of DeWitt, and that neither Astraquillo, nor his alleged successor in
interest, De los Santos, has ever demand from DeWitt the return of said certificate, or even
recriminated Recio for having voluntarily parted with its possession, as he would have us believe,
without authority therefor, as a broker or agent who was supposed merely to find a buyer.

As to the second observation, Perkins knew that Recio was acting solely as a broker or agent. As
such, he was not the real holder of Exhibit 2, and, consequently, the presumption adverted to did not
apply to him. Even if it did, however, what could Perkins have done? Use force or violence upon the
person of Recio, or ask a policeman to detain him? Neither step, however, could have been taken
without some risks. To begin with, Perkins could not have properly taken the law in his own hands.
Had he done so, Recio could have legally used force against force. Moreover, said presumption is
rebuttable and would have easily been offset by the undeniable fact that Recio had acted merely in a
representative capacity. Again, why should Perkins take the initiative in the matter? Was it not being
handled by his associate in the law firm, Mr. DeWitt, one of the most able members of the Philippine
Bar? It may not be amiss to add that the record before us discloses absolutely nothing that may cast
even a shadow of doubt upon the honesty of Mr. Perkins.

The language of the lower court in commenting on the testimony of Miwa was:

. . . In general, the testimony of Miwa is unreliable. His behaviour in Court in denying first and
then in accepting later his own signature throws him to a position where the Court must look
upon him with suspicion and distrust. His prevarication before the Court as to the genuineness
of his own signature was probably due to the conscience of a man who came to the Court with
a mental reservation, but who may have been compelled under the circumstances to play the
role of a willing tool. (p. 54, R.A.)

The following portion of Miwa's testimony illustrates the point referred to in the decision appealed
from:

ATTY. QUIRINO:

Q. Will you please go over this paper which for purposes of identification we request that it
be marked as Exhibit M for the plaintiffs and which was marked Exhibit 6-b before the Vested
Property Claims Committee, and tell us if you know that document? — A. No. I do not
remember this paper.

Q. Mr. Miwa, at the bottom of this certificate or Exhibit M, which was Exhibit 6b in the
committee and submitted by the Alien Property Administration, there is a typewritten name,
Kingy Miwa, and above it is a signature. Will you kindly tell the Court if that is your signature or
not? Please look over it again. — A. No. It is not mine.
47
 Q. Please examine it carefully and tell the Court afterwards if you recognize that signature.
Examine it carefully. — A. It looks very similar to my signature.

Q. But would you want or are you willing to go on record and say that it is not your
signature? — A. I can not say. I don't exactly remember that I signed this, but it looks
very similar to my signature.

Q. You will not testify under oath that this is your signature? — A. Yes. sir.

Q. What do you mean to say by "yes, sir"? Do you swear that this is your signature or not
your signature? — A. I think this is my signature.

Q. So, you are willing to go on record now that that signature appearing in Exhibit "M" is
your signature? — A. Yes, I think so. (pp. 125-126, t. s. n.)

We do not agree with its appraisal by the lower court. It is clear that, as he did not remember the
execution of Exhibit M several years before the hearing of this case, Miwa had doubts about the
genuineness of the signature thereon, but the appearance thereof, similar or identical to that of his
own signature, prevented him from denying its authenticity. This does not indicate lack of veracity on
his part. At any rate, plaintiffs claim to have bought the shares of stock in question in December,
1942, or during the management of Kitajima, who held the corresponding stock certificates
continuously from December, 1941, to April, 1943, when Miwa substituted him, so that neither
Campos nor Hess could have delivered those certificates to De los Santos in December 1942. Apart
from this, if there are flaws in the proof for the defense, those of the evidence for the plaintiffs are
much bigger and more substantial and vital. Consequently, we hold that plaintiffs have not
established their pretense by a preponderance of the evidence.

Even, however, if Juan Campos and Carl Hess had sold the shares of stock in question, as testified
to by De los Santos, the result, insofar as plaintiffs are concerned, would be the same. It is not
disputed that said shares of stock were registered, in the records of the Lepanto, in the name of
Vicente Madrigal. Neither it is denied that the latter was, as regards said shares of stock, a mere
trustee for the benefit of the Mitsuis. The record shows — and there is no evidence to the contrary —
that Madrigal had never disposed of said shares of stock in any manner whatsoever, except by
turning over the corresponding stock certificates, late in 1941, to the Mitsuis, the beneficial and true
owners thereof. It has, moreover, been established,, by the uncontradicted testimony of Kitajima and
Miwa, the managers of the Mitsuis in the Philippines, from 1941 to 1945, that the Mitsuis had neither
sold, conveyed, or alienated said shares of stock, nor delivered the aforementioned stock certificates,
to anybody during said period. Section 35 of the Corporation Law reads:

The capital stock corporations shall be divided into shares for which certificates signed by the
president or the vice-president, countersigned by the secretary or clerk and sealed with the
seal of the corporation, shall be issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by delivery of the certificate endorsed by
the owner or his attorney in fact or other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the parties, until the transfer is entered
and noted upon the books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate, and the number of shares
transferred.

48
 No shares of stock against which the corporation holds any unpaid claim shall be transferable
on the books of the corporation. (Emphasis supplied.)

Pursuant to this provision, a share of stock may be transferred by endorsement of the corresponding
stock certificate, coupled with its delivery. However, the transfer shall "not be valid, except as
between the parties," until it is "entered and noted upon the books of the corporation." no such entry
in the name of the plaintiffs herein having been made, it follows that the transfer allegedly effected by
Juan Campos and Carl Hess in their favor is "not valid, except as between" themselves. It does not
bind either Madrigal or the Mitsuis, who are not parties to said alleged transaction. What is more, the
same is "not valid," or, in the words of the Supreme Court of Wisconsin (Re Murphy, 51 Wisc. 519, 8
N. W. 419) — which were quoted approval in Uson vs. Diosomito (61 Phil., 535) — "absolutely void"
and, hence, as good as non-existent, insofar as Madrigal and the Mitsuis are concerned. For this
reason, although a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it
may be transferred by endorsement, coupled with delivery, it is well settled that the instrument is non-
negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the
registered owner or creditor may have under the law, except insofar as such rights or defenses are
subject to the limitations imposed by the principles governing estoppel.

Certificates of stock are not negotiable instruments (post, Par. 102), consequently, a transferee
under a forged assignment acquires no title which can be asserted against the true owner,
unless his own negligence has been such as to create an estoppel against him (Clarke on
Corporations, Sec. Ed. p. 415). If the owner of the certificate has endorsed it in blank, and it is
stolen from him, no title is acquired by an innocent purchaser for value (East Birmingham Land
Co. vs. Dennis, 85 Ala. 565, 2 L.R.A. 836; Sherwood vs. mining co., 50 Calif. 412). As was said
by the Supreme Court of the United States in a leading case (Western Union Telegraph
Co. vs. Davenfort, 97 U. S. 369; 24 L. Ed. 1047) —

"Neither the absence of blame on the part of the officers of the company in allowing an
unauthorized transfer of stock, nor the good faith of the purchaser of stolen property, will avail
as an answer to the demand of the true owner. The great principle that no one can deprived of
his property without his assent, except by processes of the law, requires, in the case
mentioned, that the property wrongfully transferred or stolen should be restored to its rightful
owner." (The Philippine Law of Stock Corporations by Fisher, p. 132.) (Emphasis supplied.)

In the language of Fletcher's Cyclopedia Corporations (Vol. 12, pp. 521-534):

The doctrine that a bona fide purchaser of shares under a forged or unauthorized transfer
acquires no title as against the true owner does not apply where the circumstances are such as
to estop the latter from asserting his title. . . .

A reason often given for the rule is that it is a case for the application of the maxim that where
one of two innocent parties must suffer by reason of a wrongful or unauthorized act, the loss
must fall on the one who first trusted the wrongdoer and put in his hands the means of inflicting
such loss. But "negligence which will work an estoppel of this kind must be a proximate cause
of the purchase or advancement of money by the holder of the property, and must enter into
the transaction itself "; the negligence must be in or immediately connected with the transfer
itself . Furthermore, "to establish this estoppel it must appear that the true owner had conferred
upon the person who has diverted the security the indicia of ownership, or an apparent title or
authority to transfer the title." So the owner is not guilty of negligence in merely entrusting
another with the possession of his certificate of stock, if he does not, by assignment or
49
 otherwise, clothe him with the apparent title. Nor is he deprived of his title or his remedy
against the corporation because he intrusts a third person with the key of a box in which the
certificate are kept, where the latter takes them from the box and by forging the owner's name
to a power of attorney procures their transfer on the corporate books. Nor is the mere
indorsement of an assignment and power of attorney in blank on a certificate of stock, which is
afterwards lost or stolen, such negligence as will estop the owner from asserting his title
as against a bona fide purchaser from the finder or thief, or from holding the corporation liable
for allowing a transfer on its books, where the loss or theft of the certificate was not due to any
negligence on the part of the owner, although there is some dangerous and wholly unjustifiable
dictum to the contrary. So it has been held that the fact that stock pledged to a bank is
endorsed in blank by the owner does not estop him from asserting title thereto as against a
bona fide purchaser for value who derives his title from one who stole the certificate from the
pledgee. And this has also been held to be true though the thief was an officer of the pledgee,
since his act in wrongfully appropriating the certificate cannot be regarded as a
misappropriation by the bank to whose custody the certificate was intrusted by the owner, even
though the bank may be liable to the pledgor. . . . . A person is not guilty of negligence in
leaving a certificate of stock endorsed in blank in a safe deposit box used by himself and
another jointly, so as to be estopped from asserting his title after the certificate has been stolen
by the other, and sold or pledged to a bona fide purchaser or pledgee. Nor is he negligent in
putting a certificate so endorsed in a place to which an employee had access, where he has no
reason to doubt the latter's honesty, . . . . (Emphasis supplied.)

In the leading case of Knox vs. Eden Muscee American Co. (42 N. E. 988, 992-993), the rule has
been forcefully stated as follows:

The courts have been frequently importuned to extend the qualities of negotiability of stock
certificates beyond the limits mentioned, and clothe them with the same character of complete
negotiability as attaches to commercial paper, so as to make a transfer to a purchaser in good
faith for value equivalent to actual title, although there was no agency in the transferor, and the
certificate had been lost without the fault of the true owner, or had been obtained by theft or
robbery. But the courts have refused to accede to this view, and we have found no case
entitled to be regarded as authority which denies to the owner of a stock certificate which has
been lost without his negligence, or stolen, the right to reclaim it from the hands of any person
in whose possession it subsequently comes, although the holder may have taken it in good
faith and for value. The precise question has not often been presented to the courts, for the
reason, probably, that they have with great uniformity held that stock certificates were not
negotiable instruments in the broad meaning of that phrase; but whenever the question has a
risen it has been held that the title of the true owner of a lost or stolen certificate may be
asserted against any one subsequently its possession although the holder may be bona fide
purchaser. Anderson vs. Nicholas, 28 N. Y. 600; Power vs. Robinson, 52 Fed. 520;
Biddle vs. Bayard, 13 Pa. St. 150; Barstow vs. mining Co., 64 Cal. 388, 1 Pac. 349. See
Shaw vs. Railroad Co., 101 U. S. 557. . . . It is plain, we think, that the argument in support of
the judgment in this case, base on the complete negotiability of stock certificates,
is not supported by, but is contrary to, the decisions. If public policy requires that a further
advance should be made in more completely assimilating them to commercial paper in the
qualities of negotiability, the legislature, and not the courts, should so declare. Under the law
as it has hitherto prevailed there does not seem to have been any serious hindrance in dealing
with property of this character. It may, perhaps, be doubted, taking into consideration the
interests of investors as well as dealers, whether it would be wise to remove the protection
which the true owner of a stock certificate now has against accident, theft, or robbery. The
50
 system of registry of negotiable bonds, which prevails to a considerable extent, authorized by
statutes of some of the states and of the United States, seems to indicate a tendency
to restrict, rather than to extend, the range of negotiable instruments. (Emphasis supplied.)

The status of quasi-negotiability generally accorded to, and at present enjoyed by, certificates of
stock, under the Philippine law, is in itself a recognition of the fact that the certificates are non-
negotiable. Instead of sustaining appellees' claim, section 5 of the uniform Stock Transfer Act, which
"gives full negotiability to certificates of stock," refutes said claim and confirms the non-negotiable
character of stock certificates in the absence of said Unifrom Act, for, obviously, the same could not
have given, negotiability to an instrument already possessing this attribute prior thereto. Again, apart
from being distinct from the general Corporation Law, the aforementioned Uniform Act is not in force
in the Philippines. In this connection, it should be noted that this special piece of legislation was
adopted in some states of the union as early as the year 1910. The failure of the Philippine
government to incorporate its provisions in our statute books, for a period of almost 45 years, is, to
our mind, clear proof of the unwillingness of our department to change the policy set forth in section
35 of Act No. 1459. Needless to say, this fact negates our authority — which is limited to the
interpretation of the law, and its application, with all its imperfections — to abandon what the
dissenting opinion characterizes as the "civil law standpoint," and substitute, in lieu thereof, the
commercial viewpoint, by applying said section 5 of the Uniform Stock Transfer Act, although not a
part of the law of the land. Indeed, even in matters generally considered as falling within "commercial
territory", the Roman Law concept has not given way in the Philippines to the Common Law
approach, except when there is explicit statutory provision to the contrary.

In the case at bar, neither madrigal nor the Mitsuis had alienated shares of stock in question. It is not
even claimed that either had, through negligence, given — occasion for an improper or irregular
disposition of the corresponding stock certificates. Plaintiffs merely argue without any evidence
whatsoever thereon — that Kitajima might have, or must have, assigned the certificates on or
before December 1942, although, as above stated, this is, not only, improbable, under the conditions,
then obtaining, but, also., impossible, considering that, in April 1943, Kitajima delivered the
instruments to Miwa, who kept them in its possession until 1945. At any rate, such assignment by
Miwa — granting for the sake of argument the accuracy of the surmise of plaintiffs herein — was
unauthorized by the mitsuis, who, in the light of the precedents cited above, are not chargeable with
negligence. In other words, assuming that Kitajima had been guilty of embezzlement, by negotiating
the stock certificates in question for his personal benefit, as claimed by the plaintiffs, the title of his
assignees and successors in interest would still be subject to the rights of the registered owner,
namely, Madrigal, and consequently, of the party for whose benefit and account the latter held the
corresponding shares of stock, that is to say, the Mitsuis.

At any rate, at the time of the alleged sales in their favor, plaintiffs were aware of sufficient facts to
put them on notice of the need of inquiring into the regularity of the transactions and the title of the
supposed vendors. Indeed, the certificates of stock in question were in the name of madrigal.
Obviously, therefore, the alleged sellers (Campos and Hess) were not registered owners of the
corresponding shares of stock. Being presumed to know the law — particularly the provisions of
section 35 of Act No. 1459 — and, as experienced traders in shares of stock, plaintiffs must have,
accordingly, been conscious of the consequent infirmities in the title of the supposed vendors, or of
the handicaps thereof. Moreover, the aforementioned sales were admittedly hostile to the Japanese,
who had prohibited it and plaintiffs had actual knowledge of these facts and of the risks attendant to
the alleged transaction. In other words, plaintiffs advisedly assumed those risks and, hence, they can
not validly claim, against the registered stockholder, the status of purchasers in good faith.

51
The lower court held, and plaintiffs maintain that, not being the registered owners of the shares of
stock in question, the Mitsuis can not assert a better right than said plaintiffs. This pretense is
untenable. Inasmuch as Madrigal, the registered owner of said shares of stock, has always
acknowledged that he held the same merely as an agent of, or trustee for, the mitsuis — and this is
not denied — it follows that the latter are entitled to invoke such rights as Madrigal had as registered
stockholder. Upon the other hand, even the alleged sale by Juan Campos and Carl Hess to plaintiffs
herein is contested by the defense and, to our mind, has not been established by a preponderance of
the evidence. Hence, as the undisputed principal or beneficiary of the registered owner (Madrigal),
the Mitsuis may claim his rights, which cannot be exercised by the plaintiffs, not only because their
alleged title is not derived either from madrigal or from the Mitsuis, but, also, because it is in
derogation, of said rights. madrigal and the Mitsuis are not privies to the alleged sales by Campos
and Hess to the plaintiffs, contrary to the latter's pretense.

In conclusion, when the Property Custodian issued the Vesting Order complained of, the shares of
stock in question belonged to the Mitsuis, admittedly an enemy corporation, so that Vesting Order is
in conformity with law and should be upheld. Wherefore, the decision appealed from is hereby
reversed, and the complaint, accordingly, dismissed, with costs against the plaintiffs-appellees. It is
so ordered.

Separate Opinions BENGZON, J., dissenting:

Unable to agree with my distinguished colleagues, I find it necessary to write a rather extended
dissent, due principally to the far-reaching effect of their ruling upon future operations of the local
stock market and corporate business. A dissent at least indicate what is not the law.

During the Japanese occupation two Filipinos — the plaintiffs — secretly purchased shares of an
American corporation, whose assets had been seized by the enemy invader. Risking Japanese
wrath, they staked their funds (perhaps their freedom or lives) on the eventual return of the American
forces. After two years, these came back in victorious liberation; but oddly enough plaintiffs lose their
money and the shares.

Such anti-climax is brought about by this decision of the Philippine Supreme Court, upon the initiative
or opposition of Americans and Filipinos, resulting ultimately to the benefit of the Japanese.1 Not that
I believe property rights should be apportioned on the basis of nationality; but the impact of plaintiffs'
misadventure may not be fully realized unless these details are described.

Just the luck of plaintiffs: They won the before the U. S. Treasury, and later before the Vested
Property Aliens Committee but they lost before the Administrator because this officer applied an
erroneous legal principle.2Thereafter they resort to the courts, winning the first round. Now again they
lose.

Perspective, imperfect I believe, accounts for their second defeat. We take the viewpoint of a trial
judge passing on conflicting testimony, and thusly adjudicate: "evidence for the plaintiffs is `as
improbable as that of the defense'; yet the burden of proof is upon plaintiffs', therefore judgment for
defendants." On appeal our coign of vantage lies on higher ground; and, following established
practice, the issue credibility of witnesses, we should uphold the judgment for plaintiffs — unless the
trial judge unduly discarded significant evidentiary pieces for the defendants. Reading the testimony
in black and white, we might disagree with his estimate of the factual probabilities; nevertheless we
should, as usual, make allowance for his peculiar advantage of having seen the witnesses testifying

52
on the chair; and then affirm, realizing that this distance we cannot perceive minor movements of the
pointer in the judicial balance.

The majority attempt to justify their deviation from accepted practice with the statement that "in
rejecting the theory of the defense" His Honor "was guided not by the conduct of the witnesses in the
course of their testimony", but by the inherent "weakness" of such theory. For the application of the
principle recognizing the advantage of the trial judge, it is not necessary in my opinion-for the said
officer to declare explicitly, that in appraising the witnesses' versions he was guided by their conduct
on the witness-stand; normally, in matters of credibility he weighs their testimony against the
background of the sense-images they produced, their demeanor, expression of their faces etc.

Nevertheless, admitting arguendo, that this appeal must be decided upon the finding that plaintiffs'
theory of purchase "is as improbable as defendant's theory" (of looting), I submit that, inasmuch as
the plaintiffs have possession of the certificates which were endorsed in blank, and inasmuch as
the burden of proof shifted to the defendants to prove the alleged looting, plaintiffs should receive the
award. In addition to plaintiffs' testimony, — it must be emphasized — they have the certificates in
proper order, endorsed in blank. Such documentary proof, speaking for itself, should tip the scales,
whenever, — as this court declares now — the testimonial evidence "is even.".

The presumption is that . . . stock which was endorsed in blank was delivered to the parties who had
possession of stock (Hess and Campos) and transferred it to bona fide purchasers (plaintiffs). (See
Lilley vs. First Federal Savings & Loan Association, La. App. 1940, 194 So. 901.)

Furthermore, there are these presumptions: (1) Hess and Campos, and Plaintiffs are innocent of
crime or wrong, and (2) things which a person possesses are owned by him. (Rule 123 sec. 69).

Listed in the majority decision are eight grounds to disbelieve Santos' declarations. Let me comment
briefly on them: Anent the first, Santos was positive the American forces would eventually return, and
he bought the shares. As to the second; and the third, he braved the dangers, for the sake of sure
financial gain. As to the fourth and fifth, it must be remembered that Santos had a monthly income of
P6,000, and was co-owner of ten hectares of land in Tondo. His living in a rented apartment does not
imply financial inability; many landed provincial flow were ordinary tenants in Manila during the war.
As to the price, Santos who had been dabbling in other stock knew that at P0.06 the Lepanto shares
were a bargain; so did not hesitate and grabbed the chance. As to the seventh, Miguel Simon could
not affirm under oath that Carl Hess "had imparted all his activities to me" (p. 29 s. n.) ; and because
the handling of these shares was "dangerous" at that time, most probably Hess didn't inform him
about it. And what about the shares Santos bought from Campos?

Concerning the 8th, remember that although Kitajima and Miwa said the Lepanto certificates were in
their possession, they didn't mean physical personal possession, but official possession, in the vaults
or cabinets of the Mitsui office. Yet they admitted that other officials had access to the same
certificates (p. 115 testimony of Miwa). Inference: such other officials could have — and probably —
disposed of the certificates.

As to Kitajima's testimony that in April 1943 he delivered these certificates to his successor Kenji
Miwa, no satisfactory explanation exists for defendants' failure to present the inventory admittedly
prepared at that time. the document was the best evidence, since Kitajima might not have been
sincere, for he would be personally responsible to the Mitsui higher-ups for the certificates; and the
temptation to palm off responsibility is great where opportunity offers.

53
And Miwa could not have received and kept these shares, because he swore to having seen it —
when ordered to leave Manila in 1945 — that the important documents including the Lepanto shares
were burned. How come these shares are now in the possession of Santos? Obviously,
because they were not among those shares burned, nor shares delivered to Miwa or kept by him in
the Manila offices.

The Mitsui Company it must be underscored — stands to benefit from a declaration that these shares
still belong to it. True, they will be confiscated now, for defendants. They are nevertheless Japanese
assets which may ultimately have to be credited to the said corporation.

Supposing Kitajima told the whole truth that he did not dispose of the shares, then the probabilities
are that such shares had been disposed of by other Mitsui officials without his knowledge.

Now then, the question arises, if the shares had been disposed of by unauthorized officials of Mitsui
Bussan Kaisha do the plaintiffs have a valid title? They have acquired the shares for value and in
good faith, without notice that Campos and Hess had defective titles.

Parenthetically, the defendants — and this decision — doubt the plaintiffs' purchase partly because
Campos died during the liberation of Manila and Hess was executed by the Japanese. That both of
them died is quite a suspicious circumstance, says the majority. I might agree, if both occurred during
normal times. Yet during the Japanese occupation and the battle of liberation, death was no unusual
occurrence in the city. And then, who knows but that Hess was executed by the Japanese for having
engaged in dangerous activities, such as the handling of this stock?

By the way, the Foreign Funds Control of the U. S. Treasury Department; the Vested Property Aliens
Committee, the Alien Property Administrator and the court of first instance never doubted such sale
by Campos and Hess. And this controversy would not have reached the courts had not the Alien
Property Administrator held that admitting the sale, the plaintiffs failed to trace their chain of title to
these shares, beginning from Madrigal (the registered owner) and Mitsui all the way down to Hess
and Campos. Which is error, because as aptly pointed out in appellees' brief:

A purchaser for value is not bound to show affirmatively that the certificates were delivered by
a former owner to his own grantor. (Hellbrook vs. New Jersey Linc., 57 N. Y. 616) (Fletchers,
Cyclopedia of the Law of Private Corporation, Vol. 12, Sec. 5474.) (Emphasis supplied).

Such a contention is quite fallacious because neither the law nor the established custom of the
trade requires a purchaser in good faith to trace back all its predecessors in interest. That
would be requiring the purchaser to prove an utter impossibility, because as shown by the
cases cited and also in the actual practice of trade, a certificate endorsed in blank may travel
through different hands which may number 10, 20, 50 or 100. (p. 169 brief.) (cf.
Hager vs. Bryan, infra.)

The holder of corporate stock containing blank assignment and power of attorney to transfer
stock of company, signed and endorsed on back thereof, has prima facie good title to the
shares. (Jones vs. Courts (1940) Ga. App. 239, 12 S. E. 2d 446.)

That the shares were disposed of by officers of the Mitsui in 1942, is not improbable, considering: (a)
the shares were purposely kept endorsed in blank before and during the war; (b) the Mitsui did not
report the shares to the American High Commissioner, violating the latter's order of July 1941; (c) the
shares were valueless during the war because the Japanese government had seized the corporate
54
property; (d) the officers of Mitsui possibly foresaw the final result of the Pacific War, and made the
most of their belongings before the oncoming disaster; and (e) the only other alternative that may
explain how the shares reached the hands of Hess and Campos in 1942 — theft or loss before 1945
— is not asserted nor proven.

Against this probability — which must be accepted,3 because the shares were subsequently found in
the possession of Hess and Campos, who cannot be declared to have stolen them — the defendants
countered with a possibility that those shares had been looted after the arrival of the Americans in
Manila in 1945.

Interesting to note that no evidence supporting such possibility was given during the hearings before
the American Claims Committee, that decided for herein plaintiffs. Moreover, the American Aliens
Property Administrator, dismissed it too, although he decided against plaintiffs, on a mistaken view of
the controlling legal principle, as hereinbefore indicated.

However, when the matter was brought to the court, the defendants, perceiving the weakness of their
stand, presented Victor Lednicky, Vice President of the Lepanto Consolidated, the Corporation
that, without waiting for a court determination of plaintiffs' right to the shares issued new certificates
cancelling (prematurely and illegally) the certificate in plaintiffs' custody, with actual knowledge of the
latter's claims.

Lednicky testified that on or about February 12 or 13, 1945 he went to the office of Mitsui Bussan
Kaisha on the Ayala Building, across the Pasig River and saw Lepanto papers and other documents
scattered over the floor; that he picked up two certificates of the Lepanto, one in the name of
Madrigal and the other in the name of a Japanese or Chinese; that upon hearing some noises, he
threw the certificates away and left. The trial judge considered his testimony inherently improbable,
giving among other reasons:

Here is an old man who had been imprisoned in the concentration camp during the occupation,
suffering brutalities at the hands of the Japanese, and whose escape from death may perhaps
be even termed providential, yet when finally saved and liberated, he ventured into the areas
where bombing, shelling and fighting were still going on, thus risking his dear life only to
salvage the papers, document, and securities belonging to he Lepanto Consolidated Mining
Company, which, according to the information of an American soldier, were all scattered on the
floor of the offices of the Mitsui Bussan Kaisha in the Ayala Building. . . .

. . . In explaining his failure to pick up the documents which was contrary to his avowed desire
to save the records of the Lepanto Consolidated Mining Company, he said that he and the
American soldier with him heard noises around, and fearing lest they be shot as looters, they
took to their heels.

. . . The fear of being taken for looters, likewise does not appear logical, because he was with
an American soldier in uniform (pp. 41-43 Record on Appeal.)

His Honor was right. Those who were in Manila remember that on February 12 or 13, 1945 and
subsequent days, the battle of liberation was raging in Ermita and Malate; Intramuros was besieged;
and unless compelled by absolute necessity nobody — except looters — dared to circulate around
the places surrounding Intramuros or other points near the scene of fighting.4 It is hard to believe that
Lednicky, a substantial resident of advanced age, would care to go sight-seeing, to satisfy his
curiosity about some Lepanto shares. Unless we yield to the uncharitable suspicion that he too
55
wanted to lay hands on those Lepanto shares of the Japanese. Which would not, of course, exactly
bolster his personal credibility.

Anyway as plaintiff's reasoned out,

Conceding, however, that Mr. Lednicky did find some certificates of the Lepanto Consolidated
on the Third Floor of the Ayala Building — it does not prove that the shares adjudicated to the
plaintiffs were precisely the ones looted there, for the simple reason that the 1,600,000 shares
in the possession of the plaintiffs were not the only certificates of the Lepanto Consolidated.
And Lednickly saw only one4a — if he saw anything at all. It will be remembered that Mitsui
purchased a total of 1,900,000 shares in the name of Madrigal, all of them endorsed in blank.
So conceding, arguendo, that Mr. Lednicky found some shares of the Lepanto on the Third
Floor of the Ayala Building — it is nonetheless possible that the certificates he had seen were
part of what might have been left of the 1,900,000 shares after the certificates of he plaintiffs
had left the safe of the company. (pp. 56-57 brief.)

On this issue, another line of thought suggests itself. Because of the Japanese war, Hess and
Campos cannot now confirm the sale to plaintiffs nor help them trace their chain of title; because of
war conditions, plaintiffs could not and did not ask from Hess and Campos who their predecessors
were; because of war, looting occurred in the city and planted the seed of suspicion against plaintiffs'
title; because of war, plaintiffs find themselves litigating with their own government. Should the
Japanese profits from such mix-up?

In fine, the probability of looting of these particular shares in 1945 ( to make it stronger for defendants
should yield to the uncontradicted evidence of sale to plaintiffs in 1942 by Hess and Campos.

Again, in support of their thesis of looting, the defendant presented Atty. Eugene E. Perkins who
testified about the alleged unceremonious departure of Leonardo Recio when Atty. DeWitt (to whom
he offered one of the certificates for sale) happened to mention looted certificates. Recio denied, and
gave a plausible explanation of the incident. The matter is controversial. Yet supposing that facts
were as Atty. Perkins had described, Recio's "flight" could at most demonstrate that he (Recio) had
some doubts about the origin of said particular certificate — one only (5). Looting was an ugly word
and may be he wanted to avoid all discussion with big lawyers. Nevertheless, his private notions
cannot legally reflect plaintiffs' state of mind. Recio's opinions were his own. And mark well, the
shares were not placed in his hands by plaintiffs directly, but by Primitivo Javier.

Once the theory of looting is discarded, defendants remaining line of defense would fall on the
proposition that he shares must have been disposed of by officers of the Mitsui Company, who had
no authority to sell. And plaintiffs would counter with the assertion that they bought the shares from
Hess and Campos in good faith without knowledge of such breach of trust or excess of authority.
What is then the governing principle? his is the last and decisive issue.

At the outset it should be clear that the situation is the same as if Mitsui litigated with the plaintiffs,
considering that, having paid nothing for the shares, defendants may not assert better rights than the
Mitsui Company had.

It should also be observed that the blank indorsements of these shares signed by V. Madrigal are
worded as follows:

56
 For value received, ................................................ hereby
sell, assign, and transfer unto
.................................................................................. shares of
the Capital Stock represented by the within Certificate, and to
hereby irrevocably constitute and appoint
....................................................................................... to
transfer the said Stock on the books of the within named
Corporation with full power of substitution in the premises.

Dated .......................................... 19......

...............................................................................
V. Madrigal

Stock-traders in this jurisdiction know (Hagar vs. Bryan, 19 Phil., 138) that through the above
indorsement "by the usages of business of which the courts take judicial notice, the certificate may be
passed from hand to hand;" and when "it reaches the hands of someone who desires o assume the
legal rights of a shareholder . . . he fills up the blanks by inserting his own name as transferee", and
"inserts in the second blank the name of the attorney in fact whom he wishes to make the transfer for
him" on the corporate books. (And then such attorney-in-fact may compel the transfer.) According to
Commissioner Cosio of the Securities and Exchange Commission, such indorsement increases the
marketability of he certificate enhances he mobility of this form of wealth so that by mere delivery of
the certificates endorsed in blank the ownership thereof is transferred.

The certificates of stock when so endorsed, we said once, acquire quasi-negotiable character,
(Bachrach Motor Co. vs. Ledesma, 38 Off. Gaz., 796); and parties who deal with them innocently
have long been protected by the law upon principles analogous to those applicable to commercial
paper. (Tolentino Commercial Laws of the Philippines Vol. II (5th Ed.) p. 796 citing cases).

Under the Negotiable Instruments Law a bona fide purchaser for value (holder in due course) of an
instrument would be protected, even if his seller had obtained the "bearer" instrument by theft.

A holder in due course, it has been broadly held, both an common law and under the
Negotiable Instruments Ac takes good title even from a thief; more strictly, if the instrument is
made payable to bearer, or is endorsed in blank, or is otherwise negotiable by delivery, an
innocent purchaser for value and before maturity who acquires it from a thief or finder acquires
a good title and may recover thereon, and he may retain it even as against the true owner. (10
C. J. S., pp. 1117, 1118, citing lots of cases.)

As a less serious defect in the seller's title would exist when he conveys the instrument in breach of
faith or breach of trust, a fortiori, a bona fide purchaser of such instrument, without notice and for
value, should likewise be protected.

In this part of this dissent — I will admit that the situation before us is a sale by Mitsui employees in
excess of, or without, authority. Then I say, it is taken to sale or pledge in breach of trust. It should be
validated, especially because he Misui Corporation purposely kept the shares endorsed in blank for a
long time, notwithstanding its managers' actual knowledge that in such form the shares were easily
negotiable (73, 74 s. n.) and even when the times were so topsy-turvy war that loss, theft, or
misplacement of the papers were likely to occur.

57
This Court has already began applying principles of negotiability to corporate certificates in a recent
case where the owner of the certificate pledged the same o a broker and the broker misused the
certificate by pledging the same to guaranty his own account with a bank. We held, the owner of the
certificate can not recover the same from the bank.6

Ours is now the opportunity, and duty, to carry this principle forward in line with the general tendency
o regard shares endorsed in blank as in the nature of negotiable credits. After all, Commercial law is
essentially "progressive".7

Thus we would be following the last word in the law governing transfers of stocks, as embodied in the
Uniform Stock Transfer Act in force in all the States of the American Union, from Alabama, Arizona
etc. all the way down to Wisconsin and Wyoming, some states having adopted it as recently as the
year 1947.

SECTION 1. How title to certificates and shares may be transferred. — Title to a certificate and
to the shares represented thereby can be transferred only,

(a) By delivery of the certificate endorsed either in blank or to a specified person by the person
appearing by the certificate to be the owner of the shares represented thereby, or

(b) By delivery of the certificate and a separate document containing a written assignment of
the certificate or a power of attorney to sell, assign, or transfer the same or the shares
represented thereby, signed by the person appearing by the certificate to be the owner of the
shares represented thereby. . . .

SEC. 5. Who may deliver a certificate. — The delivery of a certificate to transfer title with the
provisions of section 1, is effectual, except as provided in section 7, though made by one
having no right of possession and having no authority from the owner of the certificate or from
the person purporting to transfer the title. (Emphasis supplied.)

SEC. 7. Rescission of transfer. — If the endorsement of delivery of a certificate,

(a) was procured by fraud or duress, or

(b) was made under such mistake as to make the indorsement or delivery inequitable; or

If the delivery of a certificate was made

(c) without the authority from the owner, or

(d) after the owner's death or legal incapacity, the possession of the certificate may be
reclaimed and the transfer thereof rescinded, unless:

(l) The certificate has been transferred to a purchaser for value in good faith without notice of
any facts making the transfer wrongful, or . . . . (Emphasis supplied.)

The Uniform Act is a mere codification of common law principles. (Patterson vs. Fitzpatrick —
McElroy Co. (1927) 247 Ill. App. 1.) It necessarily reflects the prevailing opinion in all the States. And
section 5 "gives full negotiability to certificate of stock," according to the Commissioners that drafted
the Act (Uniform Laws Annotated Vol. 6 p. 10.)

58
(Cases and authorities are to be found in the enclosed addenda.)

Vis-a-vis the Uniform Stock Transfer Act, the authorities cited by the majority decision turn out to be
dated, apart from the circumstance that at the time they were enunciated or published there were
court decisions in the other direction.8 Now the Transfer Act — unanimously adopted by all the states
— settled the conflicts, and declared the predominant doctrine to be, that a bona fide buyer for value
of stock endorsed in blank acquires title even if his seller had no authority to sell from the owner.
(Please read again the provisions of the Act above quoted, and the cases in addenda.).

Such prevailing doctrine in the U.S. may properly be engrafted in our corporation law, of American
origin, specially because our statute contains nothing contrary to it (cf. sec. 35 Corporation Law).
Besides, it must be taken to represent the true sentiment of the commercial world, which the local
community could not but echo. For as Commissioner Cosio explained, referring to local practice,
mere delivery of the certificate endorsed in blank transferred ownership. And usages of commerce, or
commercial practices, the Code says, are part of the Commercial Law. (Art. 2 Code of Commerce.)

Therefore, on legal principles should prevail. Even if the certificate had been stolen9 and then sold to
Hess and Campos (which is not the case.)

At this juncture I may advert to the majority propositions allegedly supported by section 35 of the
Corporation Law:

Pursuant to this provision, a share of stock may be transferred by endorsement of the

corresponding stock certificate, coupled with its delivery. However, the transfer shall "not be
valid, except as between the parties," until it is "entered and noted upon the books of the
corporation." No such entry in the name of the plaintiffs heren having been made, it follows that
the transfer allegedly effected by Juan Campos and Carl Hess in their favor is "not valid,
except as between" themselves. It does not bind either Madrigal or the Mitsuis, ho are not
parties to said alleged transaction.

This argument, with due respect to the majority, is their weakest.

The phrase "except as between the parties" means parties and their privies, their predecessors or
successors in interest. The exception was meant to protect creditors of the parties, or the corporation
itself, that may be paying dividends to the recorded stockholder even after said stock-holder had sold
his stock recording the sale. Adoption of the majority view would have the effect of requiring every
transfer of the stock to be entered on the books (contrary to what we said in Hager vs. Bryan, 19 Phil.
138 and the accepted practice). For if a certificate endorsed in blank has passed from A to B, then to
C, then to D and then to E, but the transfers to B to C and to D have not been recorded, therefore E
gets no title and may not have it recorded in the books of the corporation, because his contract with D
does not affect A, B and C. It is not the purpose, I hope, presently to overrule Hager vs. Bryan now.
Peculiar thing about this Hager vs. Bryan case there is another decision between the same parties
reported in vol. 21 p. 523; the unwary reader is apt to conclude that the decision in Vol. 21 overrules
the decision in the previous volume, but it is just reverse; look at the dates.

Even on grounds of equity 10, plaintiffs should win. Who caused these shares to be endorsed in
blank? Who kept them thus even knowing the dangers of loss or confusion? Who allowed its officers
to have access to those shares? Who appointed those officers?.

59
Incidentally, these shares, I understand, are now worth much more than the amount invested by
plaintiffs. I find no reluctance to validate their good fortune. For I have always maintained that in
contracts involving speculation, the resultant profit to the purchaser, however sizable, can never of
itself serve to becloud the genuineness of the transaction. (Gomez vs. Roño, 46 Off. Gaz., Supp. (11)
339.)

One final paragraph:

Overshadowing the deliberative process of the majority opinion, I perceive the guiding principle in
civilian affairs that, the purchaser of goods acquires no better title than his seller had. It examined the
problem from a civil law standpoint. Again, perspective, less than perfect, inasmuch as the issue
arises on Commercial territory, wherein the need of promoting exchange of goods in business have
often allowed purchasers for value in good faith to obtain a better title than their seller had, for
instance, (1) purchasers of goods from stores open to the public (Art. 85 Code of Commerce, Art.
1505 New Civil Code) (2) purchasers for value in good faith of negotiable bearer instruments, see
supra, and (3) purchasers in good faith for value of shares endorsed in blank, under the Uniform
Stock Transfer Act.

60
MAKATI SPORTS CLUB, INC., Petitioner, vs. CECILE H. CHENG, MC FOODS, INC., and RAMON
SABARRE, Respondents. G.R. No. 178523 June 16, 2010 NACHURA, J.:

This is a petition for review on certiorari1 under Rule 45 of the Rules of Court, assailing the
Decision2 dated June 25, 2007 of the Court of Appeals (CA) in CA-G.R. CV No. 80631, affirming the
decision3 dated August 20, 2003 of the Regional Trial Court (RTC), Branch 138, Makati City in Civil
Case No. 01-837.

The facts of the case, as narrated by the RTC and adopted by the CA, are as follows:

On October 20, 1994, plaintiff’s Board of Directors adopted a resolution (Exhibit 7) authorizing the
sale of 19 unissued shares at a floor price of ₱400,000 and ₱450,000 per share for Class A and B,
respectively.

Defendant Cheng was a Treasurer and Director of plaintiff in 1985. On July 7, 1995, Hodreal
expressed his interest to buy a share, for this purpose he sent the letter, Exhibit 13. In said letter, he
requested that his name be included in the waiting list.1avvphi1

It appears that sometime in November 1995, McFoods expressed interest in acquiring a share of the
plaintiff, and one was acquired with the payment to the plaintiff by McFoods of ₱1,800,000 through
Urban Bank (Exhibit 3). On December 15, 1995, the Deed of Absolute Sale, Exhibit 1, was executed
by the plaintiff and McFoods Stock Certificate No. A 2243 was issued to McFoods on January 5,
1996. On December 27, 1995, McFoods sent a letter to the plaintiff giving advise (sic) of its offer to
resell the share.

It appears that while the sale between the plaintiff and McFoods was still under negotiations, there
were negotiations between McFoods and Hodreal for the purchase by the latter of a share of the
plaintiff. On November 24, 1995, Hodreal paid McFoods ₱1,400,000. Another payment of ₱1,400,000
was made by Hodreal to McFoods on December 27, 1995, to complete the purchase price of
₱2,800,000.

On February 7, 1996, plaintiff was advised of the sale by McFoods to Hodreal of the share evidenced
by Certificate No. 2243 for ₱2.8 Million. Upon request, a new certificate was issued. In 1997, an
investigation was conducted and the committee held that there is prima facie evidence to show that
defendant Cheng profited from the transaction because of her knowledge.

Plaintiff’s evidence of fraud are – [a] letter of Hodreal dated July 7, 1995 where he expressed interest
in buying one (1) share from the plaintiff with the request that he be included in the waiting list of
buyers; [b] declaration of Lolita Hodreal in her Affidavit that in October 1995, she talked to Cheng
who assured her that there was one (1) available share at the price of ₱2,800,000. The purchase to
be validated by paying 50% immediately and the balance after thirty (30) days; [c] Marian Punzalan,
Head, Membership Section of the plaintiff declared that she informed Cheng of the intention of
Hodreal to purchase one (1) share and she gave to Cheng the contact telephone number of Hodreal;
and [d] the authorization from Sabarre to claim the stock certificate.4

Thus, petitioner sought judgment that would order respondents to pay the sum of ₱1,000,000.00,
representing the amount allegedly defrauded, together with interest and damages.

After trial on the merits, the RTC rendered its August 20, 2003 decision, dismissing the complaint,
including all counterclaims.

61
Aggrieved, Makati Sports Club, Inc. (MSCI) appealed to the CA, arguing that the RTC erred in finding
neither direct nor circumstantial evidence that Cecile H. Cheng (Cheng) had any fraudulent
participation in the transaction between MSCI and Mc Foods, Inc. (Mc Foods), while it allegedly
ignored MSCI’s overwhelming evidence that Cheng and Mc Foods confabulated with one another at
the expense of MSCI.

After the submission of the parties’ respective briefs, the CA promulgated its assailed Decision,
affirming the August 20, 2003 decision of the RTC. Hence, this petition anchored on the grounds
that—

THE APPELLATE COURT ERRED IN UPHOLDING THE CONCLUSION OF THE TRIAL COURT
THAT PETITIONER DID NOT PROFFER CLEAR AND CONVINCING EVIDENCE SHOWING THAT
THE RESPONDENTS DEFRAUDED THE PETITIONER DESPITE OVERWHELMING EVIDENCE
TO THE CONTRARY AS SHOWN BY THE FOLLOWING:

(A) RESPONDENTS CHENG AND SABARRE’S OWN ADMISSIONS, MARIAN PUNZALAN’S

AFFIDAVIT, AND OTHER PERTINENT DOCUMENTARY EVIDENCE ALL UNEQUIVOCALLY
PROVE THAT RESPONDENT CHENG HAD INTIMATE

PARTICIPATION IN THE SALE OF MSCI’S UNISSUED CLASS "A" SHARE TO MC FOODS,

INC. FOR THE CONSIDERATION OF ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(PHP1,800,000.00).

(B) RESPONDENT CHENG’S ADMISSIONS AND OTHER PERTINENT DOCUMENTARY

EVIDENCE RELATED TO THE SALE OF MSCI’S UNISSUED CLASS "A" SHARE TO
RESPONDENT MC FOODS, INC. AND THE RESALE OF THE SAME TO SPOUSES
HODREAL PROVE THAT THE SALE OF THE SAID UNISSUED SHARE TO MC FOODS,
INC. AT ONE MILLION EIGHT HUNDRED THOUSAND PESOS (PHP1,800,000.00) WAS
MADE WITH A VIEW TO RESELL THE SAME AT A PROFIT TO THE HODREAL SPOUSES
AT THE AMOUNT OF TWO MILLION EIGHT HUNDRED PESOS (PHP2,800,000.00); THE
"RESALE" OF THE SAID SHARE TO THE SPOUSES HODREAL OCCURRING EVEN
BEFORE MC FOODS, INC. GAINED OWNERSHIP OVER THE SAID UNISSUED SHARE.

(C) THE UTTER LACK OF DOCUMENTARY EVIDENCE SHOWING THAT MC FOODS, INC.
EVINCED A DESIRE TO PURCHASE PETITIONER’S UNISSUED SHARES CONCLUSIVELY
PROVES THAT MC FOODS, INC. NEVER MADE ANY FORMAL OFFER TO BUY AN
UNISSUED M[SC]I SHARE FROM PETITIONER’S BOARD OF DIRECTORS AND/OR
MEMBERSHIP COMMITTEE, COURSING THE SAID TRANSACTION CLANDESTINELY
THROUGH RESPONDENT CHENG.

(D) RESPONDENT CHENG’S OWN ADMISSIONS INDUBITABLY PROVE THAT SHE

DELIBERATELY CONCEALED THE FACT THAT THERE WERE OTHER UNISSUED M[SC]I
SHARES AVAILABLE FOR PURCHASE BY THE SPOUSES HODREAL, CHOOSING
INSTEAD TO BROKER THE "RESALE" OF THE SHARE PURCHASED BY MC FOODS, INC.
FROM MSCI TO THE SPOUSES HODREAL AT THE PRICE OF TWO MILLION EIGHT
HUNDRED THOUSAND PESOS (PHP2,800,000.00) TO THE DETRIMENT OF THE
PETITIONER.

(E) RESPONDENTS CHENG AND SABARRE’S ADMISSIONS, MSCI’S BY-LAWS AND

DOCUMENTARY EVIDENCE RELATING TO THE TWO IRREGULAR SALES
62
 TRANSACTIONS ALL POINT TO THE CONCLUSION THAT MC FOODS, INC. IN
RESELLING ITS MSCI SHARE TO SPOUSES HODREAL FAILED TO GIVE MSCI A
CREDIBLE OPPORTUNITY TO REPURCHASE THE SAME IN ACCORDANCE WITH
SECTION 30 (E) OF MSCI’S BY-LAWS.

(F) RESPONDENT CHENG’S OWN DOCUMENTARY EVIDENCE PROVES THAT

RESPONDENTS FALSIFIED AN ENTRY IN MC FOODS, INC.’S "OFFER" TO SELL ITS
SHARE TO MSCI IN AN EFFORT TO COAT THE RESELLING OF THE SAID SHARE TO
SPOUSES HODREAL WITH A SEMBLANCE OF REGULARITY[.]

(G) FINALLY, PERHAPS THE MOST OVERLOOKED MATTER BY THE TRIAL COURT AND
THE APPELLATE COURT IS THE SINGULAR UNDENIABLE FACT THAT RESPONDENT
CHENG DURING THE PERIOD IN WHICH THE ABOVE-MENTIONED TRANSACTIONS
CAME INTO FRUITION WAS A MEMBER OF THE BOARD OF DIRECTORS AND THE
TREASURER OF MSCI, THIS FACT ALONE TAINTS THE PARTICIPATION OF
RESPONDENT CHENG IN THE SAID IRREGULAR TRANSACTIONS WITH BAD FAITH.5

The petition should be denied.

At the outset, we note that this recourse is a petition for review on certiorari under Rule 45 of the
Rules of Court. Under Section 1 of the Rule, such a petition shall raise only questions of law which
must be distinctly alleged in the appropriate pleading. In a case involving a question of law, the
resolution of the issue must rest solely on what the law provides for a given set of facts drawn from
the evidence presented. Stated differently, there should be nothing in dispute as to the state of facts;
the issue to be resolved is merely the correctness of the conclusion drawn from the said facts. Once
it is clear that the issue invites a review of the probative value of the evidence presented, the
question posed is one of fact. If the query requires a reevaluation of the credibility of witnesses, or the
existence or relevance of surrounding circumstances and their relation to each other, then the issue
is necessarily factual.6

A perusal of the assignment of errors and the discussion set forth by MSCI would readily show that
the petition seeks a review of all the evidence presented before the RTC and reviewed by the CA;
therefore, the issue is factual. Accordingly, the petition should be dismissed outright, especially
considering that the very same factual circumstances in this petition have already been ruled upon by
the CA.

However, MSCI seeks to evade this rule that the findings of fact made by the trial court, particularly
when affirmed by the appellate court, are entitled to great weight and even finality, claiming that its
case falls under two of the well-recognized exceptions, to wit: (1) that the judgment of the appellate
court is premised on a misapprehension of facts or that it has failed to consider certain relevant facts
which, if properly considered, will justify a different conclusion; and (2) that the findings of fact of the
appellate court are ostensibly premised on the absence of evidence, but are contradicted by the
evidence on record.7

MSCI insists that Cheng, in collaboration with Mc Foods, committed fraud in transacting the transfers
involving Stock Certificate No. A 2243 (Certificate A 2243) on account of the following
circumstances—(1) on November 24, 1995, Joseph L. Hodreal (Hodreal) paid the first installment of
₱1,400,000.00 for the purchase of a Class "A" share in favor of Mc Foods;8 (2) on November 28,
1995, Mc Foods deposited to MSCI’s account an Allied Banking Corporation manager’s check for the
purchase of the same share in the amount of ₱1,800,000.00,9 sans an official receipt from
63
MSCI;10 (3) on December 15, 1995, MSCI and Mc Foods executed a Deed of Sale for the purchase
of a Class "A" share;11 (4) on December 27, 1995, Hodreal paid the last installment of ₱1,400,000.00
to Mc Foods;12 (5) on December 27, 1995, Mc Foods sent a letter to MSCI, offering to sell its
purchased share of stock in the amount of ₱2,800,000.00;13 (6) on January 5, 1996, Certificate A
2243 was issued to Mc Foods by MSCI;14 and (7) on January 29, 1996, Mc Foods and Hodreal
executed a Deed of Sale for the same share of stock.15

Based on the above incidents, MSCI asserts that Mc Foods never intended to become a legitimate
holder of its purchased Class "A" share but did so only for the purpose of realizing a profit in the
amount of ₱1,000,000.00 at the expense of the former. MSCI further claims that Cheng confabulated
with Mc Foods by providing it with an insider’s information as to the status of the shares of stock of
MSCI and even, allegedly with unusual interest, facilitated the transfer of ownership of the subject
share of stock from Mc Foods to Hodreal, instead of an original, unissued share of stock. According
to MSCI, Cheng’s fraudulent participation was clearly and overwhelmingly proven by the following
circumstances: (1) sometime in October 1995, Lolita Hodreal, wife of Hodreal, talked to Cheng about
the purchase of one Class "A" share of stock and the latter assured her that there was already an
available share for ₱2,800,000.00;16 (2) the second installment payment of ₱1,400,000.00 of spouses
Hodreal to Mc Foods was received by Cheng on the latter’s behalf;17 (3) Marian N. Punzalan
(Punzalan), head of MSCI’s membership section, informed Cheng about Hodreal’s intention to
purchase a share of stock and Cheng asked her if there was a quoted price for it, and for Hodreal’s
contact number;18 and (4) on January 29, 1996, Cheng claimed Certificate A 2243 on behalf of Mc
Foods,19 per letter of authority dated January 26, 1996, executed by Mc Foods in favor of Cheng.20

The Court is not convinced.

It is noteworthy that, as early as July 7, 1995, Hodreal already expressed to the MSCI Membership
Committee his intent to purchase one Class "A" share and even requested if he could be included in
the waiting list of buyers. However, there is no evidence on record that the Membership Committee
acted on this letter by replying to Hodreal if there still were original, unissued shares then or if he
would indeed be included in the waiting list21 of buyers. All that Punzalan did was to inform Cheng of
Hodreal’s intent and nothing more, even as Cheng asked for Hodreal’s contact number. It may also
be observed that, although established by Punzalan’s affidavit that she informed Cheng about
Hodreal’s desire to purchase a Class "A" share and that Cheng asked for Hodreal’s contact number,
it is not clear when Punzalan relayed the information to Cheng or if Cheng indeed initiated contact
with Hodreal to peddle Mc Foods’ purchased share.

While Punzalan declared that, in December 1995, she received a Deed of Absolute Sale between
MSCI and Mc Foods of a Class "A" share for ₱1,800,000.00 signed by Atty. Rico Domingo and
Cheng, in their respective capacities as then President and Treasurer of MSCI, and by Ramon
Sabarre, as President of Mc Foods, what she merely did was to inquire from her immediate superior
Becky Peñaranda what share to issue; and the latter, in turn, replied that it should be an original
share. Thereafter, Punzalan prepared a letter, signed by then corporate secretary, Atty. Rafael
Abiera, to be sent to MSCI’s stock transfer agent for the issuance of the corresponding certificate of
stock. Then, Certificate A 2243 was issued in favor of Mc Foods on January 5, 1996.

Also in point are the powers and duties of the MSCI’s Membership Committee, viz.:

SEC. 29. (a) The Membership Committee shall process applications for membership; ascertain that
the requirements for stock ownership, including citizenship, are complied with; submit to the Board its
recommended on applicants for inclusion in the Waiting List; take charge of auction sales of shares of
64
stock; and exercise such other powers and perform such other functions as may be authorized by the
Board.22

Charged with ascertaining the compliance of all the requirements for the purchase of MSCI’s shares
of stock, the Membership Committee failed to question the alleged irregularities attending Mc Foods’
purchase of one Class "A" share at ₱1,800,000.00. If there was really any irregularity in the
transaction, this inaction of the Management Committee belies MSCI’s cry of foul play on Mc Foods’
purchase of the subject share of stock. In fact, the purchase price of ₱1,800,000.00 cannot be said to
be detrimental to MSCI, considering that it is the same price paid for a Class "A" share in the last sale
of an original share to Land Bank of the Philippines on September 25, 1995, and in the sale by
Marina Properties Corporation to Xanland Properties, Inc. on October 23, 1995.23 These
circumstances have not been denied by MSCI. What is more, the purchase price of ₱1,800,000.00 is
₱1,400,000.00 more than the floor price set by the MSCI Board of Directors for a Class "A" share in
its resolution dated October 20, 1994.24

Further, considering that Mc Foods tendered its payment of ₱1,800,000.00 to MSCI on November 28,
1995, even assuming arguendo that it was driven solely by the intent to speculate on the price of the
share of stock, it had all the right to negotiate and transact, at least on the anticipated and expected
ownership of the share, with Hodreal.25 In other words, there is nothing wrong with the fact that the
first installment paid by Hodreal preceded the payment of Mc Foods for the same share of stock to
MSCI because eventually Mc Foods became the owner of a Class "A" share covered by Certificate A
2243. Upon payment by Mc Foods of ₱1,800,000.00 to MSCI and the execution of the Deed of
Absolute Sale on December 15, 1995, it then had the right to demand the delivery of the stock
certificate in its name. The right of a transferee to have stocks transferred to its name is an inherent
right flowing from its ownership of the stocks.26

It is MSCI’s stance that Mc Foods violated Section 30(e) of MSCI’s Amended By-Laws on its pre-
emptive rights, which provides—

SEC. 30. x x x .

(e) Sale of Shares of Stockholder. Where the registered owner of share of stock desires to sell his
share of stock, he shall first offer the same in writing to the Club at fair market value and the club
shall have thirty (30) days from receipt of written offer within which to purchase such share, and only
if the club has excess revenues over expenses (unrestricted retained earning) and with the approval
of two-thirds (2/3) vote of the Board of Directors. If the Club fails to purchase the share, the
stockholder may dispose of the same to other persons who are qualified to own and hold shares in
the club. If the share is not purchased at the price quoted by the stockholder and he reduces said
price, then the Club shall have the same pre-emptive right subject to the same conditions for the
same period of thirty (30) days. Any transfer of share, except by hereditary succession, made in
violation of these conditions shall be null and void and shall not be recorded in the books of the Club.

The share of stock so acquired shall be offered and sold by the Club to those in the Waiting List in
the order that their names appear in such list, or in the absence of a Waiting List, to any applicant.27

We disagree.

Undeniably, on December 27, 1995, when Mc Foods offered for sale one Class "A" share of stock to
MSCI for the price of ₱2,800,000.00 for the latter to exercise its pre-emptive right as required by
Section 30(e) of MSCI’s Amended By-Laws, it legally had the right to do so since it was already an
65
owner of a Class "A" share by virtue of its payment on November 28, 1995, and the Deed of Absolute
Share dated December 15, 1995, notwithstanding the fact that the stock certificate was issued only
on January 5, 1996. A certificate of stock is the paper representative or tangible evidence of the stock
itself and of the various interests therein. The certificate is not a stock in the corporation but is merely
evidence of the holder’s interest and status in the corporation, his ownership of the share represented
thereby. It is not in law the equivalent of such ownership. It expresses the contract between the
corporation and the stockholder, but is not essential to the existence of a share of stock or the nature
of the relation of shareholder to the corporation.28

Therefore, Mc Foods properly complied with the requirement of Section 30(e) of the Amended By-
Laws on MSCI’s pre-emptive rights. Without doubt, MSCI failed to repurchase Mc Foods’ Class "A"
share within the thirty (30) day pre-emptive period as provided by the Amended By-Laws. It was only
on January 29, 1996, or 32 days after December 28, 1995, when MSCI received Mc Foods’ letter of
offer to sell the share, that Mc Foods and Hodreal executed the Deed of Absolute Sale over the said
share of stock. While Hodreal had the right to demand the immediate execution of the Deed of
Absolute Sale after his full payment of Mc Foods’ Class "A" share, he did not do so. Perhaps, he
wanted to wait for Mc Foods to first comply with the pre-emptive requirement as set forth in the
Amended By-Laws. Neither can MSCI argue that Mc Foods was not yet a registered owner of the
share of stock when the latter offered it for resale, in order to void the transfer from Mc Foods to
Hodreal. The corporation’s obligation to register is ministerial upon the buyer’s acquisition of
ownership of the share of stock. The corporation, either by its board, its by-laws, or the act of its
officers, cannot create restrictions in stock transfers.29

Moreover, MSCI’s ardent position that Cheng was in cahoots with Mc Foods in depriving it of selling
an original, unissued Class "A" share of stock for ₱2,800,000.00 is not supported by the evidence on
record. The mere fact that she performed acts upon authority of Mc Foods, i.e., receiving the
payments of Hodreal in her office and claiming the stock certificate on behalf of Mc Foods, do not by
themselves, individually or taken together, show badges of fraud, since Mc Foods did acts well within
its rights and there is no proof that Cheng personally profited from the assailed transaction. Even the
statement of MSCI that Cheng doctored the books to give a semblance of regularity to the transfers
involving the share of stock covered by Certificate A 2243 remains merely a plain statement not
buttressed by convincing proof.

Fraud is deemed to comprise anything calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting
in the damage to another or by which an undue and unconscionable advantage is taken of
another.30 It is a question of fact that must be alleged and proved. It cannot be presumed and must
be established by clear and convincing evidence, not by mere preponderance of evidence.31 The
party alleging the existence of fraud has the burden of proof.32 On the basis of the above
disquisitions, this Court finds that petitioner has failed to discharge this burden. No matter how strong
the suspicion is on the part of petitioner, such suspicion does not translate into tangible evidence
sufficient to nullify the assailed transactions involving the subject MSCI Class "A" share of stock.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated June 25, 2007 of the
Court of Appeals in CA-G.R. CV No. 80631, affirming the decision dated August 20, 2003 of the
Regional Trial Court, Branch 138, Makati City in Civil Case No. 01-837, is AFFIRMED. Costs against
petitioner. SO ORDERED.

66
THE BACHRACH MOTOR CO., INC., plaintiff-appellant, vs. MARIANO LACSON LEDESMA,
TALISAY-SILAY MILLING CO., INC., and THE PHILIPPINE NATIONAL BANK, defendant-
appellees. G.R. No. L-42462 August 31, 1937 IMPERIAL, J.:

This is an action brought by the plaintiff to recover the amount of the judgments obtained by it in civil
cases Nos. 31597 and 31821 of the Court of First Instance of Manila, praying in its complaint: (a)
That the transfer of certificate of stock dividends No. 772 of the Talisay-Silay Milling of the Philippine
National Bank, be declared null and void, as against the plaintiff: (b) that the Talisay-Silay Milling Co.,
Inc., ordered to cancel the entry of the transfer of the 6,300 stock dividends covered by certificate No.
772, made by it on its books in favor of the Philippine National Bank; (c) that said stock dividends be
sold to satisfy the judgment obtained by it in civil cases Nos. 31597 of the Court of First Instance of
Manila; (d) that the Talisay-Silay Milling Co., Inc., be ordered to pay to it amount of P21,379.39, with
interest on the sums and from the dates set forth in paragraph XV of the complain, or any part thereof
necessary to complete payment of said sums and interest thereon , in case the 6,300 stock dividends
can not be sold or the proceeds of the sale thereof should be insufficient to cover the sums in
question, and (e) that the defendants pay the costs of the suit. The plaintiff appealed from the
judgment declaring the right of the Philippine National Bank to the 6,300 stock dividends a preferred
one, and absolving the defendants from the complaint, with costs.

The parties submitted the case upon the following stipulation of facts, to wit:

STIPULATION OF FACTS. — That the plaintiff, the Bachrach Motor Co., Inc., on June 30, 1927,
obtained judgment in civil case No. 31597 of the Court of First Instance of Manila against the
defendant Mariano Lacson Ledesma, in the sum of P3,442.75, with interest thereon from March 30,
1927, with costs. That a writ of execution of said judgment was issued on August 20, 1927, and Jose
Y. Orosa was appointed Special sheriff to execute it. That on October 4, 1927, said Jose Y. Orosa,
as special sheriff, in compliance with the writ of execution in question, attached all right, title to and
interest which the defendant Mariano Lacson Ledesma may have in "Any bonus, dividend, share of
stock, money, or other property which that defendant is entitle to receive from the Talisay-Silay
Milling Co., Inc., by virtue of the fact that such defendant has mortgage his land in favor of the
Philippine National Bank to guarantee the indebtedness of the Talisay-Silay Milling Co., Inc., or which
such defendant is entitled to receive from the Talisay-Silay Milling Co., Inc., on account of being a
stockholder in the corporation or which he is entitled to receive from that corporation for any other
cause or pretext whatsoever." That notice of said attachment was served not only upon the
defendant Mariano Lacson Ledesma but also upon the herein defendant the Talisay-Silay Milling Co.,
Inc., which received a copy of the notice of attachment, as evidenced by the Annex A attached to this
stipulation of facts. That on October 3, 1927, the herein plaintiff, the Bachrach Motor Co., Inc.,
obtained judgment in case No. 31821 of the Court of First Instance of Manila against the defendant
Mariano Lacson Ledesma, in the sum of four thousand four hundred pesos and seventy-eight
centavos with interest at 10 per cent per annum on the sum of P3,523.82 from April 30, 1927; in the
sum of P14,171, 52 with interest at 10 per cent per annum on the sum of P13,290.89 from April 30,
1927; and in the sum of P1,150.72 with the legal interest of 6 per cent per annum thereon from May
25, 1927, and the costs. A copy of said judgment is attached to this stipulation of facts and marked
Annex B. That a writ of execution of said judgment was issue, thereby causing the attachment, sale
and adjudication to the plaintiff the Bachrach Motor Co., Inc., for the sum of P100, Philippine
currency, of the defendant Mariano Lacson Ledesma's right of redemption over the following
properties to wit: "Original certificate of title No. 1929 (Lot No. 1473 of the Cadastral Survey of
Bacolod) containing an area of 2,647 square meters, more or less.

67
Original certificate of title No. 2978 (Lot No. 1475 of the Cadastral Survey of Bacolod) containing an
area of 8.501 square meters, more or less.

Original certificate of title No. 2624 (Lot No. 1474 of the Cadastral Survey of Bacolod) containing an
area of 8,714 square meter, more or less.

Original certificate of title No. 9443 (Lot No. 426 of the Cadastral Survey of Talisay) containing
an area of 150,301 square meters more or less. Original certificate of title No. 1928 (Lot No.
1472 of the Cadastral Survey of Bacolod) containing an area of 36,818 square meters, more or
less. Original certificate of title No. 2923 (Lot No. 1489 of the Cadastral Survey of Bacolod)
containing an area of 286,879 square meters, more or less. Original certificate of title No. 356
(Lot No. 4-A of the Cadastral Survey of Bacolod) containing an area of 641,448 square meters,
more or less. Original certificate of title No. 356 (Lot No. 4-B of the Cadastral Survey of
Bacolod) containing an area of 280,556 square meters, more or less. Original certificate of title
No. 356 (Lot No. 4-C of the cadastral Survey of Bacolod) containing an area of 2,842,946
square meters, more or less." The certificate of sale issued by the provincial sheriff of
Occidental Negros in favor of the Bachrach Motor Co., Inc., on March 29, 1928, is attached to
this stipulation of facts, and marked Annex C. That on the date of the issuance of the execution
in case No. 31597 of the Court of First Instance of Manila as well as on that of the issuance of
the execution and sale of the properties described in Exhibit C, in case No. 31821 of the same
court, said real properties were mortgaged to the Philippine National Bank to secure the
payment to said bank by Mariano Lacson Ledesma of the sum of P624,000, Philippine
currency, by virtue of an instrument executed by the debtor Mariano Lacson Ledesma in favor
of said bank on August 9, 1923. said instrument of mortgage is copied on pages 18 to 32, both
inclusive, of the bill of exceptions in case No. 8136 of the Court of First Instance of Iloilo (G. R.
No. 35223), which is attached to this stipulation of facts and marked Annex D. That in the same
instrument of mortgage (pages 18 to 32 of Annex D) said debtor Mariano Lacson Ledesma
mortgaged in favor the bank, as part of the securities to ensure compliance with his obligation,
the following shares owned by him in the Talisay-Silay Milling Co., Inc., to wit: 1,540 share
covered by Certificate No. 147; 520 shares covered by Certificate No. 146; 40 share covered
by Certificate in the preceeding two paragraph, there was another mortgage constituted on the
above-described real properties in favor of the Philippine National Bank, to answer for the
debts contracted by the Central Talisay-Silay Milling Co., with said bank. That on December
22, 1923, the defendant, Central Talisay-Silay Milling Co. resolved to grant a bonus or
compensation to the owners of the real properties mortgaged to answer for the debts
contracted by said central with the Philippine National Bank, for the risk incurred by said
properties upon being subjected to said mortgage lien, and the resolution in question the
defendant Mariano Lacson Ledesma was allotted the sum of P19,911.11, Philippine currency,
which sum, however, would not be payable until the month of January, 1930. That on
September 29, 1928, the Philippine National Bank brought an action against the defendant
Mariano Lacson Ledesma and his wife Concepcion Diaz for the recovery of a mortgage credit
which, together with interest thereon amounted to P853,729.49 on said date. Sometime later
that is, on January 2, 1929, the Philippine National Bank amended its complaint by including
the Bachrach Motor Co., Inc., as party defendant, among other, because they claim to have
some right to certain properties which are the subject matter of this complaint." Said case
bears No. 4706 of the Court of First Instance of Occidental Negros. That on January 30, 1929,
the defendant Bachrach Motor Co., Inc., file a general denial. That after due hearing the Court
of First Instance of Bacolod on September 3, 1930, rendered judgment in case No. 4706 of
said court in favor of the Philippine National Bank and against the defendant Mariano Lacson
Ledesma, sentencing the latter to pay the amount claimed by said bank and ordering, upon
68
failure to satisfy said amount, the sale at public auction of the real properties mortgaged under
the instrument of mortgage appearing on pages 18 to 32 of Annex D. That the real estate and
chattel mortgage deed in question (pages 18 to 32 of Annex D), marked as Exhibit G, was
among the exhibits presented in said case No. 4706 of the Court of First Instance of Occidental
Negros. That likewise, among the exhibit presented in said case No. 4706 of the Court of First
Instance of Occidental Negros, was Exhibit H which was a deed of mortgage of certain
carabaos belonging to the debtor Mariano Lacson Ledesma, executed by the latter in favor of
the Philippine National Bank on January 21, 1925. That in the decision rendered by the Court
of First Instance of Occidental Negros in case No. 4706 thereof, said court, referring to stock
certificates Nos. 145 and 147 of the Talisay-Silay Milling Co., Inc., which were pledged or
mortgaged by virtue of Exhibit G of said No. 4706, rendered the following ruling: "(e) With
respect to the chattel mortgaged bank, which are described in Exhibit G and H, the Philippine
National Bank, as soon as this judgment becomes final, shall have authority to sell them in
accordance with the provisions of section 23 of Act No. 2938, immediately informing this court
of whatever action it may take in the premises." That during the pendency of case No. 4706 of
the Court of First Instance of Bacolod referred to in the foregoing paragraphs, the plaintiff
Bachrach Motor Co., Inc., on December 20, 1929, brought an action in the Court of First
Instance of Iloilo against the Talisay-Silay Milling Co., Inc., recover from it the sum of P13,850
against the bonus or dividend which, by virtue of the resolution of December 22, 1923, said
Central Talisay-Silay Milling Co., Inc., had declared in favor of the defendant Mariano Lacson
Ledesma as one of the owners of the hacienda which had been mortgaged to the Philippine
National Bank to secure the obligation of the Talisay-Silay Milling Co., Inc. in favor of said
bank. Copy of said complaint appears on pages 2 to 5 of the bill of exceptions in case No.
8136 of the Court of First Instance of Iloilo (G. R. No. 35223), Annex D of this stipulation of
facts. That on January 30, 1930, the Philippine National Bank sought permission to intervene in
said case No. 8136 of the Court of First Instance of Iloilo and after the permission had been
granted, said bank, on February 13, 1930, filed a complaint in intervention alleging that it had a
preferred right to said bonus granted by the central to the defendant Mariano Lacson Ledesma
as one of the owners of the haciendas which had been mortgaged to said bank to answer for
the obligations of the Central Talisay-Silay Milling Co., Inc., basing such allegation on the fact
that, as said properties were mortgaged to it by the debtor Mariano Lacson Ledesma, not
Talisay Milling Co., Inc., but also by virtue of the deed of August 9, 1923 (pages 18 to 32 of
Annex D) and said bonus being a civil fruit of the mortgaged lands, said bank was entitled to it
on the ground that the mortgage of August 9, 1923, had become due. That after the trial of civil
case No. 8136 of the Court of First Instance of Iloilo, said court, on December 8, 1930,
rendered judgment in favor of the plaintiff Bachrach Motor Co., Inc., Upon appeal, the Supreme
Court, on September 17, 1931, 1 affirmed the judgment of the lower court, holding that the
bonus had no immediate relation to the lands in question but merely a remote and accidental
one and, therefore, it was not a civil fruit of the real properties mortgaged to the Philippine
National Bank to secure the obligation of the Talisay-Silay Milling Co., Inc., being a mere
personal right of Mariano Lacson Ledesma. The decision of the Supreme Court published in
Volume 30, No. 104, of the Official Gazette, on August 29, 1932, is attached to this stipulation
of facts and marked Annex E. That on January 24, 1930, that Talisay-Silay Milling Co., Inc.,
issued stock certificate No. 772 for 3,600 shares, as stock dividend to Mariano Lacson
Ledesma, which certificate was ordered by Mariano Lacson Ledesma to be delivered to
Roman Lacson, attorney for the Philippine National Bank, by virtue of the letter of February 27,
1930, Annex G of this stipulation of facts, and of the letter of the Philippine National Bank dated
January 18, 1930, Annex G-1. Said 6,300 shares constituted the stock dividend allotted to
Mariano Lacson Ledesma for his 2,100 original shares in the Talisay-Silay Milling Co., Inc.,
which were given as pledge to the Philippine National Bank under the deed of mortgage
69
appearing on pages 18 to 32 of Annex D prior to the issuance of stock certificate No. 772, an
were covered by Stock Certificates Nos. 145, 146 and 147 of the Talisay-Silay Milling Co., Inc.
That stock certificate No. 772 was issued by virtue of resolution No. 4 of the general meeting of
stockholders of the Talisay-Silay Milling Co., Inc., which resolution is quote in paragraph 8 of
the complaint in this case. That in a letter of March 25, 1930, addressed by the Philippine
National Bank to the Talisay-Silay Milling Co., said bank informed the letter that the 6,300
shares represented by stock certificate No. 772 had been given by Mariano Lacson Ledesma
as pledge to the Philippine National Bank. Said letter is attached to this stipulation of facts as
Annex H. That said stock certificate No. 772 has continuously been in the possession of the
Philippine National Bank from February 27, 1930, to February 25, 1931, but like stock
certificates Nos. 145, 146 and 147, it was registered in the books of the Talisay-Silay Milling
Co. in the name of Mariano Lacson Ledesma. That on August 11, 1930, the plaintiff Bachrach
Motor Co., by virtue of an alias execution issued in case No. 31821 of the Court of First
Instance of Manila, attached all right, title to an interest which the defendant Mariano Lacson
Ledesma might have in Any bonus, dividend, shares of stock, money or other property
specially on the sum of P19,911.11 which the defendant is entitled to receive from the Talisay-
Silay Milling Co., Inc., by virtue of the fact that such defendant has mortgage his lands in favor
of the Philippine National Bank to guarantee the indebtedness of the Talisay-Silay Milling Co.,
Inc., or which such defendant is entitled to receive from the Talisay-Silay Milling Co., Inc., on
account of being stockholder in that corporation, or which he is entitle to receive from that
corporation for any other cause or pretext whatsoever." In connection with the proceedings and
attachment made notice of garnishment was served on the Talisay-Silay Milling Co., Inc., as
evidence by Annexes I and J of this stipulation of facts. That on February 5, 1931, the
provincial the is positive part of the decision rendered in civil case NO. 4706 of the Court of
First Instance of Occidental Negros, copy of which is attached to this stipulation of facts as
Annex I, sold at public auction not only the 2,100 share specified in the deed of August 9,
1923, but also the 6,300 shares covered by stock certificate No. 772, the sale of said shares
having been made by order and under the direction of the attachment creditor Philippine
National Bank. A copy of the certificate of sale marked Exhibit K is attached hereto. That on
February 25, 1931, the Talisay-Silay Milling Co., Inc., upon petition of the Philippine National
Bank, as shown by the letter dated February 19,1931, marked and attached to this stipulation
as Annex L, which letter was accompanied by the certificate of sale Exhibit K, issued stock
certificate No. 1155 representing 8,968 shares, which include the 6,300 shares formerly
represented by stock certificate No. 772 and the 2,100 shares formerly represented by stock
certificates Nos. 145, 146 and 147, the bank having acknowledged receipt of certificate No.
1155 in a letter of March 4, 1931, marked as Exhibit M. Attention is invited to the fact that of the
8,969 shares represented by stock certificate No. 1155, 568 shares formerly belonged to
Concepcion Diaz e Lacson wife of the defendant Mariano Lacson Ledesma, and of the 568
shares, 142 were mortgaged under the deed of August 9, 1923, and 426 were the stock
dividend that had corresponded to said 142 shares. That on the same date, February 25,1931,
Marino Lacson Ledesma endorsed the back of stock certificate No. 772 in favor of the
Philippine National Bank. Said stock certificate with the endorsement in question is attached to
this stipulation of facts and marked Annex N. That both on the date on which the garnishment
was carried out by the Bachrach Motor Co., that is, on August 11, 1930, and on the date on
which the 6,300 shares, covered by stock certificate No. 772, were sold, case No. 8136 of the
Court of First Instance of Iloilo (G. R. No. 35223) was still pending. That the amount of the
actual indebtedness of the defendant Mariano Lacson Ledesma to the plaintiff the Bachrach
Motor Co. is P21,377.34 with the interest and other sums specified in paragraph XV of the
complaint. That the real properties mortgaged to the Philippine National Bank were sold for
P300,000 Philippine currency; the mortgaged carabaos for P2,000 Philippine currency, and all
70
 the shares, that is, the 8,968 share for the sum of P90,000 Philippine currency, the bank
having been the highest bidder herein all these sales, there still remaining unpaid in civil case
No. 4796 of the Court of First Instance of Occidental Negros the sum of P695,421.74, as stated
in Annex 9. That the notices of garnishment issue by virtue of the execution in cases Nos.
31597 and 31821 of the Court of First Instance of Manila are the same notices of attachment
and garnishment mentioned in the complaint in the case No. 8136 of the Court of First Instance
of Iloilo and presented as evidence in said case, and are the same notices mentioned in this
case now submitted to the court for decision. That on March 20,1925, the Philippine National
Bank served notice on the Talisay-Silay Milling Co., Inc, of the pledge made by Mariano
Lacson Ledesma to said bank of the shares represented by stock certificates Nos. 145, 146
and 147, and on March 25th the Talisay-Silay Milling Co., Inc., acknowledged receipt thereof
and considered itself notified of said pledge, as evidenced by Annexes P and Q of this
stipulation of facts, That prior to the declaration of stock divided by virtue of resolution No. 4 of
the regular meeting of stockholders of the Talisay-Silay Milling Co., Inc., the shares of this
corporation were quote in private sales at P32 a share; and immediately after the declaration of
stock dividend, the quotation of said shares dropped by P7 or P8 a share, the same having
been P11.25 a share on the date of their sale at public auction. Upon this stipulation of facts,
the parties submit the case to the court for decision.

I. The plaintiff bases the preferred right invoked by it over the 6,300 stock dividends, certificate No.
772, on the garnishment made thereon by reason of the issuance of the alias execution in civil case
No. 31821 of the Court of First Instance of Manila, which garnishment was carried out on August 11,
1930. The plaintiff contends in its first assignment of error that these stock dividends were certificate
No. 772 thereof was delivered to the Philippine National Bank and when the Talisay-Silay Milling Co.,
Inc., entered them in its books in the name of said bank and issued certificate No. 1166 in favor of the
latter. The contention is unfounded because it appears that the stock dividends in question were
pledged to the bank prior to the garnishment and because certificate No. 772 was in the possession
of said bank from February 27, 1930. The reasons upon which this court base its opinion in declaring
that the stock dividends were pledge beforehand to the Philippine National Bank will be stated in the
discussion of the following assignment of error.

II. In the stipulation of facts, it appears stipulated by the parties that, by virtue of the letters of the
Philippine National Bank and having been so asked by Mariano Lacson Ledesma, certificate No. 772
covering the 6,300 stock dividends was delivered as security to Attorney Roman Lacson as
representative of the bank, on February 27, 1930, in view of the fact that the original shares covered
by certificate Nos. 145, 146 and 147 had been previously mortgaged to the same bank. On February
25, 1931, the Talisay-Silay Milling Co., Inc., in conformity with the letter of the Philippines National
Bank of the 19th of said month, cancelled certificate No. 772 and in lieu thereof issued certificate No.
1155 in favor of said bank, which certificate includes the 6,300 stock dividends, among other shares.
On the other hand, the garnishment obtained by the plaintiff, upon which it bases all its alleged
preferred right was notified to the parties and became effective on August 11, 1930, more than five
months after the delivery of certificate No. 772. The plaintiff, in its second assignment of error,
maintains that the pledge is ineffective as against it because evidence of its date was not made to
appear in a public instrument and concludes that its right to the 6,300 stock dividends is superior and
preferred. It is admitted that the delivery of the certificate in question and the pledge thereof were not
made to appear in a public instrument.

It is true, according to article 1865 of the Civil Code, that in order that a pledge may be effective as
against third person, evidence of its date must appear in a public instrument in addition to the delivery
of the thing pledged to the creditor. This provision has been interpreted in the sense that for the
71
contract to affect third person, it must appear in a public instrument in addition to delivery of the thing
pledged (Ocejo, Perez and Co., vs. International Banking Corporation, 37 Phil., 631: Tec Bi & Co. vs.
Chartered Bank of India, Australia and China, 41 Phil., 596; Te Pate vs. Ingersoll, 43 Phil., 394). It
cannot be denied, however, that section 4 of Act No. 1508, otherwise known as the Chattel Mortgage
Law, implicitly modified article 1865 of the Civil Code in the sense that a contract of pledge and that
of chattel mortgage, to be effective as against third persons, need not appear in public instruments
provided the thing pledged or mortgaged be delivered or placed in the possession of the creditor. In
the case of Mahoney vs. Tuason (39 Phil., 952, 958), where this doctrine was laid down, it was
stated; "From the foregoing provisions of the abovecited Act, it is inferred that the same does not
entirely repeal the provisions of the Civil Code, but only modify them in part and amplify them in
another, as may be seen from an examination of, and comparison between, the provisions of the Civil
Code regarding pledge and the abovequoted provisions of Act No. 1508. Article 1865 of the Civil
Code provides that no pledge shall be effective against a third person unless evidence of its date
appears in a public instrument. The provision of this article has, undoubtedly, been modified by
section 4 of the Chattel Mortgage Law, in so far as it provides that a chattel mortgage shall not be
valid against any person except the mortgagor, his executors or administrators, unless the
possession of the property is delivered to and retained by the mortgagee or unless the mortgage is
recorded in the office of the register of deeds of the province in which the mortgagor resides. From
the date the said Act No. 1508 was in force, a contract of pledge or chattel mortgage should be
deemed legally entered into and should produce all its effects and consequences, provided it
appears to have been in some manner perfected and that the things pledged have been delivered,
and in a contrary case, and even if the creditor has not received them or has not retained them in his
custody, provided that the contract of pledge or chattel mortgage appears in a notarial document and
is inscribed in the registry of deeds of the province." Therefore, this court holds that the pledge of the
6,300 stock dividends is valid against the plaintiff for the reason that the certificate was delivered to
the creditor bank, notwithstanding the fact that the contract does not appear in a public instrument.

The plaintiff further contends that the pledge could not legally exist because the certificate was not
the shares themselves, making it understood that a certificate of stock or of stock dividends can not
be the subject matter of the contract of pledge or of chattel mortgage. Neither is this contention
tenable. Certificates of stock or of stock dividends, under the Corporation Law, are quasi negotiable
instruments in the sense that they may be given in pledge or mortgage to secure an obligation. The
question is settled in this wise by the weight of American authorities and it is the modern doctrine of
general acceptance by the courts.

In view, however, of the fact that certificates of stock, while not negotiable in the sense of the
law merchant, like bills and notes, are so framed and dealt with as to be transferable, when
property endorsed, by mere delivery, and as they frequently convey, by estoppel against the
corporation or against prior holders, as good a title to the transferee as if they were negotiable,
and inasmuch as a large commercial use is made of such certificates as collateral security, and
it is to the public interest that such use should be simplify and facilitated by placing them as
nearly as possible on the plane of commercial paper, they are often spoken of and treated as
quasi negotiable, that is as having some of the attributes and partaking of the character of
negotiable instruments, in passing from hand to hand, especially where they are accompanied
by an assignment and power of attorney, executed in blank, to transfer them to anyone who
may obtain possession as holders, even though such assignment and power are under seal.
(14 C. J., 665, sec 1034; South Bend First Nat. Bank vs. Lanier, 20 Law. ed., 172; Weniger vs.
Success Min. Co., 227 Fedd., 548; Scott vs. Pequonnock Nat. Bank, 15 Fed., 494.)

72
III. In the third assignment of error, the plaintiff maintains that the court erred in holding that the stock
dividends are civil fruits or an extension of the original shares. This court deems it unnecessary to
determine whether or not the stock devidends are civil fruits or an extension of the original shares.
This point becomes immaterial after the case has been decided in the manner stated in the
discussion of the second assignment of error .

IV. In the forth assignment of error, the plaintiff contends that court erred in not declaring null and
void the sale of the 6,300 stock dividends in execution of the judgment rendered in favor of the
Philippine National Bank in civil case No. 4706 of the Court of First Instance of Occidental Negros.
Inasmuch as this court has declared that the stock dividends in question were pledged to the bank, it
follows that the sale thereof in execution of said judgment is legal and valid.

V. In the fifth assignment of error, the plaintiff argues that the court erred in declaring the Philippine
National Bank's right to the stock dividends a preferred one. After it has been held that these stock
dividends had been pledged to the Philippine National Bank and that this contract was prior to the
garnishment of the plaintiff, it appear clear that the court violated no law in holding the right of the
Philippine National Bank, as pledgee, a superior one.

VI. The plaintiff assigns as sixth and last error committed by the court the fact of its having absolved
all the defendants. The case having been decided in favor of the Philippine National Bank, on the
grounds stated in passing upon the second assignment of error, the absolution of the defendants is
unavoidable, thereby making this last assignment of error likewise untenable.

For the foregoing consideration the appealed judgment is affirmed, with the costs of this instance to
the plaintiff-appellant. So ordered.

73
ENRIQUE RAZON, petitioner, vs. INTERMEDIATE APPELLATE COURT and VICENTE B.
CHUIDIAN, in his capacity as Administrator of the Estate of the Deceased JUAN T.
CHUIDIAN, respondents. G.R. No. 74306 March 16, 1992

VICENTE B. CHUIDIAN, petitioner, vs. INTERMEDIATE APPELLATE COURT, ENRIQUE RAZ0N,

and E. RAZON, INC., respondents. G.R. No. 74315 March 16, 1992 GUTIERREZ, JR., J.:

The main issue in these consolidated petitions centers on the ownership of 1,500 shares of stock in
E. Razon, Inc. covered by Stock Certificate No. 003 issued on April 23, 1966 and registered under
the name of Juan T. Chuidian in the books of the corporation. The then Court of First Instance of
Manila, now Regional Trial Court of Manila, declared that Enrique Razon, the petitioner in G.R. No.
74306 is the owner of the said shares of stock. The then Intermediate Appellate Court, now Court of
Appeals, however, reversed the trial court's decision and ruled that Juan T. Chuidian, the deceased
father of petitioner Vicente B. Chuidian in G.R. No. 74315 is the owner of the shares of stock. Both
parties filed separate motions for reconsideration. Enrique Razon wanted the appellate court's
decision reversed and the trial court's decision affirmed while Vicente Chuidian asked that all cash
and stock dividends and all the pre-emptive rights accruing to the 1,500 shares of stock be ordered
delivered to him. The appellate court denied both motions. Hence, these petitions.

The relevant Antecedent facts are as follows:

In his complaint filed on June 29, 1971, and amended on November 16, 1971, Vicente B.
Chuidian prayed that defendants Enrique B. Razon, E. Razon, Inc., Geronimo Velasco,
Francisco de Borja, Jose Francisco, Alfredo B. de Leon, Jr., Gabriel Llamas and Luis M.
de Razon be ordered to deliver certificates of stocks representing the shareholdings of
the deceased Juan T. Chuidian in the E. Razon, Inc. with a prayer for an order to restrain
the defendants from disposing of the said shares of stock, for a writ of preliminary
attachment v. properties of defendants having possession of shares of stock and for
receivership of the properties of defendant corporation . . .

In their answer filed on June 18, 1973, defendants alleged that all the shares of stock in
the name of stockholders of record of the corporation were fully paid for by defendant,
Razon; that said shares are subject to the agreement between defendants and
incorporators; that the shares of stock were actually owned and remained in the
possession of Razon. Appellees also alleged . . . that neither the late Juan T. Chuidian
nor the appellant had paid any amount whatsoever for the 1,500 shares of stock in
question . . .

The evidence of the plaintiff shown that he is the administrator of the intestate estate of
Juan Telesforo Chuidian in Special Proceedings No. 71054, Court of First Instance of
Manila.

Sometime in 1962, Enrique Razon organized the E. Razon, Inc. for the purpose of
bidding for the arrastre services in South Harbor, Manila. The incorporators consisted of
Enrique Razon, Enrique Valles, Luisa M. de Razon, Jose Tuason, Jr., Victor Lim, Jose F.
Castro and Salvador Perez de Tagle.

On April 23, 1966, stock certificate No. 003 for 1,500 shares of stock of defendant
corporation was issued in the name of Juan T. Chuidian.

74
 On the basis of the 1,500 shares of stock, the late Juan T. Chuidian and after him, the
plaintiff-appellant, were elected as directors of E. Razon, Inc. Both of them actually
served and were paid compensation as directors of E. Razon, Inc.

From the time the certificate of stock was issued on April 1966 up to April 1971, Enrique
Razon had not questioned the ownership by Juan T. Chuidian of the shares of stock in
question and had not brought any action to have the certificate of stock over the said
shares cancelled.

The certificate of stock was in the possession of defendant Razon who refused to deliver
said shares to the plaintiff, until the same was surrendered by defendant Razon and
deposited in a safety box in Philippine Bank of Commerce.

Defendants allege that after organizing the E. Razon, Inc., Enrique Razon distributed
shares of stock previously placed in the names of the withdrawing nominal incorporators
to some friends including Juan T. Chuidian

Stock Certificate No. 003 covering 1,500 shares of stock upon instruction of the late
Chuidian on April 23, 1986 was personally delivered by Chuidian on July 1, 1966 to the
Corporate Secretary of Attorney Silverio B. de Leon who was himself an associate of the
Chuidian Law Office (Exhs. C & 11). Since then, Enrique Razon was in possession of
said stock certificate even during the lifetime of the late Chuidian, from the time the late
Chuidian delivered the said stock certificate to defendant Razon until the time (sic) of
defendant Razon. By agreement of the parties (sic) delivered it for deposit with the bank
under the joint custody of the parties as confirmed by the trial court in its order of August
7, 1971.

Thus, the 1,500 shares of stook under Stock Certificate No. 003 were delivered by the
late Chuidian to Enrique because it was the latter who paid for all the subscription on the
shares of stock in the defendant corporation and the understanding was that he
(defendant Razon) was the owner of the said shares of stock and was to have
possession thereof until such time as he was paid therefor by the other nominal
incorporators/stockholders (TSN., pp. 4, 8, 10, 24-25, 25-26, 28-31, 31-32, 60, 66-68,
July 22, 1980, Exhs. "C", "11", "13" "14"). (Ro11o — 74306, pp. 66-68)

In G.R. No. 74306, petitioner Enrique Razon assails the appellate court's decision on its alleged
misapplication of the dead man's statute rule under Section 20(a) Rule 130 of the Rules of Court.
According to him, the "dead man's statute" rule is not applicable to the instant case. Moreover, the
private respondent, as plaintiff in the case did not object to his oral testimony regarding the oral
agreement between him and the deceased Juan T. Chuidian that the ownership of the shares of
stock was actually vested in the petitioner unless the deceased opted to pay the same; and that the
petitioner was subjected to a rigid cross examination regarding such testimony.

Section 20(a) Rule 130 of the Rules of Court (Section 23 of the Revised Rules on Evidence) States:

Sec. 20. Disqualification by reason of interest or relationship — The following persons

cannot testify as to matters in which they are interested directly or indirectly, as herein
enumerated.

75
 (a) Parties or assignors of parties to a case, or persons in whose behalf a case is
prosecuted, against an executor or administrator or other representative of a deceased
person, or against a person of unsound mind, upon a claim or demand against the estate
of such deceased person or against such person of unsound mind, cannot testify as to
any matter of fact accruing before the death of such deceased person or before such
person became of unsound mind." (Emphasis supplied)

The purpose of the rule has been explained by this Court in this wise:

The reason for the rule is that if persons having a claim against the estate of the
deceased or his properties were allowed to testify as to the supposed statements made
by him (deceased person), many would be tempted to falsely impute statements to
deceased persons as the latter can no longer deny or refute them, thus unjustly
subjecting their properties or rights to false or unscrupulous claims or demands. The
purpose of the law is to "guard against the temptation to give false testimony in regard to
the transaction in question on the part of the surviving party." (Tongco v. Vianzon, 50
Phil. 698; Go Chi Gun, et al. v. Co Cho, et al., 622 [1955])

The rule, however, delimits the prohibition it contemplates in that it is applicable to a case against the
administrator or its representative of an estate upon a claim against the estate of the deceased
person. (See Tongco v. Vianzon, 50 Phil. 698 [1927])

In the instant case, the testimony excluded by the appellate court is that of the defendant (petitioner
herein) to the affect that the late Juan Chuidian, (the father of private respondent Vicente Chuidian,
the administrator of the estate of Juan Chuidian) and the defendant agreed in the lifetime of Juan
Chuidian that the 1,500 shares of stock in E. Razon, Inc. are actually owned by the defendant unless
the deceased Juan Chuidian opted to pay the same which never happened. The case was filed by
the administrator of the estate of the late Juan Chuidian to recover shares of stock in E. Razon, Inc.
allegedly owned by the late Juan T. Chuidian.

It is clear, therefore, that the testimony of the petitioner is not within the prohibition of the rule. The
case was not filed against the administrator of the estate, nor was it filed upon claims against the
estate.

Furthermore, the records show that the private respondent never objected to the testimony of the
petitioner as regards the true nature of his transaction with the late elder Chuidian. The petitioner's
testimony was subject to cross-examination by the private respondent's counsel. Hence, granting that
the petitioner's testimony is within the prohibition of Section 20(a), Rule 130 of the Rules of Court, the
private respondent is deemed to have waived the rule. We ruled in the case of Cruz v. Court of
Appeals (192 SCRA 209 [1990]):

It is also settled that the court cannot disregard evidence which would ordinarily be
incompetent under the rules but has been rendered admissible by the failure of a party to
object thereto. Thus:

. . . The acceptance of an incompetent witness to testify in a civil suit, as well as the

allowance of improper questions that may be put to him while on the stand is a matter
resting in the discretion of the litigant. He may assert his right by timely objection or he
may waive it, expressly or by silence. In any case the option rests with him.
Once admitted, the testimony is in the case for what it is worth and the judge has no
76
 power to disregard it for the sole reason that it could have been excluded, if it had been
objected to, nor to strike it out on its own motion (Emphasis supplied). (Marella v. Reyes,
12 Phil. 1.)

The issue as to whether or not the petitioner's testimony is admissible having been settled, we now
proceed to discuss the fundamental issue on the ownership of the 1,500 shares of stock in E. Razon,
Inc.

E. Razon, Inc. was organized in 1962 by petitioner Enrique Razon for the purpose of participating in
the bidding for the arrastre services in South Harbor, Manila. The incorporators were Enrique Razon,
Enrique Valles, Luisa M. de Razon, Jose Tuazon, Jr., Victor L. Lim, Jose F. Castro and Salvador
Perez de Tagle. The business, however, did not start operations until 1966. According to the
petitioner, some of the incorporators withdrew from the said corporation. The petitioner then
distributed the stocks previously placed in the names of the withdrawing nominal incorporators to
some friends, among them the late Juan T. Chuidian to whom he gave 1,500 shares of stock. The
shares of stock were registered in the name of Chuidian only as nominal stockholder and with the
agreement that the said shares of stock were owned and held by the petitioner but Chuidian was
given the option to buy the same. In view of this arrangement, Chuidian in 1966 delivered to the
petitioner the stock certificate covering the 1,500 shares of stock of E. Razon, Inc. Since then, the
Petitioner had in his possession the certificate of stock until the time, he delivered it for deposit with
the Philippine Bank of Commerce under the parties' joint custody pursuant to their agreement as
embodied in the trial court's order.

The petitioner maintains that his aforesaid oral testimony as regards the true nature of his agreement
with the late Juan Chuidian on the 1,500 shares of stock of E. Razon, Inc. is sufficient to prove his
ownership over the said 1,500 shares of stock.

The petitioner's contention is not correct.

In the case of Embassy Farms, Inc. v. Court of Appeals (188 SCRA 492 [1990]) we ruled:

. . . For an effective, transfer of shares of stock the mode and manner of transfer as
prescribed by law must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65).
As provided under Section 3 of Batas Pambansa Bilang, 68 otherwise known as the
Corporation Code of the Philippines, shares of stock may be transferred by delivery to
the transferee of the certificate properly indorsed. Title may be vested in the transferee
by the delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v.
Florendo, 144 SCRA 643). However, no transfer shall be valid, except as between the
parties until the transfer is properly recorded in the books of the corporation (Sec. 63,
Corporation Code of the Philippines; Section 35 of the Corporation Law)

In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc. are
in the name of the late Juan Chuidian in the books of the corporation. Moreover, the records show
that during his lifetime Chuidian was ellected member of the Board of Directors of the corporation
which clearly shows that he was a stockholder of the corporation. (See Section 30, Corporation
Code) From the point of view of the corporation, therefore, Chuidian was the owner of the 1,500
shares of stock. In such a case, the petitioner who claims ownership over the questioned shares of
stock must show that the same were transferred to him by proving that all the requirements for the
effective transfer of shares of stock in accordance with the corporation's by laws, if any, were

77
followed (See Nava v. Peers Marketing Corporation, 74 SCRA 65 [1976]) or in accordance with the
provisions of law.

The petitioner failed in both instances. The petitioner did not present any by-laws which could show
that the 1,500 shares of stock were effectively transferred to him. In the absence of the corporation's
by-laws or rules governing effective transfer of shares of stock, the provisions of the Corporation Law
are made applicable to the instant case.

The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be
properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of
the duly indorsed certificate of stock. (Section 35, Corporation Code) Since the certificate of stock
covering the questioned 1,500 shares of stock registered in the name of the late Juan Chuidian was
never indorsed to the petitioner, the inevitable conclusion is that the questioned shares of stock
belong to Chuidian. The petitioner's asseveration that he did not require an indorsement of the
certificate of stock in view of his intimate friendship with the late Juan Chuidian can not overcome the
failure to follow the procedure required by law or the proper conduct of business even among friends.
To reiterate, indorsement of the certificate of stock is a mandatory requirement of law for an effective
transfer of a certificate of stock.

Moreover, the preponderance of evidence supports the appellate court's factual findings that the
shares of stock were given to Juan T. Chuidian for value. Juan T. Chuidian was the legal counsel
who handled the legal affairs of the corporation. We give credence to the testimony of the private
respondent that the shares of stock were given to Juan T. Chuidian in payment of his legal services
to the corporation. Petitioner Razon failed to overcome this testimony.

In G.R. No. 74315, petitioner Vicente B. Chuidian insists that the appellate court's decision declaring
his deceased father Juan T. Chuidian as owner of the 1,500 shares of stock of E. Razon, Inc. should
have included all cash and stock dividends and all the pre-emptive rights accruing to the said 1,500
shares of stock. The petition is impressed with merit.

The cash and stock dividends and all the pre-emptive rights are all incidents of stock ownership.

The rights of stockholders are generally enumerated as follows:

. . . [F]irst, to have a certificate or other evidence of his status as stockholder issued to

him; second, to vote at meetings of the corporation; third, to receive his proportionate
share of the profits of the corporation; and lastly, to participate proportionately in the
distribution of the corporate assets upon the dissolution or winding up. (Purdy's Beach
on Private Corporations, sec. 554) (Pascual v. Del Saz Orozco, 19 Phil. 82, 87)

WHEREFORE, judgment is rendered as follows:

a) In G.R. No. 74306, the petition is DISMISSED. The questioned decision and resolution of the then
Intermediate Appellate Court, now the Court of Appeals, are AFFIRMED. Costs against the petitioner.
b) In G.R. No. 74315, the petition is GRANTED. The questioned Resolution insofar as it denied the
petitioner's motion to clarify the dispositive portion of the decision of the then Intermediate Appellate
Court, now Court of Appeals is REVERSED and SET ASIDE. The decision of the appellate court is
MODIFIED in that all cash and stock dividends as, well as all pre-emptive rights that have accrued
and attached to the 1,500 shares in E. Razon, Inc., since 1966 are declared to belong to the estate of
Juan T. Chuidian. SO ORDERED.

78
NORA A. BITONG, petitioner, vs. COURT OF APPEALS (FIFTH DIVISION), EUGENIA D.
APOSTOL, JOSE A. APOSTOL, MR. & MS. PUBLISHING CO., LETTY J. MAGSANOC, AND
ADORACION G. NUYDA, respondents. G.R. No. 123553 July 13, 1998
(CA-G.R. No. 33291) July 13, 1998

NORA A. BITONG, petitioner, vs. COURT OF APPEALS (FIFTH DIVISION) and EDGARDO B.
ESPIRITU, respondents. (CA-G.R. No. 33873) July 13, 1998 BELLOSILLO, J.:

These twin cases originated from a derivative suit 1 filed by petitioner Nora A. Bitong before
the Securities and Exchange Commission (SEC hereafter) allegedly for the benefit of private
respondent Mr. & Ms. Publishing Co., Inc. (Mr. & Ms. hereafter), among others, to hold respondent
spouses Eugenia D. Apostol and Jose A. Apostol 2 liable for fraud, misrepresentation, disloyalty,
evident bad faith, conflict of interest and mismanagement in directing the affairs of Mr. & Ms. to the
damage and prejudice of Mr. & Ms. and its stockholders, including petitioner.

Alleging before the SEC that she had been the Treasurer and a Member of the Board of Directors of
Mr. & Ms. from the time it was incorporated on 29 October 1976 to 11 April 1989, and was the
registered owner of 1,000 shares of stock out of the 4,088 total outstanding shares, petitioner
complained of irregularities committed from 1983 to 1987 by Eugenia D. Apostol, President and
Chairperson of the Board of Directors. Petitioner claimed that except for the sale of the
name Philippine Inquirer to Philippine Daily Inquirer (PDI hereafter) all other transactions and
agreements entered into by Mr. & Ms. with PDI were not supported by any bond and/or stockholders'
resolution. And, upon instructions of Eugenia D. Apostol, Mr. & Ms. made several cash advances to
PDI on various occasions amounting to P3.276 million. On some of these borrowings PDI paid no
interest whatsoever. Despite the fact that the advances made by Mr. & Ms. to PDI were booked as
advances to an affiliate, there existed no board or stockholders' resolution, contract nor any other
document which could legally authorize the creation of and support to an affiliate.

Petitioner further alleged that respondents Eugenia and Jose Apostol were stockholders, directors
and officers in both Mr. & Ms. and PDI. In fact on 2 May 1986 respondents Eugenia D. Apostol,
Leticia J. Magsanoc and Adoracion G. Nuyda subscribed to PDI shares of stock at P50,000.00 each
or a total of P150,000.00. The stock subscriptions were paid for by Mr. & Ms. and initially treated, as
receivables from officers and employees. But, no payments were ever received from respondents,
Magsanoc and Nuyda.

The petition principally sought to (a) enjoin respondents Eugenia D. Apostol and Jose A. Apostol from
further acting as president-director and director, respectively, of Mr. & Ms. and disbursing any money
or funds except for the payment of salaries and similar expenses in the ordinary course of business,
and from disposing of their Mr. & Ms. shares; (b) enjoin respondents Apostol spouses, Magsanoc and
Nuyda from disposing of the PDI shares of stock registered in their names; (c) compel respondents
Eugenia and Jose Apostol to account for and reconvey all profits and benefits accruing to them as a
result of their improper and fraudulent acts; (d) compel respondents Magsanoc and Nuyda to account
for and reconvey to Mr. & Ms. all shares of stock paid from cash advances from it and all accessions
or fruits thereof; (e) hold respondents Eugenia and Jose Apostol liable for damages suffered by Mr. &
Ms. and the other stockholders, including petitioner, by reason of their improper and fraudulent acts;
(f) appoint a management committee for Mr. & Ms. during the pendency of the suit to prevent further
dissipation and loss of its assets and funds as well as paralyzation of business operations; and, (g)
direct the management committee for Mr. & Ms. to file the necessary action to enforce its rights
against PDI and other third parties.

79
Private respondents Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms., on the other hand, refuted
the allegations of petitioner by starting with a narration of the beginnings of Mr. & Ms. They recounted
that on 9 March 1976 Ex Libris Publishing Co., Inc. (Ex Libris hereafter) was incorporated for the
purpose of publishing a weekly magazine. Its original principal stockholders were spouses Senator
Juan Ponce Enrile (then Minister of National Defense) and Cristina Ponce Enrile through Jaka
Investments Corporation (JAKA hereafter), and respondents Eugenia and Jose Apostol. When Ex
Libris suffered financial difficulties, JAKA and the Apostols, together with new investors Luis
Villafuerte and Ramon Siy, restructured Ex Libris by organizing a new corporation known as Mr. &
Ms.

The original stockholders of Mr. & Ms., i.e., JAKA, Luis Villafuerte, Ramon Siy, the Apostols and Ex
Libris continued to be virtually the same up to 1989. Thereafter it was agreed among them that, they
being close friends, Mr. & Ms. would be operated as a partnership or a close corporation; respondent
Eugenia D. Apostol would manage the affairs of Mr. & Ms.; and, no shares of stock would be sold to
third parties without first offering the shares to the other stockholders so that transfers would be
limited to and only among the original stockholders.

Private respondents also asserted that respondent Eugenia D. Apostol had been informing her
business partners of her actions as manager, and obtaining their advice and consent. Consequently
the other stockholders consented, either expressly or impliedly, to her management. They offered no
objections. As a result, the business prospered. Thus, as shown in a statement prepared by the
accounting firm Punongbayan and Araullo, there were increases from 1976 to 1988 in the total assets
of Mr. & Ms. from P457,569.00 to P10,143,046.00; in the total stockholders' equity from P203,378.00
to P2,324,954.00; and, in the net sales, from P301,489.00 to P16,325,610.00. Likewise, cash
dividends were distributed and received by the stockholders.

Private respondents further contended that petitioner, being merely a holder-in-trust of JAKA shares,
only represented and continued to represent JAKA in the board. In the beginning, petitioner
cooperated with and assisted the management until mid-1986 when relations between her and her
principals on one hand, and respondent Eugenia D. Apostol on the other, became strained due to
political differences. Hence from mid-1986 to mid-1988 petitioner refused to speak with respondent
Eugenia D. Apostol, and in 1988 the former became openly critical of the management of the latter.
Nevertheless, respondent Eugenia D. Apostol always made available to petitioner and her
representatives all the books of the corporation.

Private respondents averred that all the PDI shares owned by respondents Eugenia and Jose
Apostol were acquired through their own private funds and that the loan of P750,000.00 by PDI from
Mr. & Ms. had been fully paid with 20% interest per annum. And, it was PDI, not Mr. & Ms., which
loaned off P250,000.00 each to respondents Magsanoc and Nuyda. Private respondents further
argued that petitioner was not the true party to this case, the real party being JAKA which continued
to be the true stockholder of Mr. & Ms.; hence, petitioner did not have the personality to initiate and
prosecute the derivative suit which, consequently, must be dismissed.

On 6 December 1990, the SEC Hearing Panel 3 issued a writ of preliminary injunction enjoining
private respondents from disbursing any money except for the payment of salaries and other similar
expenses in the regular course of business. The Hearing Panel also enjoined respondent Apostol
spouses, Nuyda and Magsanoc from disposing of their PDI shares, and further ruled —

. . . respondents' contention that petitioner is not entitled to the provisional reliefs prayed
for because she is not the real party in interest . . . is bereft of any merit. No less than
80
 respondents' Amended Answer, specifically paragraph V, No. 8 on Affirmative
Allegations/Defenses states that "The petitioner being herself a minor stockholder and
holder-in-trust of JAKA shares represented and continues to represent JAKA in the
Board." This statement refers to petitioner sitting in the board of directors of Mr. & Ms. in
two capacities, one as a minor stockholder and the other as the holder in trust of the
shares of JAKA in Mr. & Ms. Such reference alluded to by the respondents indicates an
admission on respondents' part of the petitioner's legal personality to file a derivative suit
for the benefit of the respondent Mr. & Ms. Publishing Co., Inc.

The Hearing Panel however denied petitioner's prayer for the constitution of a management
committee.

On 25 March 1991 private respondents filed a Motion to Amend Pleadings to Conform to

Evidence alleging that the issue of whether petitioner is the real party-in-interest had been tried by
express or implied consent of the parties through the admission of documentary exhibits presented
by private respondents proving that the real party-in-interest was JAKA, not petitioner Bitong. As
such, No. 8, par. V (Affirmative Allegations/Defenses), Answer to the Amended Petition, was
stipulated due to inadvertence and excusable mistake and should be amended. On 10 October 1991
the Hearing Panel denied the motion for amendment.

Petitioner testified at the trial that she became the registered and beneficial owner of 997 shares of
stock of Mr. & Ms. out of the 4,088 total outstanding shares after she acquired them from JAKA
through a deed of sale executed on 25 July 1983 and recorded in the Stock and Transfer Book of Mr.
& Ms. under Certificate of Shares of Stock No. 008. She pointed out that Senator Enrile decided that
JAKA should completely divest itself of its holdings in Mr. & Ms. and this resulted in the sale to her of
JAKA's interest and holdings in that publishing firm.

Private respondents refuted the statement of petitioner that she was a stockholder of Mr. & Ms. since
25 July 1983 as respondent Eugenia D. Apostol signed Certificate of Stock No. 008 only on 17 March
1989, and not on 25 July 1983. Respondent Eugenia D. Apostol explained that she stopped using
her long signature (Eugenia D. Apostol) in 1987 and changed it to E.D. Apostol, the signature which
appeared on the face of Certificate of Stock No. 008 bearing the date 25 July 1983. And, since the
Stock and Transfer Book which petitioner presented in evidence was not registered with the SEC, the
entries therein including Certificate of Stock No. 008 were fraudulent. Respondent Eugenia D.
Apostol claimed that she had not seen the Stock and Transfer Book at anytime until 21 March 1989
when it was delivered by petitioner herself to the office of Mr. & Ms., and that petitioner repeatedly
referred to Senator Enrile as "my principal" during the Mr. & Ms. board meeting of 22 September
1988, seven (7) times no less.

On 3 August 1993, after trial on the merits, the SEC Hearing Panel dismissed the derivative suit filed
by petitioner and dissolved the writ of preliminary injunction barring private respondents from
disposing of their PDI shares and any of Mr. & Ms. assets. The Hearing Panel ruled that there was no
serious mismanagement of Mr. & Ms. which would warrant drastic corrective measures. It gave
credence to the assertion of respondent Eugenia D. Apostol that Mr. & Ms. was operated like a close
corporation where important matters were discussed and approved through informal consultations at
breakfast conferences. The Hearing Panel also concluded that while the evidence presented tended
to show that the real party-in-interest indeed was JAKA and/or Senator Enrile, it viewed the real issue
to be the alleged mismanagement, fraud and conflict of interest on the part of respondent Eugenia D.
Apostol, and allowed petitioner to prosecute the derivative suit if only to resolve the real issues.
Hence, for this purpose, the Hearing Panel considered petitioner to be the real party-in-interest.
81
On 19 August 1993 respondent Apostol spouses sold the PDI shares registered in the name of their
holding company, JAED Management Corporation, to Edgardo B. Espiritu. On 25 August 1993
petitioner Bitong appealed to the SEC En Banc.

On 24 January 1994 the SEC En Banc 4 reversed the decision of the Hearing Panel and, among
others, ordered private respondents to account for, return and deliver to Mr. & Ms. any and all funds
and assets that they disbursed from the coffers of the corporation including shares of stock, profits,
dividends and/or fruits that they might have received as a result of their investment in PDI, including
those arising from the P150,000.00 advanced to respondents Eugenia D. Apostol, Leticia J.
Magsanoc and Adoracion G. Nuyda; account for and return any profits and fruits of all amounts
irregularly or unlawfully advanced to PDI and other third persons; and, cease and desist from
managing the affairs of Mr. & Ms. for reasons of fraud, mismanagement, disloyalty and conflict of
interest.

The SEC En Banc also declared the 19 August 1993 sale of the PDI shares of JAED Management
Corporation to Edgardo B. Espiritu to be tainted with fraud, hence, null and void, and considered Mr.
& Ms. as the true and lawful owner of all the PDI shares acquired by respondents Eugenia D.
Apostol, Magsanoc and Nuyda. It also declared all subsequent transferees of such shares as
trustees for the benefit of Mr. & Ms. and ordered them to forthwith deliver said shares to Mr. & Ms.

Consequently, respondent Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms. filed a petition for
review before respondent Court of Appeals, docketed as CA-GR No. SP 33291, while respondent
Edgardo B. Espiritu filed a petition for certiorari and prohibition also before respondent Court of
Appeals, docketed as CA-GR No. SP 33873. On 8 December 1994 the two (2) petitions were
consolidated.

On 31 August 1995 respondent appellate court rendered a decision reversing the SEC En Banc and
held that from the evidence on record petitioner was not the owner of any share of stock in Mr. & Ms.
and therefore not the real party-in-interest to prosecute the complaint she had instituted against
private respondents. Accordingly, petitioner alone and by herself as an agent could not file a
derivative suit in behalf of her principal. For not being the real party-in-interest, petitioner's complaint
did not state a cause of action, a defense which was never waived; hence, her petition should have
been dismissed. Respondent appellate court ruled that the assailed orders of the SEC were issued in
excess of jurisdiction, or want of it, and thus were null and void. 5 On 18 January 1996, petitioner's
motion for reconsideration was denied for lack of merit.

Before this Court, petitioner submits that in paragraph 1 under the caption "I. The Parties" of
her Amended Petition before the SEC, she stated that she was a stockholder and director of Mr. &
Ms. In par. 1 under the caption "II. The Facts" she declared that she "is the registered owner of 1,000
shares of stock of Mr. & Ms. out of the latter's 4,088 total outstanding shares" and that she was a
member of the Board of Directors of Mr. & Ms. and treasurer from its inception until 11 April 1989.
Petitioner contends that private respondents did not deny the above allegations in their answer and
therefore they are conclusively bound by this judicial admission. Consequently, private respondents'
admission that petitioner has 1,000 shares of stock registered in her name in the books of Mr. & Ms.
forecloses any question on her status and right to bring a derivative suit on behalf of Mr. & Ms.

Not necessarily. A party whose pleading is admitted as an admission against interest is entitled to
overcome by evidence the apparent inconsistency, and it is competent for the party against whom the
pleading is offered to show that the statements were inadvertently made or were made under a
mistake of fact. In addition, a party against whom a single clause or paragraph of a pleading is
82
offered may have the right to introduce other paragraphs which tend to destroy the admission in the
paragraph offered by the adversary. 6

The Amended Petition before the SEC alleges —

I. THE PARTIES

1. Petitioner is a stockholder and director of Mr. & Ms. . . . .

II. THE FACTS

1. Petitioner is the registered owner of 1,000 shares of stock of Mr. & Ms. out of the
latter's 4,088 total outstanding shares. Petitioner, at all times material to this petition, is a
member of the Board of Directors of Mr. & Ms. and from the inception of Mr. & Ms. until
11 April 1989 was its treasurer . . .

On the other hand, the Amended Answer to the Amended Petition states —

I. PARTIES

1. Respondents admit the allegations contained in Caption I, pars. 1 to 4 of the Petition

referring to the personality, addresses and capacity of the parties to the petition except .
. . but qualify said admission insofar as they are limited, qualified and/or expanded by
allegations in the Affirmative Allegations/Defenses . . .

II. THE FACTS

1. Respondents admit paragraph 1 of the Petition, but qualify said admission as to the
beneficial ownership of the shares of stock registered in the name of the petitioner, the
truth being as stated in the Affirmative Allegations/Defenses of this Answer . . .

V. AFFIRMATIVE ALLEGATIONS/DEFENSES

Respondents respectfully allege by way of Affirmative Allegations/Defenses, that . . . .

3. Fortunately, respondent Apostol was able to convince Mr. Luis Villafuerte to take
interest in the business and he, together with the original investors, restructured the Ex
Libris Publishing Company by organizing a new corporation known as Mr. & Ms.
Publishing Co., Inc. . . . Mr. Luis Villafuerte contributed his own P100,000.00. JAKA and
respondent Jose Z. Apostol, original investors of Ex Libris contributed P100,000.00
each; Ex Libris Publishing Company was paid 800 shares for the name of Mr. & Ms.
magazine and goodwill. Thus, the original stockholders of respondent Mr. & Ms. were:

Cert./No./Date Name of Stockholder No. of Shares %

001-9-15-76 JAKA Investments Corp. 1,000 21%

002-9-15-76 Luis Villafuerte 1,000 21%

003-9-15-76 Ramon L. Siy 1,000 21%

83
 004-9-15-76 Jose Z. Apostol 1,000 21%

005-9-15-76 Ex Libris Publishing Co. 800 16%

—— ——

4,800 96%

4. The above-named original stockholders of respondent Mr. & Ms. continue to be

virtually the same stockholders up to this date . . . .

8. The petitioner being herself a minor stockholder and holder-in-trust of JAKA shares,
represented and continues to represent JAKA in the Board . . . .

21. Petitioner Nora A. Bitong is not the true party to this case, the true party being JAKA
Investments Corporation which continues to be the true stockholder of respondent Mr. &
Ms. Publishing Co., Inc., consequently, she does not have the personality to initiate and
prosecute this derivative suit, and should therefore be dismissed . . . .

The answer of private respondents shows that there was no judicial admission that petitioner was a
stockholder of Mr. & Ms. to entitle her to file a derivative suit on behalf of the corporation. Where the
statements of the private respondents were qualified with phrases such as, "insofar as they are
limited, qualified and/or expanded by," "the truth being as stated in the Affirmative
Allegations/Defenses of this Answer" they cannot be considered definite and certain enough, cannot
be construed as judicial admissions. 7

More so, the affirmative defenses of private respondents directly refute the representation of
petitioner that she is a true and genuine stockholder of Mr. & Ms. by stating unequivocally that
petitioner is not the true party to the case but JAKA which continues to be the true stockholder of Mr.
& Ms. In fact, one of the reliefs which private respondents prayed for was the dismissal of the petition
on the ground that petitioner did not have the legal interest to initiate and prosecute the same.

When taken in its totality, the Amended Answer to the Amended Petition, or even the Answer to
the Amended Petition alone, clearly raises an issue as to the legal personality of petitioner to file the
complaint. Every alleged admission is taken as an entirety of the fact which makes for the one side
with the qualifications which limit, modify or destroy its effect on the other side. The reason for this is,
where part of a statement of a party is used against him as an admission, the court should weigh any
other portion connected with the statement, which tends to neutralize or explain the portion which is
against interest.

In other words, while the admission is admissible in evidence, its probative value is to be determined
from the whole statement and others intimately related or connected therewith as an integrated unit.
Although acts or facts admitted do not require proof and cannot be contradicted, however,
evidence aliunde can be presented to show that the admission was made through palpable
mistake. 8 The rule is always in favor of liberality in construction of pleadings so that the real matter in
dispute may be submitted to the judgment of the court. 9

Petitioner also argues that since private respondents failed to appeal the 6 December 1990 Order
and the 3 August 1993 Decision of the SEC Hearing Panel declaring that she was the real party-in-
interest and had legal personality to sue, they are now estopped from questioning her personality.

84
Not quite. The 6 December 1990 Order is clearly an interlocutory order which cannot be considered
as having finally resolved on the merits the issue of legal capacity of petitioner. The SEC Hearing
Panel discussed the issue of legal capacity solely for the purpose of ruling on the application for writ
of preliminary injunction as an incident to the main issues raised in the complaint. Being a mere
interlocutory order, it is not appealable.

For, an interlocutory order refers to something between the commencement and end of the suit which
decides some point or matter but it is not the final decision of the whole controversy. 10 Thus, even
though the 6 December 1990 Order was adverse to private respondents, they had the legal right and
option not to elevate the same to the SEC En Banc but rather to await the decision which resolves all
the issues raised by the parties and to appeal therefrom by assigning all errors that might have been
committed by the Hearing Panel.

On the other hand, the 3 August 1993 Decision of the Hearing Panel dismissing the derivative suit for
failure to prove the charges of mismanagement, fraud, disloyalty and conflict of interest and
dissolving the writ of preliminary injunction, was favorable to private respondents. Hence, they were
not expected to appeal therefrom.

In fact, in the 3 August 1993 Decision, the Hearing Panel categorically stated that the evidence
presented showed that the real party-in-interest was not petitioner Bitong but JAKA and/or Senator
Enrile. Petitioner was merely allowed to prosecute her complaint so as not to sidetrack "the real issue
to be resolved (which) was the allegation of mismanagement, fraud and conflict of interest allegedly
committed by respondent Eugenia D. Apostol." It was only for this reason that petitioner was
considered to be capacitated and competent to file the petition.

Accordingly, with the dismissal of the complaint of petitioner against private respondents, there was
no compelling reason for the latter to appeal to the SEC En Banc. It was in fact petitioner's turn as
the aggrieved party to exercise her right to appeal from the decision. It is worthy to note that even
during the appeal of petitioner before the SEC En Banc private respondents maintained their
vigorous objection to the appeal and reiterated petitioner's lack of legal capacity to sue before the
SEC.

Petitioner then contends that she was a holder of the proper certificates of shares of stock and that
the transfer was recorded in the Stock and Transfer Book of Mr. & Ms. She invokes Sec. 63 of The
Corporation Code which provides that no transfer shall be valid except as between the parties until
the transfer is recorded in the books of the corporation, and upon its recording the corporation is
bound by it and is estopped to deny the fact of transfer of said shares. Petitioner alleges that even in
the absence of a stock certificate, a stockholder solely on the strength of the recording in the stock
and transfer book can exercise all the rights as stockholder, including the right to file a derivative suit
in the name of the corporation. And, she need not present a separate deed of sale or transfer in her
favor to prove ownership of stock.

Sec. 63 of The Corporation Code expressly provides —

Sec. 63. Certificate of stock and transfer of shares. — The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or
vice president, countersigned by the secretary or assistant secretary, and sealed with
the seal of the corporation shall be issued in accordance with the by-laws. Shares of
stock so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person
85
 legally authorized to make the transfer. No transfer however shall be valid except as
between the parties until the transfer is recorded in the books of the corporation showing
the names of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred . . . .

This provision above quoted envisions a formal certificate of stock which can be issued only upon
compliance with certain requisites. First, the certificates must be signed by the president or vice-
president, countersigned by the secretary or assistant secretary, and sealed with the seal of the
corporation. A mere typewritten statement advising a stockholder of the extent of his ownership in a
corporation without qualification and/or authentication cannot be considered as a formal certificate of
stock. 11 Second, delivery of the certificate is an essential element of its issuance. Hence, there is no
issuance of a stock certificate where it is never detached from the stock books although blanks
therein are properly filled up if the person whose name is inserted therein has no control over the
books of the company. 12 Third, the par value, as to par value shares, or the full subscription as to no
par value shares, must first be fully paid. Fourth, the original certificate must be surrendered where
the person requesting the issuance of a certificate is a transferee from a stockholder.

The certificate of stock itself once issued is a continuing affirmation or representation that the stock
described therein is valid and genuine and is at least prima facie evidence that it was legally issued in
the absence of evidence to the contrary. However, this presumption may be rebutted. 13 Similarly,
books and records of a corporation which include even the stock and transfer book are generally
admissible in evidence in favor of or against the corporation and its members to prove the corporate
acts, its financial status and other matters including one's status as a stockholder. They are ordinarily
the best evidence of corporate acts and proceedings.

However, the books and records of a corporation are not conclusive even against the corporation but
are prima facie evidence only. Parol evidence may be admitted to supply omissions in the records,
explain ambiguities, or show what transpired where no records were kept, or in some cases where
such records were contradicted. 14 The effect of entries in the books of the corporation which purport
to be regular records of the proceedings of its board of directors or stockholders can be destroyed by
testimony of a more conclusive character than mere suspicion that there was an irregularity in the
manner in which the books were kept. 15

The foregoing considerations are founded on the basic principle that stock issued without authority
and in violation of law is void and confers no rights on the person to whom it is issued and subjects
him to no liabilities. 16 Where there is an inherent lack of power in the corporation to issue the stock,
neither the corporation nor the person to whom the stock is issued is estopped to question its validity
since an estopped cannot operate to create stock which under the law cannot have existence. 17

As found by the Hearing Panel and affirmed by respondent Court of Appeals, there is overwhelming
evidence that despite what appears on the certificate of stock and stock and transfer book, petitioner
was not a bona fide stockholder of Mr. & Ms. before March 1989 or at the time the complained acts
were committed to qualify her to institute a stockholder's derivative suit against private respondents.
Aside from petitioner's own admissions, several corporate documents disclose that the true party-in-
interest is not petitioner but JAKA.

Thus, while petitioner asserts in her petition that Certificate of Stock No. 008 dated 25 July 1983 was
issued in her name, private respondents argue that this certificate was signed by respondent Eugenia
D. Apostol as President only in 1989 and was fraudulently antedated by petitioner who had
possession of the Certificate Book and the Stock and Transfer Book. Private respondents stress that
86
petitioner's counsel entered into a stipulation on record before the Hearing Panel that the certificate
was indeed signed by respondent Apostol only in 1989 and not in 1983.

In her reply, petitioner admits that while respondent Eugenia D. Apostol signed the Certificate of
Stock No. 008 in petitioner's name only in 1989, it was issued by the corporate secretary in 1983 and
that the other certificates covering shares in Mr. & Ms. had not yet been signed by respondent
Eugenia D. Apostol at the time of the filing of the complaint with the SEC although they were issued
years before.

Based on the foregoing admission of petitioner, there is no truth to the statement written in Certificate
of Stock No. 008 that the same was issued and signed on 25 July 1983 by its duly authorized officers
specifically the President and Corporate Secretary because the actual date of signing thereof was 17
March 1989. Verily, a formal certificate of stock could not be considered issued in contemplation of
law unless signed by the president or vice-president and countersigned by the secretary or assistant
secretary.

In this case, contrary to petitioner's submission, the Certificate of Stock No. 008 was only legally
issued on 17 March 1989 when it was actually signed by the President of the corporation, and not
before that date. While a certificate of stock is not necessary to make one a stockholder, e.g., where
he is an incorporator and listed as stockholder in the articles of incorporation although no certificate
of stock has yet been issued, it is supposed to serve as paper representative of the stock itself and of
the owner's interest therein. Hence, when Certificate of Stock No. 008 was admittedly signed and
issued only on 17 March 1989 and not on 25 July 1983, even as it indicates that petitioner owns 997
shares of stock of Mr. & Ms., the certificate has no evidentiary value for the purpose of proving that
petitioner was a stockholder since 1983 up to 1989.

And even the factual antecedents of the alleged ownership by petitioner in 1983 of shares of stock of
Mr. & Ms. are indistinctive if not enshrouded in inconsistencies. In her testimony before the Hearing
Panel, petitioner said that early in 1983, to relieve Mr. & Ms. from political pressure, Senator Enrile
decided to divest the family holdings in Mr. & Ms. as he was then part of the government and Mr. &
Ms. was evolving to be an opposition newspaper. The JAKA shares numbering 1,000 covered by
Certificate of Stock No. 001 were thus transferred to respondent Eugenia D. Apostol in trust or in
blank. 18

Petitioner now claims that a few days after JAKA's shares were transferred to respondent Eugenia D.
Apostol, Senator Enrile sold to petitioner 997 shares of JAKA. For this purpose, a deed of sale was
executed and antedated to 10 May 1983. 19 This submission of petitioner is however contradicted by
the records which show that a deed of sale was executed by JAKA transferring 1,000 shares of Mr. &
Ms. to respondent Apostol on 10 May 1983 and not to petitioner. 20

Then Senator Enrile testified that in May or June 1983 he was asked at a media interview if his family
owned shares of stock in Mr. & Ms. Although he and his family were stockholders at that time he
denied it so as not to embarrass the magazine. He called up petitioner and instructed her to work out
the documentation of the transfer of shares from JAKA to respondent Apostol to be covered by a
declaration of trust. His instruction was to transfer the shares of JAKA in Mr. & Ms. and Ex Libris to
respondent Apostol as a nominal holder. He then finally decided to transfer the shareholdings to
petitioner. 21

When asked if there was any document or any written evidence of that divestment in favor of
petitioner, Senator Enrile answered that there was an endorsement of the shares of stock. He said
87
that there was no other document evidencing the assignment to petitioner because the stocks were
personal property that could be transferred even orally. 22 Contrary to Senator Enrile's testimony,
however, petitioner maintains that Senator Enrile executed a deed of sale in her favor.

A careful perusal of the records shows that neither the alleged endorsement of Certificate of Stock
No. 001 in the name of JAKA nor the alleged deed of sale executed by Senator Enrile directly in favor
of petitioner could have legally transferred or assigned on 25 July 1983 the shares of stock in favor of
petitioner because as of 10 May 1983 Certificate of Stock No. 001 in the name of JAKA was already
cancelled and a new one, Certificate of Stock No. 007, issued in favor of respondent Apostol by virtue
of a Declaration of Trust and Deed of Sale. 23

It should be emphasized that on 10 May 1983 JAKA executed, a deed of sale over 1,000 Mr. & Ms.
shares in favor of respondent Eugenio D. Apostol. On the same day, respondent Apostol signed a
declaration of trust stating that she was the registered owner of 1,000 Mr. & Ms. shares covered by
Certificate of Stock No. 007.

The declaration of trust further showed that although respondent Apostol was the registered owner,
she held the shares of stock and dividends which might be paid in connection therewith solely in trust
for the benefit of JAKA, her principal. It was also stated therein that being a trustee, respondent
Apostol agreed, on written request of the principal, to assign and transfer the shares of stock and any
and all such distributions or dividends unto the principal or such other person as the principal would
nominate or appoint.

Petitioner was well aware of this trust, being the person in charge of this documentation and being
one of the witnesses to the execution of this
document. 24 Hence, the mere alleged endorsement of Certificate of Stock No. 001 by Senator Enrile
or by a duly authorized officer of JAKA to effect the transfer of shares of JAKA to petitioner could not
have been legally feasible because Certificate of Stock No. 001 was already canceled by virtue of the
deed of sale to respondent Apostol.

And, there is nothing in the records which shows that JAKA had revoked the trust it reposed on
respondent Eugenia D. Apostol. Neither was there any evidence that the principal had requested her
to assign and transfer the shares of stock to petitioner. If it was true that the shares of stock covered
by Certificate of Stock No. 007 had been transferred to petitioner, the person who could legally
endorse the certificate was private respondent Eugenia D. Apostol, she being the registered owner
and trustee of the shares of stock covered by Certificate of Stock No. 007. It is a settled rule that the
trustee should endorse the stock certificate to validate the cancellation of her share and to have the
transfer recorded in the books of the corporation. 25

In fine, the records are unclear on how petitioner allegedly acquired the shares of stock of JAKA.
Petitioner being the chief executive officer of JAKA and the sole person in charge of all business and
financial transactions and affairs of JAKA 26 was supposed to be in the best position to show
convincing evidence on the alleged transfer of shares to her, if indeed there was a transfer.
Considering that petitioner's status is being questioned and several factual circumstances have been
presented by private respondents disproving petitioner's claim, it was incumbent upon her to submit
rebuttal evidence on the manner by which she allegedly became a stockholder. Her failure to do so
taken in the light of several substantial inconsistencies in her evidence is fatal to her case.

The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any
other person legally authorized to make the transfer shall be sufficient to effect the transfer of shares
88
only if the same is coupled with delivery. The delivery of the stock certificate duly endorsed by the
owner is the operative act of transfer of shares from the lawful owner to the new transferee.

Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must be delivery of the
stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer; and, (c) to be valid against third parties, the transfer
must be recorded in the books of the corporation. 27 At most, in the instant case, petitioner has
satisfied only the third requirement. Compliance with the first two requisites has not been clearly and
sufficiently shown.

Considering that the requirements provided under Sec. 63 of The Corporation Code should be
mandatorily complied with, the rule on presumption of regularity cannot apply. The regularity and
validity of the transfer must be proved. As it is, even the credibility of the stock and transfer book and
the entries thereon relied upon by petitioner to show compliance with the third requisite to prove that
she was a stockholder since 1983 is highly doubtful.

The records show that the original stock and transfer book and the stock certificate book of Mr. & Ms.
were in the possession of petitioner before their custody was transferred to the Corporate Secretary,
Atty. Augusto San Pedro. 28 On 25 May 1988, Assistant Corporate Secretary Renato Jose Unson
wrote Mr. & Ms. about the lost stock and transfer book which was also noted by the corporation's
external auditors, Punongbayan and Araullo, in their audit. Atty. Unson even informed respondent
Eugenia D. Apostol as President of Mr. & Ms. that steps would be undertaken to prepare and register
a new Stock and Transfer Book with the SEC. Incidentally, perhaps strangely, upon verification with
the SEC, it was discovered that the general file of the corporation with the SEC was missing. Hence,
it was even possible that the original Stock and Transfer Book might not have been registered at all.

On 20 October 1988 respondent Eugenia D. Apostol wrote Atty. Augusto San Pedro noting the
changes he had made in the Stock and Transfer Book without prior notice to the corporate
officers. 29 In the 27 October 1988 directors' meeting, respondent Eugenia D. Apostol asked about
the documentation to support the changes in the Stock and Transfer Book with regard to the JAKA
shares. Petitioner answered that Atty. San Pedro made the changes upon her instructions
conformably with established practice. 30

This simply shows that as of 1988 there still existed certain issues affecting the ownership of the
JAKA shares, thus raising doubts whether the alleged transactions recorded in the Stock and
Transfer Book were proper, regular and authorized. Then, as if to magnify and compound the
uncertainties in the ownership of the shares of stock in question, when the corporate secretary
resigned, the Stock and Transfer Book was delivered not to the corporate office where the book
should be kept but to petitioner. 31

That JAKA retained its ownership of its Mr. & Ms. shares was clearly shown by its receipt of the
dividends issued in December 1986. 32 This only means, very obviously, that Mr. & Ms. shares in
question still belonged to JAKA and not to petitioner. For, dividends are distributed to stockholders
pursuant to their right to share in corporate profits. When a dividend is declared, it belongs to the
person who is the substantial and beneficial owner of the stock at the time regardless of when the
distribution profit was earned. 33

Finally, this Court takes notice of the glaring and open admissions of petitioner made, not just seven
(7) but nine (9) times, during the 22 September 1988 meeting of the board of directors that the

89
Enriles were her principals or shareholders, as shown by the minutes thereof which she duly
signed 34 —

5. Mrs. E. Apostol explained to the Directors that through her efforts, the asset base of
the Company has improved and profits were realized. It is for this reason that the
Company has declared a 100% cash dividend in 1986. She said that it is up for the
Board to decide based on this performance whether she should continue to act as Board
Chairman or not. In this regard, Ms. N.A. Bitong expressed her recollection of how Ex-
Libris/Mr. & Ms. were organized and her participation for and on behalf of her principals,
as follows: She recalled that her principals were invited by Mrs. E. Apostol to invest in
Ex-Libris and eventually Mr. & Ms. The relationship between her principals and Mrs. E.
Apostol made it possible for the latter to have access to several information concerning
certain political events and issues. In many instances, her principals supplied first hand
and newsworthy information that made Mr. & Ms. a popular
paper . . . .

6. According to Ms. Bitong, her principals were instrumental in helping Mr. & Ms. survive
during those years that it was cash strapped . . . . Ms. N.A. Bitong pointed out that the
practice of using the former Minister's influence and stature in the government is one
thing which her principals themselves are strongly against . . . .

7. . . . . At this point, Ms. N. Bitong again expressed her recollection of the subject matter
as follows: (a) Mrs. E. Apostol, she remembers, brought up the concept of a cooperative-
ran newspaper company in one of her breakfast session with her principals sometime
during the end of 1985. Her principals when asked for an opinion, said that they
recognized the concept as something very noble and visible . . . . Then Ms. Bitong asked
a very specific question — "When you conceptualized Ex-Libris and Mr. & Ms., did you
not think of my shareholders the Ponce Enriles as liabilities? How come you associated
yourself with them then and not now? What is the difference?" Mrs. Apostol did not
answer the question.

The admissions of a party against his interest inscribed upon the record books of a corporation are
competent and persuasive evidence against him. 35 These admissions render nugatory any argument
that petitioner is a bona fide stockholder of Mr. & Ms. at any time before 1988 or at the time the acts
complained of were committed. There is no doubt that petitioner was an employee of JAKA as its
managing officer, as testified to by Senator Enrile himself. 36 However, in the absence of a special
authority from the board of directors of JAKA to institute a derivative suit for and in its behalf,
petitioner is disqualified by law to sue in her own name. The power to sue and be sued in any court
by a corporation even as a stockholder is lodged in the board of directors that exercises its corporate
powers and not in the president or officer thereof. 37

It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust, not of
mere error of judgment or abuse of discretion, and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly
upon the stockholders. 38 The stockholder's right to institute a derivative suit is not based on any
express provision of The Corporation Code but is impliedly recognized when the law makes
corporate directors or officers liable for damages suffered by the corporation and its stockholders for
violation of their fiduciary duties.

90
Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets because
of a special injury to him for which he is otherwise without redress. 39 In effect, the suit is an action for
specific performance of an obligation owed by the corporation to the stockholders to assist its rights
of action when the corporation has been put in default by the wrongful refusal of the directors or
management to make suitable measures for its protection. 40

The basis of a stockholder's suit is always one in equity. However, it cannot prosper without first
complying with the legal requisites for its institution. The most important of these is the bona
fide ownership by a stockholder of a stock in his own right at the time of the transaction complained
of which invests him with standing to institute a derivative action for the benefit of the corporation. 41

WHEREFORE, the petition is DENIED. The 31 August 1995 Decision of the Court of Appeals
dismissing the complaint of petitioner Nora A. Bitong in CA-G.R. No. SP 33291, and granting the
petition for certiorari and prohibition filed by respondent Edgardo U. Espiritu as well as annulling the 5
November 1993, 24 January 1993 and 18 February 1994 Orders of the SEC En Banc in CA-G.R. No.
SP 33873, is AFFIRMED. Costs against petitioner.

SO ORDERED.

91
THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS, BERNARDO
BAUTISTA, JAIME CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO CUSTODIO, and JUANITA
BAUTISTA OF THE RURAL BANK OF LIPA CITY, INC., petitioners, vs. HONORABLE COURT OF
APPEALS, HONORABLE COMMISSION EN BANC, SECURITIES AND EXCHANGE
COMMISSION, HONORABLE ENRIQUE L. FLORES, JR., in his capacity as Hearing Officer,
REYNALDO VILLANUEVA, SR, AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES
GONZALES, AURORA LACERNA, CELSO LAYGO, EDGARDO REYES, ALEJANDRA
TONOGAN and ELENA USI, respondents. G.R. No. 124535 September 28, 2001

YNARES-SANTIAGO, J.:

Before us is a petition for review on certiorari assailing the Decision of the Court of Appeals dated
February 27, 1996, as well as the Resolution dated March 29, 1996, in CA-G.R. SP No. 38861.

The instant controversy arose from a dispute between the Rural Bank of Lipa City, Incorporated
(hereinafter referred to as the Bank), represented by its officers and members of its Board of
Directors, and certain stockholders of the said bank. The records reveal the following antecedent
facts:

Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City, executed a
Deed of Assignment,1 wherein he assigned his shares, as well as those of eight (8) other
shareholders under his control with a total of 10,467 shares, in favor of the stockholders of the Bank
represented by its directors Bernardo Bautista, Jaime Custodio and Octavio Katigbak. Sometime
thereafter, Reynaldo Villanueva, Sr. and his wife, Avelina, executed an Agreement2 wherein they
acknowledged their indebtedness to the Bank in the amount of Four Million Pesos (P4,000,000.00),
and stipulated that said debt will be paid out of the proceeds of the sale of their real property
described in the Agreement.

At a meeting of the Board of Directors of the Bank on November 15, 1993, the Villanueva spouses
assured the Board that their debt would be paid on or before December 31 of that same year;
otherwise, the Bank would be entitled to liquidate their shareholdings, including those under their
control. In such an event, should the proceeds of the sale of said shares fail to satisfy in full the
obligation, the unpaid balance shall be secured by other collateral sufficient therefor.

When the Villanueva spouses failed to settle their obligation to the Bank on the due date, the Board
sent them a letter3 demanding: (1) the surrender of all the stock certificates issued to them; and (2)
the delivery of sufficient collateral to secure the balance of their debt amounting to P3,346,898.54.
The Villanuevas ignored the bank's demands, whereupon their shares of stock were converted into
Treasury Stocks. Later, the Villanuevas, through their counsel, questioned the legality of the
conversion of their shares.4

On January 15, 1994, the stockholders of the Bank met to elect the new directors and set of officers
for the year 1994. The Villanuevas were not notified of said meeting. In a letter dated January 19,
1994, Atty. Amado Ignacio, counsel for the Villanueva spouses, questioned the legality of the said
stockholders' meeting and the validity of all the proceedings therein. In reply, the new set of officers
of the Bank informed Atty. Ignacio that the Villanuevas were no longer entitled to notice of the said
meeting since they had relinquished their rights as stockholders in favor of the Bank.

Consequently, the Villanueva spouses filed with the Securities and Exchange Commission (SEC), a
petition for annulment of the stockholders' meeting and election of directors and officers on January
92
15, 1994, with damages and prayer for preliminary injunction5 , docketed as SEC Case No. 02-94-
4683. Joining them as co-petitioners were Catalino Villanueva, Andres Gonzales, Aurora Lacerna,
Celso Laygo, Edgardo Reyes, Alejandro Tonogan, and Elena Usi. Named respondents were the
newly-elected officers and directors of the Rural Bank, namely: Bernardo Bautista, Jaime Custodio,
Octavio Katigbak, Francisco Custodio and Juanita Bautista.

The Villanuevas' main contention was that the stockholders' meeting and election of officers and
directors held on January 15, 1994 were invalid because: (1) they were conducted in violation of the
by-laws of the Rural Bank; (2) they were not given due notice of said meeting and election
notwithstanding the fact that they had not waived their right to notice; (3) they were deprived of their
right to vote despite their being holders of common stock with corresponding voting rights; (4) their
names were irregularly excluded from the list of stockholders; and (5) the candidacy of petitioner
Avelina Villanueva for directorship was arbitrarily disregarded by respondent Bernardo Bautista and
company during the said meeting

On February 16, 1994, the SEC issued a temporary restraining order enjoining the respondents,
petitioners herein, from acting as directors and officers of the Bank, and from performing their duties
and functions as such.6

In their joint Answer,7 the respondents therein raised the following defenses:

1) The petitioners have no legal capacity to sue;

2) The petition states no cause of action;

3) The complaint is insufficient;

4) The petitioners' claims had already been paid, waived, abandoned, or otherwise
extinguished;

5) The petitioners are estopped from challenging the conversion of their shares.

Petitioners, respondents therein, thus moved for the lifting of the temporary restraining order and the
dismissal of the petition for lack of merit, and for the upholding of the validity of the stockholders'
meeting and election of directors and officers held on January 15, 1994. By way of counterclaim,
petitioners prayed for actual, moral and exemplary damages.

On April 6, 1994, the Villanuevas' application for the issuance of a writ of preliminary injunction was
denied by the SEC Hearing Officer on the ground of lack of sufficient basis for the issuance thereof.
However, a motion for reconsideration8 was granted on December 16, 1994, upon finding that since
the Villanuevas' have not disposed of their shares, whether voluntarily or involuntarily, they were still
stockholders entitled to notice of the annual stockholders' meeting was sustained by the SEC.
Accordingly, a writ of preliminary injunction was issued enjoining the petitioners from acting as
directors and officers of the bank.9

Thereafter, petitioners filed an urgent motion to quash the writ of preliminary injunction, 10 challenging
the propriety of the said writ considering that they had not yet received a copy of the order granting
the application for the writ of preliminary injunction.

93
With the impending 1995 annual stockholders' meeting only nine (9) days away, the Villanuevas filed
an Omnibus Motion11 praying that the said meeting and election of officers scheduled on January 14,
1995 be suspended or held in abeyance, and that the 1993 Board of Directors be allowed, in the
meantime, to act as such. One (1) day before the scheduled stockholders meeting, the SEC Hearing
Officer granted the Omnibus Motion by issuing a temporary restraining order preventing petitioners
from holding the stockholders meeting and electing the board of directors and officers of the Bank.12

A petition for Certiorari and Annulment with Damages was filed by the Rural Bank, its directors and
officers before the SEC en banc,13 naming as respondents therein SEC Hearing Officer Enrique L.
Flores, Jr., and the Villanuevas, erstwhile petitioners in SEC Case No. 02-94-4683. The said petition
alleged that the orders dated December 16, 1994 and January 13, 1995, which allowed the issuance
of the writ of preliminary injunction and prevented the bank from holding its 1995 annual stockholders'
meeting, respectively, were issued by the SEC Hearing Officer with grave abuse of discretion
amounting to lack or excess of jurisdiction. Corollarily, the Bank, its directors and its officers
questioned the SEC Hearing Officer's right to restrain the stockholders' meeting and election of
officers and directors considering that the Villanueva spouses and the other petitioners in SEC Case
No. 02-94-4683 were no longer stockholders with voting rights, having already assigned all their
shares to the Bank.

In their Comment/Opposition, the Villanuevas and other private respondents argued that the filing of
the petition for certiorari was premature and there was no grave abuse of discretion on the part of the
SEC Hearing Officer, nor did he act without or in excess of his jurisdiction.

On June 7, 1995, the SEC en banc denied the petition for certiorari in an Order,14 which stated:

In the case now before us, petitioners could not show any proof of despotic or arbitrary
exercise of discretion committed by the hearing officer in issuing the assailed orders save and
except the allegation that the private respondents have already transferred their stockholdings
in favor of the stockholders of the Bank. This, however, is the very issue of the controversy in
the case a quo and which, to our mind, should rightfully be litigated and proven before the
hearing officer. This is so because of the undisputed fact the (sic) private respondents are still
in possession of the stock certificates evidencing their stockholdings and as held by the
Supreme Court in Embassy Farms, Inc. v. Court of Appeals, et al., 188 SCRA 492, citing Nava
v. Peers Marketing Corp., the non-delivery of the stock certificate does not make the transfer of
the shares of stock effective. For an effective transfer of stock, the mode of transfer as
prescribed by law must be followed.

We likewise find that the provision of the Corporation Code cited by the herein petitioner,
particularly Section 83 thereof, to support the claim that the private respondents are no longer
stockholders of the Bank is misplaced. The said law applies to acquisition of shares of stock by
the corporation in the exercise of a stockholder's right of appraisal or when the said
stockholder opts to dissent on a specific corporate act in those instances provided by law and
demands the payment of the fair value of his shares. It does not contemplate a "transfer"
whereby the stockholder, in the exercise of his right to dispose of his shares (jus disponendi)
sells or assigns his stockholdings in favor of another person where the provisions of Section 63
of the same Code should be complied with.

The hearing officer, therefore, had a basis in issuing the questioned orders since the private
respondents' rights as stockholders may be prejudiced should the writ of injunction not be
issued. The private respondents are presumably stockholders of the Bank in view of the fact
94
 that they have in their possession the stock certificates evidencing their stockholdings. Until
proven otherwise, they remain to be such and the hearing officer, being the one directly
confronted with the facts and pieces of evidence in the case, may issue such orders and
resolutions which may be necessary or reasonable relative thereto to protect their rights and
interest in the meantime that the said case is still pending trial on the merits.

A subsequent motion for reconsideration15 was likewise denied by the SEC en banc in a
Resolution16 dated September 29, 1995.

A petition for review was thus filed before the Court of Appeals, which was docketed as CA-G.R. SP
No. 38861, assailing the Order dated June 7, 1995 and the Resolution dated September 29, 1995 of
the SEC en banc in SEC EB No. 440. The ultimate issue raised before the Court of Appeals was
whether or not the SEC en banc erred in finding:

1. That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did not commit any grave abuse
of discretion that would warrant the filing of a petition for certiorari;

2. That the private respondents are still stockholders of the subject bank and further stated that
"it does not contemplate a transfer" whereby the stockholders, in the exercise of his right to
dispose of his shares (Jus Disponendi) sells or assigns his stockholdings in favor of another
person where the provisions of Sec. 63 of the same Code should be complied with; and

3. That the private respondents are presumably stockholders of the bank in view of the fact that
they have in their possession the stock certificates evidencing their stockholdings.

On February 27, 1996, the Court of Appeals rendered the assailed Decision17 dismissing the petition
for review for lack of merit. The appellate court found that:

The public respondent is correct in holding that the Hearing Officer did not commit grave abuse
of discretion. The officer, in exercising his judicial functions, did not exercise his judgment in a
capricious, whimsical, arbitrary or despotic manner. The questioned Orders issued by the
Hearing Officer were based on pertinent law and the facts of the case.

Section 63 of the Corporation Code states: "x x x Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates indorsed by the
owner x x x. No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation so as to show the names of the parties to
the transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred."

In the case at bench, when private respondents executed a deed of assignment of their shares
of stocks in favor of the Stockholders of the Rural Bank of Lipa City, represented by Bernardo
Bautista, Jaime Custodio and Octavio Katigbak, title to such shares will not be effective unless
the duly indorsed certificate of stock is delivered to them. For an effective transfer of shares of
stock, the mode and manner of transfer as prescribed by law should be followed. Private
respondents are still presumed to be the owners of the shares and to be stockholders of the
Rural Bank.

We find no reversible error in the questioned orders.

95
Petitioners' motion for reconsideration was likewise denied by the Court of Appeals in an
Order18 dated March 29, 1996.

Hence, the instant petition for review seeking to annul the Court of Appeals' decision dated February
27, 1996 and the resolution dated March 29, 1996. In particular, the decision is challenged for its
ruling that notwithstanding the execution of the deed of assignment in favor of the petitioners, transfer
of title to such shares is ineffective until and unless the duly indorsed certificate of stock is delivered
to them. Moreover, petitioners faulted the Court of Appeals for not taking into consideration the acts
of disloyalty committed by the Villanueva spouses against the Bank.

We find no merit in the instant petition.

The Court of Appeals did not err or abuse its discretion in affirming the order of the SEC en banc,
which in turn upheld the order of the SEC Hearing Officer, for the said rulings were in accordance
with law and jurisprudence.

The Corporation Code specifically provides:

SECTION 63. Certificate of stock and transfer of shares. — The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or vice
president, countersigned by the secretary or assistant secretary, and sealed with the seal of
the corporation shall be issued in accordance with the by-laws. Shares of stocks so issued are
personal property and may be transferred by delivery of the certificate or certificates indorsed
by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the parties, until the transfer is recorded in
the books of the corporation so as to show the names of the parties to the transaction, the date
of the transfer, the number of the certificate or certificates and the number of shares
transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable
in the books of the corporation. (Emphasis ours)

Petitioners argue that by virtue of the Deed of Assignment,19 private respondents had relinquished to
them any and all rights they may have had as stockholders of the Bank. While it may be true that
there was an assignment of private respondents' shares to the petitioners, said assignment was not
sufficient to effect the transfer of shares since there was no endorsement of the certificates of stock
by the owners, their attorneys-in-fact or any other person legally authorized to make the transfer.
Moreover, petitioners admit that the assignment of shares was not coupled with delivery, the absence
of which is a fatal defect. The rule is that the delivery of the stock certificate duly endorsed by the
owner is the operative act of transfer of shares from the lawful owner to the transferee.20 Thus, title
may be vested in the transferee only by delivery of the duly indorsed certificate of stock.21

We have uniformly held that for a valid transfer of stocks, there must be strict compliance with the
mode of transfer prescribed by law.22 The requirements are: (a) There must be delivery of the stock
certificate: (b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons
legally authorized to make the transfer; and (c) To be valid against third parties, the transfer must be
recorded in the books of the corporation. As it is, compliance with any of these requisites has not
been clearly and sufficiently shown.

96
It may be argued that despite non-compliance with the requisite endorsement and delivery, the
assignment was valid between the parties, meaning the private respondents as assignors and the
petitioners as assignees. While the assignment may be valid and binding on the petitioners and
private respondents, it does not necessarily make the transfer effective. Consequently, the
petitioners, as mere assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted
for, and will not be entitled to dividends, insofar as the assigned shares are concerned
Parenthetically, the private respondents cannot, as yet, be deprived of their rights as stockholders,
until and unless the issue of ownership and transfer of the shares in question is resolved with finality.

There being no showing that any of the requisites mandated by law23 was complied with, the SEC
Hearing Officer did not abuse his discretion in granting the issuance of the preliminary injunction
prayed for by petitioners in SEC Case No. 02-94-4683 (herein private respondents). Accordingly, the
order of the SEC en banc affirming the ruling of the SEC Hearing Officer, and the Court of Appeals
decision upholding the SEC en banc order, are valid and in accordance with law and jurisprudence,
thus warranting the denial of the instant petition for review.

To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect their directors, the
temporary restraining order issued by the SEC Hearing Officer on January 13, 1995 must be lifted.
However, private respondents shall be notified of the meeting and be allowed to exercise their rights
as stockholders thereat.

While this case was pending, Republic Act No. 879924 was enacted, transferring to the courts of
general jurisdiction or the appropriate Regional Trial Court the SEC's jurisdiction over all cases
enumerated under Section 5 of Presidential Decree No. 902-A.25 One of those cases enumerated is
any controversy "arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates, between any and/or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the state insofar as it concerns their
individual franchise or right to exist as such entity." The instant controversy clearly falls under this
category of cases which are now cognizable by the Regional Trial Court.

Pursuant to Section 5.2 of R.A. No. 8799, this Court designated specific branches of the Regional
Trial Courts to try and decide cases formerly cognizable by the SEC. For the Fourth Judicial Region,
specifically in the Province of Batangas, the RTC of Batangas City, Branch 32 is the designated
court.26

WHEREFORE, in view of all the foregoing, the instant petition for review on certiorari is DENIED. The
Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 38861 are hereby AFFIRMED.
The case is ordered REMANDED to the Regional Trial Court of Batangas City, Branch 32, for proper
disposition. The temporary restraining order issued by the SEC Hearing Officer dated January 13,
1995 is ordered LIFTED.

SO ORDERED.

97
IRINEO S. BALTAZAR, plaintiff-appellee, vs. LINGAYEN GULF ELECTRIC POWER, CO., INC.,
DOMINADOR C. UNGSON, BRIGIDO G. ESTRADA, MANUEL L. FERNANDEZ, BENEDICTO C.
YUSON and BERNARDO ACENA, defendants-appellants. G.R. No. L-16236 June 30, 1965

MARVIN O. ROSE, plaintiff-appellee, vs. LINGAYEN GULF ELECTRIC CO., INC., DOMINADOR,
C. UNGSON, BRIGIDO G. ESTRADA, MANTEL L. FERNANDEZ, BENEDICTO C. YUSON and
BERNARDO C. ACENA, defendants-appellants. G.R. No. L-16237 June 30, 1965

IRINEO S. BALTAZAR and MARVIN O. ROSE, plaintiffs-appellees, vs. BERNARDO

ACENA, defendant-appellant. G.R. No. L-16238 June 30, 1965. PAREDES, J.:

In Civil Case G.R. No. L-16236 (CFI No. 13211), Irineo S. Baltazar, filed the complaint against
Lingayen Gulf Electric Power Co., Inc., Dominador C. Ungson, Brigido G. Estrada, Manuel L.
Fernandez, Benedicto C. Yuson and Bernardo Acena.

In Civil Case G.R. No. L-16237 (CFI No. 13212), Marvin O. Rose filed the complaint against the
same defendants.

In Civil Case G.R. No. L-16238 (CFI No. 13340), Baltazar and Rose filed their complaint against
Bernardo Acena alone.

The Lingayen Gulf Electric Power Co., Inc., hereinafter referred to as Corporation, was doing
business in the Philippines, with principal offices at Lingayen, Pangasinan, and with an authorized
capital stock of P300.000.00 divided into 3,000 shares of voting stock at P100.00 par value, per
share. Plaintiffs Baltazar and Rose were among the incorporators, having subscribed to 600 and 400
shares of the capital stock, or a total par value of P60,000.00 and P40.000.00, respectively. It is
alleged that it has always been the practice and procedure of the Corporation to issue certificates of
stock to its individual subscribers for unpaid shares of stock. Of the 600 shares of capital stock
subscribed by Baltazar, he had fully paid 535 shares of stock, and the Corporation issued to him
several fully paid up and non-assessable certificates of stock, corresponding to the 535 shares. After
having made transfers to third persons and acquired new ones, Baltazar had to his credit, on the
filing of the complaint 341 shares fully paid and non-assessable. He had also 65 shares with par
value of P6,500.00, for which no certificate was issued to him. Of the 400 shares of stock subscribed
by Rose, he had 375 shares of fully paid stock, duly covered by certificates of stock issued to him.

The respondents Ungson, Estrada, Fernandez and Yuson were small stockholders of the
Corporation, all holding a total number of fully paid-up shares of stock, of not more than 100 shares,
with a par value of P10,000.00 and the defendant Acena, was likewise an incorporator and
stockholder, holding 600 shares of stock, for which certificate of stock were issued to him and as
such, was the largest individual stockholder thereof. Defendants Ungson, Estrada, Fernandez and
Yuzon, constituted the majority of the holdover seven-member Board of Directors of the Corporation,
in 1955, two (2) of said defendants having been elected as members of the Board in the annual
stockholders' meeting held in May 1954, largely on the vote of their co-defendant Acena, while the
other two (2) were elected mainly on the vote of the plaintiffs and their group of stockholders. Let the
first group be called the Ungson group and the second, the Baltazar group.

The date of the annual stockholders' meeting of the Corporation had been fixed, under its by-laws, on
the first Tuesday of February of every year, but for one reason or another, the meeting was to be held
on May 1, 1955, principally for the purpose of electing new officers and Board of Directors for the
calendar year 1955. In connection with said meeting since January 1, 1955, there was a realignment
98
effected, and the fight for control of the management and property of the corporation was close and
keen. The total number of fully paid-up shares held by stockholders of one group, was almost equal
the number of fully paid-up shares held by the other group.

The Ungson group (specially defendant Acena), which had been in complete control of the
management and property of the Corporation since January 1, 1955, in order to continue retaining
such control, over the objection oil three majority members of the Board, in the regular meeting of the
Board of Directors, held on January 30, 1955, passed three (3) resolutions (Exhs. A, B, C).

Resolution No. 2 (Exh. A), declared all watered stocks issued to Acena, Baltazar, Rose and
Jubenville, "of no value and consequently cancelled from the books of the Corporation.

Resolution No. 3 (Exh. B) resolved that "... all unpaid subscriptions should bear interest
annually from the year of subscription on the basis of quarterly payment, and any or all
payments already made on said unpaid subscriptions should be credited to pay interest first,
then the capital debt after all interest is fully paid.

All shares of stock issued to and in favor of any stockholder or stockholders of the Lingayen
Gulf Electric Power Co., Inc., on account of payments on unpaid subscriptions without the
interest thereon — accrued and collectible having been fully paid from the date of subscription
as required by the Corporation Law, shall be declared of no value and cancelled from its
books, and if the payments already made exceeded the interest accrued and collectible by
virtue of the provision of law and the previous resolution of its board of directors, the excess
should be applied to the payment of the unpaid subscription. For this purpose, the accountant
of the corporation is directed to make and report the proper computation of the interest.

Resolution No. 4 (Exh. C) resolved that "any and all shares of stock of the Lingayen Gulf
Electric Power Co., Inc., issued as fully paid-up to stockholders whose subscription to a
number of shares have been declared delinquent with the accrued interest on the unpaid
thereof per Resolution No. 42, S. 1954, of the Board of Directors which has been duly
published in the "Manila Chronicle," are hereby incapacitated to utilize or avail of the voting
power until such delinquency with the accrued interest is fully paid up as indicated in
Resolution No. 3, S. 1955.

On the authority of these resolutions, the Ungson group was threatening and procuring to expel and
oust the plaintiffs and their companion stockholders, for the ultimate purpose of depriving them of
their right to vote in the said annual stockholders' meeting scheduled for May 1, 1955.

In their complaint, Baltazar and Rose prayed that a writ of preliminary injunction be issued against the
defendants, enjoining them to desist and refrain from carrying out the objects and purposes of the
three resolutions aforestated, and commanding them to allow plaintiffs and companions to vote in the
stockholders' meeting, on May 1, 1955, their fully paid up shares of stocks, as evidenced by stock
certificates issued to them and outstanding on the stock book of the defendant Corporation, on or
before January 30, 1955, to declare said three resolutions illegal and invalid, and to pay plaintiffs the
sum of P10,000.00 each, as damages. On April 29, 1955, the trial court, after due hearing, issued
Preliminary Injunction, as prayed for.

The defendants, in their answers, allege that during the years that plaintiffs and their allies were in
control of the Corporation, no serious effort was attempted to retrieve it from its financial collapse,
caused by accumulated indebtedness and by poor and inefficient management, resulting in losses of
99
big sums of money from vicious manipulation of funds, nepotism, unconscionable grant of big
salaries and allowances, illegal payments, unaccounted funds of Caltex business and sales
department store, etc.; that during the time the management was in the hands of plaintiffs (Rose, as
manager); attempts were made to release themselves from liability of their unpaid subscriptions; that
the three resolutions were merely functional instruments to bolster the faith in the assets of the
defendant Corporation and did not deprive the plaintiffs of their property without due process of law;
that the issuance of a writ of injunction for the purpose of arresting the holding of the election of the
Board, was beyond the jurisdiction of the court. They set up counterclaims. They prayed that the
resolutions be declared legal and valid, thus invalidating the "watered stocks" of plaintiffs, if not paid,
and disqualifying the delinquent subscribers, among whom were the plaintiffs, from voting totally or
partially, their subscriptions; to order plaintiffs to pay the defendant Corporation first, the interest due
and payable quarterly at 6% per annum from January 11, 1946 to December 31, 1954, on their
liability under their delinquent subscriptions, out of the installment made therein; to pay defendant
entity damages under the counterclaims and expenses for the enforcement of the collection; and that
after complete payment of the interests and the balance of their unpaid subscriptions, the defendant
Corporation should issue the shares of stock to plaintiffs for their full subscription. Plaintiffs filed their
answer to defendants' counterclaims, with counterclaims against defendants. On August 8, 1955, the
lower court issued an order dismissing plaintiffs' counterclaims against Acena, Ungson and
Fernandez "without prejudice to filing the proper separate actions therefor by the parties."
Consequently, and as heretofore mentioned, Baltazar and Rose filed Case No. 13340 (supra).

The following tentative amicable settlement, dated September 13, 1958, formulated and entered into
by some of the parties and their respective attorneys, before presiding Judge Jesus P. Morfe, in the
three cases, was submitted:

1. As to the so-called water stocks P30,000.00 each of the holders of said stock, namely, Irineo
Baltazar, Marvin Rose, and Bernardo Acena, will return to the corporation P3,500 each of said
stocks, thereby retaining P6,500 worth of stocks to be considered as valid for each under this
compromise;

2. With respect to Dr. Bernardo Acena, of the certificates of stock allegedly representing, his
profit, he will return to the corporation P3,500 of said share of stock and retain P7,500 worth
thereof ;

3. With respect to the interest on unpaid balance of subscription it is agreed that the
subscribers with unpaid subscription be given the opportunity to pay in two installments, the
first installment to cover one-half of the unpaid balance to be paid in three months, and the
second installment will be for the remaining unpaid half payable in another three months, from
the time of the approval of this agreements, with the understanding that those who comply with
this arrangement will not pay interest on the balance of their subscription, for the date of
incorporation up to the grant of franchise on February 24, 1948, which shall be deemed as
condoned, and from 1948 they will pay only as interest 3% compounded annually, it being
understood that failure of any subscriber to pay any of the installment here provided will subject
the stockholders concerned to the provision of the corporation law of the payment of 6%
interest compounded quarterly.

4. All claims and counterclaims other than those covered by the preceding paragraph of
stipulation will be deemed dismissed without prejudice, in all these three cases;

100
 5. All the resolutions of the Board and the stockholders involved in these instant cases will be
deemed modified in accordance with this agreement.

On February 20, 1959, the lower court rendered a decision, approving the agreement and requiring
the parties to comply with the same, and dissolved the writ of preliminary injunction, with costs. The
pertinent portions of the decision are:

In view of the agreement of the parties transcribed above, this Court is called upon to decide
whether or not any of the agreements of the parties as above transcribed is contrary to law or
public policy. First, as regards pars. 1 and 2, of said agreement, the legal capacity of the
parties to sue and be sued carries with it the power to enter into an amicable settlement of
pending litigations and to expressly or impliedly make admissions of facts; and they could,
therefore, agree and recognize as fully paid for and valid the shares of stocks mentioned in
said paragraphs of their agreement, which agreement must be held valid and binding among
the parties, and even as against their persons who have no proof that said agreement was
entered into in fraud of creditors.

The next question for decision is whether or not a corporation may validly condone interest on
unpaid subscriptions to its capital stock. The fact that our Corporation Law authorizes
provisions in the by-laws of a corporation different from that set out in Sec. 37 of said law,
shows that the provision of said law is to interest of unpaid stock subscriptions is merely
directory, so that a corporation may fix a different interest rate, or condone the payment of
interest altogether if such condonation would, as in the instant cases, serve as inducement for
early payment of stock subscriptions. The condonation and reduction of interest agreed upon in
par. 3 of the aforequoted agreement is, therefore, valid in the absence of proof that said
agreement was entered into in fraud of creditors.

In connection with par. 5 of the aforequoted agreement, in relation to par. 3 thereof, this, Court
is of the opinion, and so holds, that the periods of time allowed for making payments under par.
3 of said agreement, must be counted from date of receipt of a copy of this decision by counsel
of the parties, this decision constituting the final approval of said agreement, and as to
stockholders who are not parties to these cases, from date of notice of the said time extension.
The extension of time to pay, as granted in par. 3 of the repealing previous declaration of
delinquency of the corresponding shares of stock, and all subscribed shares of stock, except
those ordered to be returned as provided in pars. 1 and 2 of said agreement, will therefore be
entitled to vote until once again declared delinquent after the expiration of the periods of time
set out in par. 3 of said agreement.

Defendants on March 14, 1959 filed a motion for reconsideration, alleging that the decision was partly
against the spirit and intention of the parties to the agreement and portions of the decision, carried
"prejudicial eventualities," and asking that the same be amended in the sense that "the payment of
obligations of delinquent incorporators has been reduced by the agreement as stated in paragraphs 3
and 5" of said agreement; that delinquent stocks cannot be voted until fully paid in accordance with
the agreement and that if the plaintiffs in the above entitled cases could not pay in full their
obligations within the periods stated in the agreement, the resolutions of delinquency would
automatically stand.

On March 18, 1959, plaintiffs, in cases Nos. 13211 and 13212, filed a petition for immediate
execution and for preliminary injunction and/or mandamus, praying that a writ be issued, ordering the
defendants, as controlling majority of hold-over board of directors, to hold immediately the long
101
delayed stockholders' meeting, and to allow the plaintiffs and all the stockholders, with still unpaid
subscriptions, to vote all their stocks and subscriptions at said stockholders' meeting, as directed in
the decision.

On March 25, 1959, the Court issued an amending decision, pertinent portions of which are
hereunder reproduced —

... . After hearing the parties in extensive oral argument, this Court agrees with the defendants
that par. 5 of the compromise agreement of the parties, dated September 13, 1958,
contemplates a modification and not a repeal of the resolutions of the Board of Directors and of
the Stockholders referred to in said agreement. The question is, therefore, to what extent has
said resolutions been modified? Considering that the primary intention of each of said
resolutions was to effect an early collection of unpaid balance of stock subscriptions and
interest thereon, and the moving consideration for a compromise settlement of the instant
cases is likewise the early collection of the obligations of stockholders of the defendant
corporation, the extension of time to pay, as granted in par. 3 of said agreement, was clearly
intended to cover not only the accrued interest but also the unpaid stock subscription of the
stockholders, for to hold otherwise would be to defeat the primary purpose of early collection of
said obligations. Considering the same paramount intention of said resolution, and of the
aforesaid compromise agreement, it likewise follows that the extension of time to pay and the
reduction of interest embodied in the said agreement must apply to all stockholders similarly
situated.

Regarding the right to vote, this Court likewise agrees with the defends its that the facts
considered during the negotiations for settlement effected by the parties in the Chambers of
the presiding judge do not warrant repeal of the declaration of delinquency and complete
restoration of voting rights until full payment of the unpaid stock subscriptions and interest
within the time and to the extent mentioned in par. 3 of the aforesaid compromise agreement.
To rule otherwise would be to encourage non-payment of the balance of stock subscriptions
and thus defeat the paramount intention of the compromise agreement. Stated differently, this
Court now holds that the extension of time to pay, as granted in par. 3 of the aforesaid
compromise agreement, has the effect of lifting the previous declaration of delinquency
effective as of full payment of the balance of said stock subscriptions and interest within the
periods of time mentioned in par. 3 of said compromise agreement.

In view of the uncertainty brought about by the motion for reconsideration and the motion for
execution aforementioned, it would be unjust to count the periods of time mentioned in the
aforesaid compromise agreement from the date of receipt of the original decision of this Court
in these cases. The extension of time to pay should, therefore, be counted from receipt by
counsel for the parties of a copy of this amending decision, and from receipt by the other
stockholders of notice of said extension of time; and the injunction in the instant case should be
deemed in force for the duration of said extension of time to pay.

WHEREFORE, the decision of this Court rendered in these cases on February 20, 1959 is
hereby modified in the manner set out above, maintaining said decision in all other respects.

On April 4, 1959 , plaintiffs filed a motion for reconsideration and/or new trial, praying that the
amending decision dated March 25, 1959, be reconsidered and/or further clarified. On July 16, 1959,
the trial court reversed its amending decision in an order, the relevant parts thereof follow:

102
 WHEREFORE, by way of amendment to both the original and amending decisions of this Court
in the instant case, this Court hereby expressly rules that all shares of the capital stock of the
defendant corporation covered by fully paid capital stock shares certificates are entitled to vote
in all meetings of the stockholders of this corporation, and Resolutions Nos. 2, 3 and 4 (Exhs.
C, C-1 and C-2) of defendant's corporation's Board of Directors are hereby nullified insofar as
they are inconsistent the this ruling.

The extensions of time to pay, referred to in par. 3 of the settlement agreement of the parties,
will start to run from the date of receipt by counsel for the parties of a copy of this Order, and
from receipt by the other stockholders of notice of said extension of time.

The injunction granted in the instant case is hereby dissolved, and the injunction bond filed by
the plaintiffs is hereby cancelled and released.

Defendants on August 14, 1959 perfected their appeal against the above ruling, on purely questions
of law. Plaintiffs-appellees did not file any brief, manifesting that they were relying on their arguments
contained in their motion for reconsideration, dated April 4, 1959 filed with the trial court. (pp. 213 to
218, rec. on appeal) and on the reasons set forth in the trial court's order, dated July 16, 1959, third
decision (pp. 219 to 230 R.A.).

Pending decision, the parties were required to show cause why the cases should not be dismissed
for having become moot or academic, in view of the fact that the appellees, taking advantage of the
decision of the trial court, "had paid all other delinquencies and interest thereon," but the appellants
manifested that these cases should be decided on the issues raised, to determine, once and for all,
the voting rights of the other delinquent subscribers, in the election of the company's Board of
Directors which had been suspended since May 1, 1955, because of the litigation.

The questions posted in the appeal, in view of the above facts would, therefore, be:

1. If a stockholder, in a stock corporation, subscribes to a certain number of shares of stock,

and he pays only partially, for which he is issued certificates of stock, is he entitled to vote the
latter, notwithstanding the fact that he has not paid the balance of his subscription, which has
been called for payment or declared delinquent?

2. If a stockholder subscribes to a certain number of shares of stock and makes partial

payment only and declared delinquent as to the rest, with interest, should previous payments
on account of the capital, be first applied to interest, thus diminishing the voting power of the
shares of stock already paid? In other words, if the entire subscribed shares of stock are not
paid, will the paid shares of stock be deprived of the right to vote, until the entire subscribed
shares of stock are fully paid, including interest?

3. Has estoppel or waiver, by virtue of the settlement agreement, set in?

Defendants-appellants claim that resolution No. 4 (Exh. C-2), withdrawing or nullifying the voting
power of all the aforesaid shares of stock is valid, notwithstanding the existence of partial payments,
evidenced by certificates duly issued therefor. They invoke the ruling laid down by the Court in
the Fua Cun v. Summers case (44 Phil, 705, March 27, 1923) pertinent portion of which states:

In the absence of special agreement to the contrary, a subscriber for a certain number of
shares of stock does not, upon payment of one-half of the subscription price, become entitled

103
 to the issuance of certificates for one-half of the number of shares subscribed for; the
subscriber's right consists only in equity entitling him to a certificate for the total number of
shares subscribed for by him upon payment of the remaining portion of the subscription price.

The cited case connotes the principle that a partial payment of a subscription does not entitle the
stockholder to a certificate for the total number of shares subscribed by him; his right consists only in
equity to a certificate of the total number of shares subscribed for, upon payment of the remaining
portion of the subscription price. In other words, it is contended, as in the present case, that if
Baltazar subscribed to 600 shares of stock in a single subscription, and he merely paid for 300
shares, for which he was given fully paid certificates for 300 shares, he cannot vote said 300 shares,
in any meeting of the Corporation, until he shall have paid the remaining 300 shares of stock. The
saving clause in the quoted pronouncement, "in the absence of special agreement to the contrary,"
reveals that the doctrine is not mandatory, but merely directory, which is not violative of law, the rigor
of the pronouncement may be relaxed. The plaintiffs-appellees seem to sustain an adverse concept,
postulating that once a stockholder has subscribed to a certain number of shares, although he has
made partial payments only, but is issued a certificate for the paid-up shares of stock, he is entitled to
vote the whole number of shares subscribed by him, paid or not, until the said unpaid shares shall
have been called for payment or declared delinquent.

The cases at bar do not come under the aegis of the principle enunciated in the Fua Cun v.
Summers case, because it was the practice and procedure, since the inception of the corporation, to
issue certificates of stock to its individual subscribers for unpaid shares of stock and gave voting
power to shares of stock fully paid. And even though no agreement existed, the ruling in said case,
does not now reflect the correct view on the matter, for better than an agreement or practice, there is
the law, which renders the said case of Fua Cun-Summers, obsolescent.

Section 37 of the Corporation Law, as amended by Act No. 3518, approved on March 1, 1929, six (6)
years after the promulgation of the Fua-Summers case (decided in 1923), provides:

SEC. 37. ... . No certificate of stock shall be issued to a subscriber as fully paid up until the full
par value thereof, or the full subscription in the case of no par stock, has been paid by him to
the corporation. Subscribed shares not fully paid up may be voted provided no subscription is
unpaid and delinquent.

The law just quoted was originally section 36 of the Corporation Law of 1906, which reads as follows:

SEC. 36. ... . No certificate of stock shall be issued to a subscriber as fully paid up until the full
par value thereof has been paid by him to the corporation. Subscribed shares not fully paid up
may be voted provided no subscription is unpaid and delinquent.

As may readily be seen, said Section 37 makes payment of the "par value" as prerequisite for the
issuance of certificates of par value stocks, and makes payment of the "full subscription" as
prerequisite for the issuance of certificates of no par value stocks. No such distinction was contained
in section 36 of our Corporation Law of 1906, corresponding to section 37 now. The present law
could have simply provided that no certificate of par value and no par value stock shall be issued to a
subscriber, as fully paid up, until the full subscription has been paid by him to the corporation, if full
payment of subscription were intended is the criterion in the issuance of certificates, for both the par
value and no par value stocks. Stated in another way, the present law requires as a condition before
a share holder can vote his shares, that his full subscription be paid in the case of no par value
stock; and in case of stock corporation with par value, the stockholder can vote the shares fully paid
104
by him only, irrespective of the unpaid delinquent shares. As well-observed by the trial court, a
corporation may now, in the absence of provisions in their by-laws to the contrary, apply payment
made by , subscribers-stockholders, either as: "(a) full payment for the corresponding number of
shares of stock, the par value of each of which is covered by such payment; or (b) as payment pro-
rata to each and all the entire number of shares subscribed for" (amended decision). In the cases at
bar, the defendant-corporation had chosen to apply payments by its stockholders to definite shares of
the capital stock of the corporation and had fully paid capital stock shares certificates for said
payments; its call for payment of unpaid subscription and its declaration of delinquency for non-
payment of said call affecting only the remaining number of shares of its capital stock for which no
fully paid capital stock shares certificates have been issued, "and only these have been legally shorn
of their voting rights by said declaration of delinquency" (amended decision).

The third paragraph of the settlement agreement relates to interest on the unpaid balance of
subscription to the capital stock. The second paragraph of resolution No. 3 (Exh. C-1), unilaterally
declared as of no value and cancelled all capital stock shares certificates issued as fully paid up,
upon payments made by stockholders, when interests on unpaid subscription from date of
subscription were not previously and/or then and there paid. Defendants-appellants, invoking Art.
1253 NCC (Art. 1173 of the Old Civil Code) which provides that "if the debt produces interest,
payment of the principal shall not be deemed to have been made until the interests have been
covered," and relying on an opinion of the Securities and Exchange Commission, claim that said
unilateral nullification and/or cancellation of previously issued capital stock shares certificates was
valid. This provision of law only applies in the absence of verbal or written agreement, to the contrary
(8 Manresa, p. 317); it is likewise merely directory, and not mandatory. (Art. 1252 NCC). In the
present case, the defendant-corporation had applied the payments made by the stockholders to the
full par value of the shares of stock subscribed by them, instead of the accepted interest, as shown
by the capital stock shares certificate issued for the payments made, and the stockholders had
accepted such certificates issued for such payments. This being the case, the said application of
payments must be deemed to have been agreed upon by the Corporation and the stockholders, and
the same cannot now be changed without the consent of the stockholders concerned. The
Corporation Law and the by-laws of the defendant Corporation do not contain any provision,
prohibiting the application of stockholders' payments to the full par value of a corporation's capital
stock, ahead of the payment of accrued interest for unpaid subscriptions. It would, therefore, result
that a corporation may, upon request of an interested stockholder, as his option, apply payment by
them to the full par value of shares of capital leaving its collection later of the accrued interest on
unpaid subscriptions, and that once such option has been exercised and the corresponding stock
certificates have been issued, the corporation cannot, by a unilateral act, legally nullify and cancel the
capital stock certificates so issued.

It is finally argued by defendants-appellants that the plaintiffs-appellees waived, under the agreement
heretofore quoted, the right to enforce the voting power they were claiming to exercise, and upon the
principle of estoppel, they are now prohibited from insisting on the existence of such power, ending
with the exhortation, that "they should lie upon the bed they helped built, for a lasting peace in the
interest of the corporation." It should, however, be stated as heretofore exposed, that certain clauses
of the agreement are contrary to law and public policy and would cause injury to plaintiffs-appellees
and other stockholders similarly situated. Estoppel cannot be predicated on acts which are prohibited
by law or are against public policy (Benguet Cons. Mining Co. v. Pineda, 52 Off. Gaz. 1961, L-7231,
March 28, 1956; Eugenio v. Perdido L-7083, May 19, 1955; III Rep. of the Philippines Digest, p. 269-
270).

105
WHEREFORE, the order of the trial court of July 16, 1959, (1) Expressly ruling "that all shares of the
capital stocks of the defendant corporation covered by fully paid capital stock shares of certificates
are entitled to vote in all meetings of the stockholders of this corporation and resolutions Nos. 2, 3
and 4 (Exhs. C, C-1 and C-2) of defendant corporation's Board of Directors are hereby nullified
insofar as they are inconsistent with this ruling"; and (2) Dissolving the injunction granted in the cases
and releasing the injunction bond filed by the plaintiffs-appellees, is correct and the same should be,
as it is hereby affirmed. Costs taxed against the defendants- appellants.

Bengzon , C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala and Zaldivar, JJ., concur.
Makalintal, J., concurs in the result.

106
JOSEFA SANTAMARIA, assisted by her husband, FRANCISCO SANTAMARIA, Jr., plaintiff-
appellee, vs. THE HONGKONG AND SHANGHAI BANKING CORPORATION and R. W.
TAPLIN, defendants-appellant. G.R. No. L-2808 August 31, 1951 BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Manila ordering the Hongkong and
Shanghai Banking Corporation to pay the plaintiff the sum of P8,041.20 plus the costs of suit. The
case was certified to this Court of Appeals.

The facts of this case found by the Court of Appeals are as follows:

Sometime in February, 1937, Mrs. Josefa T. Santamaria bought 10,000 shares of the
Batangas Minerals, Inc., through the offices of Woo, Uy-Tioco & Naftaly, a stock brokerage firm
and pay therefore the sum of P8,041.20 as shown by receipt Exh. B. The buyer received Stock
Certificate No. 517, Exh. "F", issued in the name of Woo, Uy-Tioco & Naftaly and indorsed in
bank by this firm.

On March 9, 1937, Mrs. Santamaria placed an order for the purchase of 10,000 shares of the
Crown Mines, Inc. with R.J. Campos & Co., a brokerage firm, and delivered Certificate No. 517
to the latter as security therefor with the understanding that said certificate would be returned
to her upon payment of the 10,000 Crown Mines, Inc. shares. Exh. D. is the receipt of the
certificate in question signed by one Mr. Cosculluela, Manager of the R.J. Campos & Co., Inc.
According to certificate Exh. E, R. J. Campos & Co., Inc. bought for Mrs. Josefa Santamaria
10,000 shares of the Crown Mines, Inc. at .225 a share, or the total amount of P2,250.

At the time of the delivery of a stock Certificate No. 517 to R.J. Campos & Co., Inc. this
certificate was in the same condition as that when Mrs. Santamaria received from Woo, Uy-
Tioco & Naftaly, with the sole difference that her name was later written in lead pencil on the
upper right hand corner thereof.

Two days later, on March 11, Mrs. Santamaria went to R.J. Campos & Co., Inc. to pay for her
order of 10,000 Crown Mines shares and to get back Certificate No. 517. Cosculluela then
informed her that R.J. Campos & Co., Inc. was no longer allowed to transact business due to a
prohibition order from Securities and Exchange Commission. She was also inform that her
Stock certificate was in the possession of the Hongkong and Shanghai Banking Corporation.

Certificate No. 517 came into possession of the Hongkong and Shanghai Banking Corporation
because R.J. Campos & Co., Inc. had opened an overdraft account with this bank and to this
effect it had executed on April 16, 1936 a document of hypothecation, Exhibit 1, by the term of
which R.J. Campos & Co., Inc. pledged to the said bank "all stocks, shares and securities
which I/we may hereafter come into their possession of my/our account and whether originally
deposited for safe custody only or for any other purpose whatever or which may hereinafter be
deposited by me/us in lieu of or in addition to the Stocks Shares and Securities now deposited
or for any other purposes whatsoever."

On March 11, 1937, as shown by Exhibit G. Certificate No. 517, already indorsed by R.J.
Campos Co. Inc. to the Hongkong & Shanghai Banking Corporation, was sent by the latter to
the office of the Batangas Minerals, Inc. with the request that the same be cancelled and a new
certificate be issued in the name of R.W. Taplin as trustee and nominee of the banking
corporation. Robert W. Taplin was an officer of this institution in charge of the securities
belonging to or claimed by the bank. As per this request the Batangas Minerals, Inc. on March
107
 12, 1937, issued Certificate No. 715 in lieu of Certificate No. 517, in the name of Robert W.
Taplin as trustee and nominee of the Hongkong & Shanghai Banking Corporation. (Exhibits G,
H, I, J, 1, 4 and 5.)

According to Mrs. Santamaria, she made the claim to the bank for her certificate, though she
did not remember the exact date, but it was most likely on the following day of that when she
went to Cosculluela for the purpose of paying her order for 10,000 shares of the Crown Mines,
Inc., or else on March 13, 1937. In her interview with Taplin, the bank's representative, she
informed him that the certificate belonged to her, and she demanded that it be returned to her.
Taplin then replied that the bank did not know anything about the transaction had between her
and R.J. Campos & Co., Inc., and that he could not do anything until the case of the bank with
Campos shall have been terminated. This declaration was not contradicted by the adverse
party.

"In Civil Case No. 51224, R.J. Campos & Co., Inc. was declared insolvent, and on July 12,
1937, the Hongkong & Shanghai Banking Corporation asked permission in the insolvency court
to sell the R.J. Campos & Co., Inc., securities listed in its motion by virtue of the document of
hypothecation Exhibit 1. In an order dated July 15, 1937, the insolvency court granted this
motion.

"On June 3, 1938, to 10,000 shares of Batangas Minerals, Inc. represented by Certificate No.
715, were sold to the same bank by the Sheriff for P300 at the foreclosure sale authorized by
said order. (Exhibits F, 2 and 3.)

R.J. Campos, the president of R.J. Campos & Co., Inc., was prosecuted for estafa and found
guilty of this crime and was sentenced by the Manila Court of First Instance in Criminal Case
No. 54428, to an imprisonment and to indemnify the offended party, Mrs. Josefa Santamaria, in
the amount of P8,041.20 representing the value of the 10,000 shares of Batangas Minerals,
Inc. (Exhibits I and J.) The decision was later confirmed by the Court of Appeals. (Exhibits J.)
The offended party and R. W. Taplin were among the witnesses for the prosecution in this
criminal case No. 54428. (Exhibits 4.).

When Mrs. Santamaria failed in her efforts to force the civil judgment rendered in her favor in
the criminal case because the accused became insolvent, she filed her complaint in this case
on October 11, 1940. At the trial both parties agreed that the 10,000 Batangas Minerals shares
formerly represented by Certificate No. 517 and thereafter by Certificate No. 715, have no
actual market value.

The errors assigned by the defendants-appellants as committed by the lower court are:

The trial court erred in finding that the plaintiff-appellee was not chargeable with negligence in
the transaction which gave rise to this case.

II

The trial court erred in holding that it was the obligation of the bank to have inquired into the
ownership of the certificate when it received it from R.J. Campos & Company and in concluding
that the bank was negligent for not having done so.

108
 III

The trial court erred on ordering defendants-appellants to pay to plaintiff the sum of P8,041.20.

1. Defendants-appellants contend in the first place that the trial court erred in finding that the plaintiff-
appellee was not chargeable with negligence in the transaction which gave rise to this case.

A careful analysis of the facts seems to justify this contention. Certificate of stock No. 517 was made
out in the name of Wo, Uy-Tioco & Naftaly, brokers, and was duly indorsed in bank by said brokers.
This certificate of stock was delivered by plaintiff to R.J. Campos & Co., Inc. to comply with a
requirement that she deposit something on account if she wanted to buy 10,000 shares of Crown
Mines Inc. In making said deposit, plaintiff did not take any precaution to protect herself against the
possible misuse of the shares represented by the certificate of stock. Plaintiff could have asked the
corporation that had issued said certificate to cancel it and issue another in lieu thereof in her name
to apprise the holder that she was the owner of said certificate. This she failed to do, and instead she
delivered said certificate, as it was, to R.J. Campos & Co., Inc., thereby clothing the latter with
apparent title to the shares represented by said certificate including apparent authority to negotiate it
by delivering it to said company while it was indorsed in blank by the person or firm appearing on its
face as the owner thereof. The defendant Bank had no knowledge of the circumstances under which
the certificate of stock was delivered to R.J. Campos & Co., Inc., and had a perfect right to assume
that R.J. Campos & Co., Inc. was lawfully in possession of the certificate in view of the fact that it was
a street certificate, and was in such form as would entitle any possessor thereof to a transfer of the
stock on the books of the corporation concerned. There is no question that, in this case, plaintiff
made the negotiation of the certificate of stock to other parties possible and the confidence she
placed in R.J. Campos & Co., Inc. made the wrong done possible. This was the proximate cause of
the damage suffered by her. She is, therefore, estopped from claiming further title to or interest
therein as against a bona fide pledge or transferee thereof, for it is a well-known rule that a bona
fide pledgee or transferee of a stock from the apparent owner is not chargeable with knowledge of
the limitations placed on it by the real owner, or of any secret agreement relating to the use which
might be made of the stock by the holder (Fletcher, Cyclopedia of Corporations, section 5562, Vol.
12, p. 521).

On the other hand, it appears that this certificate of stock, indorsed as it was in blank by Woo, Uy-
Tioco & Naftaly, stock brokers, was delivered to The Hongkong and Shanghai Banking Corporation
by R.J. Campos & Co., Inc., duly indorsed by the latter, pursuant to a letter of hypothecation
executed by R.J. Campos & Co., Inc., in favor of said Bank (Exhibit "1"). The said certificate was
delivered to the Bank in the ordinary course of business, together with many other securities, and at
the time it was delivered, the Bank had no Knowledge that the shares represented by the certificate
belonged to the plaintiff for, as already said, it was in the form of street certificate which was
transferable by mere delivery. The rule is "where one of two innocent parties must suffer by reason of
a wrongful or unauthorized act, the loss must fall on the one who first trusted the wrong doer and put
in his hands the means of inflicting such loss" (Fletcher Cyclopedia of Corporations, supra).

It is therefore clear that plaintiff, in failing to take the necessary precautions upon delivering the
certificate of stock to her broker, was chargeable with negligence in the transaction which resulted to
her own prejudice, and as such, she is estopped from asserting title to it as against the defendant
Bank.

2. The next contention of the defendant is that the trial court erred in holding that it was the obligation
of the defendant Bank to have inquired into the ownership of the certificate when it received it from
109
R.J. Campos & Co., Inc. and in concluding that the Bank was negligent for not having done so,
contrary to the claim of the plaintiff that defendant Bank acted negligently, if not in bad faith, in
accepting delivery of said certificate from RJ. Campos & Co., Inc.

Let us now see the material facts on this point. Certificate No. 517 came into the possession of the
defendant Bank because R.J. Campos & Co., Inc. had opened an overdraft account with said Bank
and to this effect it had executed on April 16, 1946, a letter of hypothecation by the terms of which
R.J. Campos & Co., Inc. pledged to the said Bank "all Stocks, Shares and Securities which I/we may
hereafter come into their possession on my/our account and whether originally deposited for safe
custody only or for any other purpose whatever or which may hereafter be deposited by me/us in lieu
of or in addition to the Stocks, Shares, and Securities now deposited or for any other purpose
whatsoever." On March 13, 1937, plaintiff went to the office of the Bank to claim for her certificate. In
her interview with one Robert W. Taplin, the officer in charge of the securities of that institution, she
informed him that the certificate belonged to her and she demanded that it be returned to her. Taplin
then replied that the Bank did not know anything about the transaction had between her and that he
could not do anything until the case of the Bank with R.J. Campos & Co., Inc. had been terminated. It
further appears that when the certificate of stock was delivered by plaintiff to R.J. Campos & Co.,
Inc., the manager thereof, Sebastian Cosculluela, wrote in pencil on the right margin the name of
Josefa T. Santamaria, pursuant to the practice followed by said firm to write on that part of the
certificate the name of the owner for purposes of identification. Upon the facts thus stated, the
question that asserts itself is: was the defendants Bank obligated to inquire who was the real owner
of the shares represented by the certificate of stock, and could it be charged with negligence for
having failed to do so?

It should be noted that the certificate of stock in question was issued in the name of the brokerage
firm-Woo, Uy-Tioco & Naftaly and that it was duly indorsed in blank by said firm, and that said
indorsement was guaranteed by R.J. Campos & Co., Inc., which in turn indorsed it in blank. This
certificate is what it is known as street certificate. Upon its face, the holder was entitled to demand its
transfer into his name from the issuing corporation. The Bank was not obligated to look beyond the
certificate to ascertain the ownership of the stock at the time it received the same from R.J. Campos
& Co., Inc., for it was given to the Bank pursuant to their letter of hypothecation. Even if said
certificate had been in the name of the plaintiff but indorsed in blank, the Bank would still have been
justified in believing that R.J. Campos & Co., Inc. had title thereto for the reason that it is a well-
known practice that a certificate of stock, indorsed in blank, is deemed quasi negotiable, and as such
the transferee thereof is justified in believing that it belongs to the holder and transferor
(Heyman vs. Hamilton National Bank, 266 S.W. 1043; Fletcher, Cyclopedia of Corporations, Vol. 12,
pp. 521-524, 525-527; McNeil vs. Tenth National Bank, 7 Am. Rep. 341).

The only evidence in the record to show that the certificate of stock in question may not have
belonged to R.J. Campos & Co., Inc. is the testimony of the plaintiff to the effect that she had
approached Robert W. Taplin on March 13, 1937, and informed him that she was the true owner of
said certificate and demanded the return thereof, or its value, but even assuming for the sake of
argument that what plaintiff has stated is true, such an incident would merely show that plaintiff has
an adverse claim to the ownership of said certificate of stock, but that would not necessarily place the
Bank in the position to inquire as to the real basis of her claim, nor would it place the Bank in the
obligation to recognize her claim and return to her the certificate outright. A mere claim and of
ownership does not establish the fact of ownership. The right of the plaintiff in such a case would be
against the transferor. In fact, this is the attitude plaintiff has adopted when she filed a charge for
estafa against Rafael J. Campos, which culminated in his prosecution and conviction, and it is only
when she found him to be insolvent that she decided to go against the Bank. The fact that on the
110
right margin of the said certificate the name of the plaintiff appeared written, granting it to be true, can
not be considered sufficient reason to indicate that its owner was the plaintiff considering that said
certificate was indorsed in blank by her brokers Woo, Uy-Tioco & Naftaly, was guaranteed by
indorsement in blank by R.J. Campos & Co., Inc., and was transferred in due course by the latter to
the Bank under their letter of hypothecation. Said indicium could at best give the impression that the
plaintiff was the original holder of the certificate.

The Court has noticed that the defendant Bank was willing from the very beginning to compromise
this case by delivering to the plaintiff certificate of stock No. 715 that was issued to said Bank by the
issuer corporation in lieu of the original as alleged and prayed for in its amended answer to the
complaint dated April 2, 1941. Considering that in the light of the law and precedents applicable in
this case, the most that plaintiff could claim is the return to her of the said certificate of stock
(Howson vs. Mechanics Sav. Bank, 183 Atl., p. 697), the Court, regardless of the conclusions arrived
at as above stated, is inclined to grant the formal tender made by the defendant to the plaintiff of said
certificate.

Wherefore, the decision of the lower court is hereby modified in the sense of ordering the defendant
to deliver to the plaintiff certificate of stock No. 715, without pronouncement as to costs.

111
NEUGENE MARKETING INC., LEONCIO TAN, NICANOR MARTIN, SONNY MORENO, JOHNSON
LEE and SECURITIES AND EXCHANGE COMMISSION, petitioners, vs. COURT OF APPEALS,
ARSENIO YANG, JR., CHARLES O. SY, LOK CHUN SUEN, BAN HUA U. FLORES, BAN HA U.
CHUA and ROGER REYES, respondents. G.R. No. 112941 February 18, 1999 PURISIMA, J.:

At bar is a petition for review of the decision1 of the Special Fifth Division of the Court of Appeals
which reversed the decision of the Securities and Exchange Commission (SEC) annulling the
dissolution of Neugene Marketing, Inc. (NEUGENE, for short).

The SEC Hearing Panel gathered the facts, as follows:

On January 27, 1978, NEUGENE was duly registered with this Commission to engage in
trading business for a term of fifty (50) years with the following as incorporators/directors,
namely:

1. Johnson Lee (one of the petitioners);

2. Lok Chun Suen (one of the respondents);

3. Charles O. Sy (one of the respondents);

4. Eugenio Flores, Jr. (husband of respondent Ban Hua U.

Flores)

5. Arsenio Yang, Jr. (one of the respondents)

The authorized capital stock of NEUGENE is THREE MILLION PESOS (P3,000.000.00)

divided into THIRTY THOUSAND (P30,000) shares with a par value of ONE HUNDRED
PESOS (P100.00) each. Out of this authorized capital stock, SIX HUNDRED
THOUSAND PESOS (P600.000.00) had been subscribed by the following subscribers,
namely:

NAME NO. OF AMOUNT

———

SHARES SUBSCRIBED

————— ———————

Johnson Lee 600 P 60,000.00

Lok Chun Suen 1,200 120,000.00

Charles O. Sy 1,800 180,000.00

Eugenio Flores, Jr. 2,100 210,000.00

Arsenio Yang, Jr. 300 30,000.00

——————————————
112
 TOTAL 6,000.00 P600,000.00

====== ==========

Out of the aforesaid subscription, ONE HUNDRED FIFTY THOUSAND PESOS

(P150,000.00) had been paid by the following subscribers as follows:

NAME AMOUNT PAID UP

——— ——————————

Johnson Lee P15,000.00

Lok Chun Suen 30,000.00

Charles O. Sy 45,000.00

Eugenio Flores, Jr. 52,500.00

Arsenio Yang, Jr. 7,500.00

——————

TOTAL P150,000.00

===========

The original shareholdings of the incorporators/stockholders of NEUGENE were

increased by ten percent (10%) each by virtue of stock dividend declaration in the
amount of SIXTY THOUSAND PESOS (P60,000.00) made by its board of directors in a
special meeting held on June 7, 1980. . . .

Again, on May 2, 1981, the Board of directors of NEUGENE declared a stock dividend in
the amount of FORTY THOUSAND PESOS (P40,000.00) in proportion to the
shareholdings of the stockholders of record of NEUGENE as of April 30, 1981. . . .

xxx xxx xxx

The outstanding capital stock of NEUGENE became, SEVEN HUNDRED THOUSAND

PESOS (P700,000.00) represented by SEVEN THOUSAND (7,000) shares.

On May 15, 1986, Eugenio Flores, Jr. assigned transferred and conveyed his entire
shareholdings of TWO THOUSAND FOUR HUNDRED FIFTY (2,450) shares in
NEUGENE to the following, to wit.

Pet. Sonny Moreno 1,050 shares (Exh. "B")

Resp. Arsenio Yang, Jr., 700 shares (Exh. "C")

Resp. Charles O. Sy 700 shares (Exh. "D")

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 —————————

TOTAL 2,450

====

Thus, immediately after the assignment of the entire shareholdings of Egenio Flores, Jr,
to petitioner Sonny Moreno and respondents Arsenio Yang, Jr., and Charles O. Sy, the
stockholders of record of NEUGENE, as appearing in the Stock and Transfer Book
(Exhibit, "A"), particularly Exhihits "A-8 " to "A-12 " thereof were as follows:

NAME NO. OF SHARES

——— ————————

Johnson Lee. 700

Lok Chun Suen 1,400

Sonny Moreno 1,050

Charles O. Sy 2,800

Arsenio Yang, Jr. 1,050

————

TOTAL 7,000 2

======

On October 24, 1987, the private respondents, Charles O. Sy, Arsenio Yang, Jr. and Lok Chun Suen,
holders of 5,250 shares of NEUGENE (representing at least two-thirds (2/3) of the outstanding capital
stock of 7,000 shares) sent notice to the directors of NEUGENE for a board meeting to be held on
November 30, 1987. They also sent notice for a special stockholders' meeting on the same day,
November 30, 1987, to consider the dissolution of NEUGENE.

At the said meetings held on November 30, 1987, the private respondents, Charles O. Sy, Arsenio
Yang, Jr. and Lok Chun Suen, the directors and stockholders then present, voted for and approved a
resolution dissolving NEUGENE.

On March 1, 1988, acting upon private respondents's Petition for Dissolution, SEC issued a
Certificate of Dissolution of NEUGENE.

On March 22, 1988, the petitioners brought an action to annul or set aside the said SEC Certification
on the Dissolution of Neugene. In their Amended Petition, petitioners stated, among others, that they
are the majority stockholders of NEUGENE, owning eighty percent (80%) of its outstanding capital
stock, at the time of the adoption and approval of the Resolution for the Dissolution of NEUGENE, on
November 30, 1987; that prior thereto or on July 1, 1987, to be precise, the private respondents had
divested themselves of their stockholdings when they endorsed their stock certificates in blank and
delivered the same to the Uy Family, the beneficial owners of NEUGENE; that at the meetings held
114
on February 11, 12 and 13, 1987, in order to settle family squabbles, the Uy family agreed to award
NEUGENE's stock certificates to Johnny K. H. Uy, who, in turn, authorized Johnson Lee to dispose of
the same; and that Johnson Lee sold the said shares of stock to the petitioners, Leoncio Tan and
Nicanor Martin, such that, as reflected in the Stock and Transfer Book of NEUGENE, respondent Lok
Chun Suen had assigned all of his 1,400 shares of stock to petitioner Nicanor Martin, respondent
Charles O. SY assigned 2,100 shares out of his 2,800 shares of stock to petitioner Leoncio Tan, and
respondent Arsenio Yang, Jr. assigned 350 shares of his 1,050 shares of stock to petitioner Leoncio
Tan; that in view of the said transfers of shares of stock, private respondents Arsenio Yang, Jr., and
Charles O. Sy (each the holder of only 700 shares or 10% each of the outstanding capital stock of
NEUGENE) and Lok Chun Suen (who had ceased to be a stockholder as July 1, 1987) could no
longer validly vote for the dissolution of EUGENE on November 30, 1987, under Section 118 of the
Corporation Code, and all the proceedings of the meetings held on November 30, 1987, which were
improperly called and held without a quorum, are null void.3

On the other hand, the private respondents, Charles O. Sy, Arsenio Yang, Jr. and Lok Chun Suen,
theorized that the alleged assignments of shares of stock in favor of petitioners were simulated and
fraudulently effected, as there never was any agreement entered into by the Uy family to award
NEUGENE'S stock certificates to Johnny K. H. Uy, because subject stock certificates of the private
respondents covering their shares of stock were endorsed in blank by them and delivered to the Uy
family, who were the beneficial owners of NEUGENE, for safe keeping and the said certificates of
stock were kept inside the confidential vault of the Uy family at 225 D. Tuazon St., Quezon City, but
the same were stolen by the spouses, Johnny K. H. Uy and Magdalena Go-Uy, without the
knowledge and authority of the Uy family; that petitioner Sonny Moreno, a co-conspirator in such
fraudulent transfer of stocks in question, recorded the Simulated and fraudulent assignments in the
Stock and Transfer Book of the corporation, which book he obtained from Johnny K. H. Uy and
Magdalena Go-Uy, together with other corporate records of NEUGENE, including the stock
certificates endorsed in blank by petitioner Johnson Lee and respondents Arsenio Yang, Jr., Charles
O. Sy and Lok Chun Suen; that the petitioners, Nicanor Martin and Leoncio Tan, are co-conspirators
of Johnson Lee and Sonny Moreno in effecting the said simulated and fraudulent transfers of shares
of stock; that the private respondents never sold their shares of stock in NEUGENE to any of the
petitioners or other stockholders of record, prior to the dissolution of the corporation, so that they
(private respondents) represented at least two-thirds (2/3) of the outstanding capital stock of
NEUGENE when they voted to dissolve NEUGENE, on November 30, 1987.4

In its decision of June 19, 1990, the SEC Panel of Hearing Officers nullified the Certification on the
Dissolution of NEUGENE issued by SEC, holding that the private respondents were no longer
holders of at least two-thirds (2/3) of the outstanding capital stock of NEUGENE at the time they
presented the petition for dissolution, as required under Section 118 of the Corporation Code. (Annex
"O"). The said decision of the SEC Panel of Hearing Officers was affirmed in toto by the SEC En
Banc in a Decision promulgated on January 14, 1993.5 Portions of the decision of the SEC Hearing
Panel read:

The resolution to dissolve NEUGENE was adopted by only two (2) of its incumbent
directors, namely: respondent Charles O. Sy and Arsenio Yang, Jr. Respondent Lok
Chun Suen had already ceased to be a stockholder of NEUGENE as of July 1, 1987, by
the endorsement and delivery and cancellation of his stock certificates (Exhs. "E", "F",
and "G") and the entries in the Stock and Transfer Book (Exhs. "A", "A-1" to "A-24").
Hence, there was no quorum at said board of directors' meeting on November 30, 1987.
There was no quorum also at the November 30, 1987 meeting of the stockholders of
NEUGENE since only the following stockholders, namely: respondent Charles O. Sy and
115
 Arsenio Yang, Jr., who own 10% each of the stockholding of NEUGENE, could be
considered officially present at said meeting. On this score alone, the case for the
petitioners should be upheld.

xxx xxx xxx

WHEREFORE, judgement is hereby rendered:

1. Declaring as null and void the Certificate of Filing of Resolution of Voluntary

Dissolution of NEUGENE MARKETING, INC. issued by this Commission on March 1,
1988 for violation of Section 118 of the Corporate Code of the Philippines;

2. Ordering the respondents, particularly respondent Roger Z. Reyes or any other

persons acting as trustees of NEUGENE from representing himself/themeselves from
acting as such;

3. Directing the respondents, particularly respondents Ban Ha U. Chua, Ban Hua U.

Flores, Charles O. Sy and Arsenio Yang, Jr., or whoever is in possession of the
corporate books and records of NEUGENE, to turn over the same to its Secretary,
petitioner Sonny Moreno, within ten (10) days from the finality of this Decision; and to
revert back NEUGENE the Cash on Hand appearing in the Balance Sheet as of
November 30, 1987 in the amount of P860,591.98;

4. Ordering the respondents to pay attorney's fees to the petitioners in the amount of
FOUR HUNDRED THOUSAND PESOS (P400,000.00).6

On June 10, 1993, the aforesaid judgment of SEC was reversed by the Court of Appeals. Upholding
the validity of NEUGENE's dissolution, the Court of Appeals found that at the time of dissolution of
NEUGENE on November 30, 1987, the private respondents owned at least two-thirds (2/3) of
NEUGENE's stocks, it appearing that the certificates of stock of private respondents, which were
endorsed in blank, as earlier mentioned, were not validly transferred to petitioners herein.

The Court of Appeals ratiocinated and concluded:

The constitute a valid transfer, a stock certificate must be delivered and its delivery must
be coupled with an intention of constituting the person to whom the stock is delivered the
transferred (sic) thereof. (Fetcher Cyc Corp., Sec. 5484)

Furthermore, in order that there is a valid transfer, the person to whom the stock
certificates are endrosed (sic) must be a bona fide transferee and for value.

In the case at bar, Nicanor Martin and Leoncio Tan were not bona fide trasferees for
value and in good faith. Private respondent alleged that petitioners Sy, Lok and Yang, Jr.
indorsed and delivered their stock certificates to Nicanor Martin and Leoncio Tan.
However, private respondent Johnson Lee testified that he acquired his shares of stock
from Johnny Uy, who in turn sold them to Nocanor Martin and Leoncio Tan (tsn, pp., 49-
50, July 18, 1989). Likewise, evidence shows that no consideration was paid by Leoncio
Tan and Nicanor Martin when they allegedly acquired the stock certificates from the Uy
Family. Johnson Lee failed to produce any document evidencing the transaction or a
receipt showing his payment for the stocks. Therefore, it is clear that they were not bona

116
 fide transferees for value and in good faith. Consequently, they cannot be considered
stockholders for the purpose of determining the 2/3 votes of the outstanding capital stock
required to dissolve Neugene, in accordance with Sec. 118 of the Corporate Code.

After a careful examination of the documentary evidence, We find that the supposed
document evidencing the partition and division of the properties of the Uy Family (Exh.
"A"), is a mere xerox copy whose original copy was never produced before the hearing
panel. Moreover, it contained erasures and/or insertions, and it is written in the Chinese
Language, with no official translation submitted. Consequently, We find no basis for the
respondent Commission's finding that Neugene belongs to Johnny K. H. Uy.

Considering the above findings, there is likewise no basis for the Commission's ruling
that the amount of P60,591.98 should be returned by the petitioners to Neugene. Lastly,
the award of attorney's fees has no basis, considering Our findings that private
respondent have no cause of action against the petitioners, hence, they are not entitled
to attorney's fees.

WHEREFORE, the decision dated January 14, 1992 of the respondent Commission is
hereby REVERSED and SET ASIDE. No
costs. 7

In Its Resolution dated December 9, 1993, the Court of Appeals denied petitioners' motion for
reconsideration, and further ruled that the transfers of stock in question could not be valid and
effective for the simple reason that there is a complete absence of proof that the alleged transfers
were recorded in the books of the corporation. It relied on Section 63 of the Corporation Code of the
Philippines which provides that no transfer shall be valid except as between the parties, until the
transfer is recorded in the books of the corporation.8

In the Petition under scrutiny, petitioners contend that the Court of Appeals: "(1) misapprehended the
facts of the case and (2) failed to consider the evidence on record showing that the private
respondents were no longer holders of the necessary number of shares of stock at the time of the
dissolution of NEUGENE.9

The pivot of inquiry here is whether or not the private respondents lacked the requisite number of
shares of stock or had divested themselves of their stockholdings as of November 30, 1987 when
they voted for the resolution dissolving NEUGENE.

After a careful study, a finding in favor of private respondents is indicated. In short, the Petition is
barren of merit.

Entries in the Stock and Transfer Book of NEUGENE, particularly on the right hand portion of Exhibits
"A-9", "A-10" and "A-12", support the disquisition and conclusion arrived at by the Court of Appeals
that at the time of dissolution of NEUGENE on November 30, 1987, the private respondents, Lok
Chun Suen, Charles O. Sy and Arsenio Yang, Jr., owned at least two-thirds (2/3) of NEUGENE's
outstanding capital stock, in sufficient compliance with the germane provision of Section 118 of the
Corporation Code of the Philippines.

As shown in the Stock and Transfer Book of NEUGENE, the right hand portion of Exhibit "A-9", under
the column "Certificates Issued", private respondent Lok Chun Suen is the holder of a total of 1,400
shares of stock, issued on February 23, 1979, October 1, 1980 and May 2, 1981, respectively.
117
(Records, p. 662) Exhibit "A-10", on its right hand portion and under the column "Certificates Issued"
reflects private respondent Charles O. Sy as the holder of a total of 2,800 shares of stock, issued on
the abovementioned dates except those acquired from Eugenio Flores, Jr. which were issued on May
15, 1986. (Records, p. 663) While the right hand portion of Exhibit "A-12", under the column
"Certificates Issued", shows that private respondent Arsenio Yang, Jr. is the holder of 1,050 shares,
issued on the abovementioned dates, except those acquired from Eugenio Flores, Jr. which were
issued on May 15, 1986. (Records, p. 665)

Therefore, the entries on the right hand portion of NEUGENE'S Stock and Transfer Book, under the
column "Certificates Issued", indubitably record the private respondents as the holders of 5,250
shares, constituting at least two-thirds (2/3) of NEUGENE's outstanding capital stock of 7,000 shares.

Petitioners introduced in evidence the very same exhibits pertaining to the Stock and Transfer Book
of NEUGENE (more specifically Exhibits "A-9", "A-10", and "A-12") to prove that the private
respondents were no longer the majority stockholders at the time of the dissolution of NEUGENE. It
should be noted, however, that on the left hand portion of the said exhibits, under the colum
"Certificates Cancelled", entries on July 1, 1987 disclose that all of Lok Chun Suen's 1,400
certificates of stock were cancelled, Charles O. Sy's 2, 100 shares out of 2,800 shares were
cancelled, and Arsenio Yang, Jr.'s 350 shares out of his 1,050 shares were likewise cancelled,
thereby leaving Arsenio Yang, Jr. and Charles O. Sy the holders of only 700 shares each or 10 % of
the outstanding capital stock of NEUGENE when its dissolution was approved and voted for.

In light of the foregoing and after a careful examination of the evidence on record, and a judicious
study of the provisions of law and jurisprudence in point, we are with the Court of Appeals on the
finding and conclusion that the certificates of stock of the private respondents were stolen and
therefore not validly transferred, and the transfers of stock relied upon by petitioners were
fraudulently recorded in the Stock and Transfer Book of NEUGENE under the column "Certificates
Cancelled".

Although well-established is the rule that the appellate court will not generally disturb the factual
findings by the trial court for the reason that the trial court heard the testimonies of the witnesses and
observed their deportment and manner of testifying during the trial and was afforded the singular
chance to assess the probative value of the evidence. The rule does not apply where, as in this case,
the SEC overlooked certain facts of substance and value which if considered would affect the result
of the case. (Tomas vs. CA, 185 SCRA 627 [1990]; People vs. Alforte, 219 SCRA 458 [1993])

In the case under consideration, records reveal that the SEC En Banc and its Panel Of Hearing
Officers misappreciated the true nature of the relationship between the stockholders of NEUGENE
and the Uy family, who had the understanding that the beneficial ownership of NEUGENE would
remain with the Uy family, such that subject shares of stock were, immediately upon issuance,
endorsed in blank by the shareholders and entrusted to the Uy family, through Ban Ha Chua, for
safekeeping. Such beneficial ownership of the Uy family is admitted not only in the testimonies of
private respondents but also of the petitioners, Sonny Moreno and Johnson Lee.10

Both the petitioners Johnson Lee (a member of the Uy family himself), and Sony Moreno, the
corporate secretary, were aware of the real import or significance of the indorsements in blank on the
stock certificates of the private respondent. Obviously, then, they (Lee and Moreno) acted in bad faith
in assigning subject certificates of stock to the petitioners, Nicanor Martin and Leoncio Tan, and in
recording the said transfers in dispute in the Stock and Transfer book of NEUGENE.

118
Then, too, as nominees of the Uy family, the approval by the private respondents, Charles O. Sy, Lok
Chun Suen and Arsenio Yang, Jr., Jr., was necessary for the validity and effectivity of the transfer of
the stock certificates registered under their (private respondents) names. In the case under
consideration, not only did the transfers of stock in question lack the requisite approval, the private
respondents categorically declared under oath that subject certificates of stock of theirs were stolen
from the confidential vault of the Uy family and illegally transferred to the names of petitioners in the
Stock and Transfer Book of NEUGENE.

As stressed by the Court of Appeals, there is no reliable showing of any valuable consideration for
the supposed transfer of subject stocks to petitioners. Fundamental and crucial is the rule that if a
contract has no cause, it does not produce any effect whatsoever and is inexistent or void from the
beginning. The complete absence of a cause or consideration renders the contract absolutely void
and inexistent. (Robleza vs. Court of Appeals, 174 SCRA 362 [1989]), citing Arts. 1352 and 1409 of
the New Civil Code)

All things studiedly evaluated in proper perspective, we are of the irresistible conclusion that the
private respondents herein are the legitimate holders and owners of at least-two-thirds (2/3) of the
outstanding capital stock of NEUGENE, with the corresponding right to vote for its dissolution, in
accordance with Section 118 of the Corporation Code of the Philippines.

WHEREFORE, the Petition is DISMISSED for lack of merit and the Decision of the Court of Appeals
AFFIRMED, in its entirety, No pronouncement as to costs. SO ORDERED.

119
SIMNY G. GUY, GERALDINE G. GUY, GLADYS G. YAO, and the HEIRS OF THE LATE GRACE
G. CHEU,Petitioners, vs. GILBERT G. GUY, Respondent. G.R. No. 189486 September 5, 2012

SIMNY G. GUY, GERALDINE G. GUY, GLADYS G. YAO, and the HEIRS OF THE LATE GRACE
G. CHEU,Petitioners, vs. THE HON. OFELIA C. CALO, in her capacity as Presiding Judge of the
RTC -Mandaluyong City - Branch 211 and GILBERT G. GUY, Respondents. G.R. No. 189699
PEREZ, J.:

THE FACTS

With 519,997 shares of stock as reflected in Stock Certificate Nos. 004-014, herein respondent
Gilbert G. Guy (Gilbert) practically owned almost 80 percent of the 650,000 subscribed capital stock
of GoodGold Realty & Development Corporation (GoodGold),1 one of the multi-million corporations
which Gilbert claimed to have established in his 30s. GoodGold’s remaining shares were divided
among Francisco Guy (Francisco) with 130,000 shares, Simny Guy (Simny), Benjamin Lim and
Paulino Delfin Pe, with one share each, respectively. Gilbert is the son of spouses Francisco and
Simny. Simny, one of the petitioners, however, alleged that it was she and her husband who
established GoodGold, putting the bulk of its shares under Gilbert’s name. She claimed that with their
eldest son, Gaspar G. Guy (Gaspar), having entered the Focolare Missionary in 1970s, renouncing
worldly possessions,2 she and Francisco put the future of the Guy group of companies in Gilbert’s
hands. Gilbert was expected to bring to new heights their family multi-million businesses and they, his
parents, had high hopes in him.

Simny further claimed that upon the advice of their lawyers, upon the incorporation of GoodGold, they
issued stock certificates reflecting the shares held by each stockholder duly signed by Francisco as
President and Atty. Emmanuel Paras as Corporate Secretary, with corresponding blank
endorsements at the back of each certificate – including Stock Certificate Nos. 004-014 under
Gilbert’s name.3 These certificates were all with Gilbert’s irrevocable endorsement and power of
attorney to have these stocks transferred in the books of corporation.4 All of these certificates were
always in the undisturbed possession of the spouses Francisco and Simny, including Stock
Certificate Nos. 004-014.5

In 1999, the aging Francisco instructed Benjamin Lim, a nominal shareholder of GoodGold and his
trusted employee, to collaborate with Atty. Emmanuel Paras, to redistribute GoodGold’s
shareholdings evenly among his children, namely, Gilbert, Grace Guy-Cheu (Grace), Geraldine Guy
(Geraldine), and Gladys Guy (Gladys), while maintaining a proportionate share for himself and his
wife, Simny.6

Accordingly, some of GoodGold’s certificates were cancelled and new ones were issued to represent
the redistribution of GoodGold’s shares of stock. The new certificates of stock were signed by
Francisco and Atty. Emmanuel Paras, as President and Corporate Secretary, respectively.

The shares of stock were distributed among the following stockholders:

NAME NO. OF SHARES

Francisco Guy [husband] 195,000

Simny G. Guy [wife] 195,000

120
 Gilbert G. Guy [son] 65,000

Geraldine G. Guy [daughter] 65,000

Grace G.Cheu (or her heirs) [daughter] 65,000

Gladys G.Yao [daughter] 65,000

Total 650,0007

In September 2004, or five years after the redistribution of GoodGold’s shares of stock, Gilbert filed
with the Regional Trial Court (RTC) of Manila, a Complaint for the "Declaration of Nullity of Transfers
of Shares in GoodGold and of General Information Sheets and Minutes of Meeting, and for Damages
with Application for a Preliminary Injunctive Relief," against his mother, Simny, and his sisters,
Geraldine, Grace, and Gladys.8 Gilbert alleged, among others, that no stock certificate ever
existed;9 that his signature at the back of the spurious Stock Certificate Nos. 004-014 which
purportedly endorsed the same and that of the corporate secretary, Emmanuel Paras, at the obverse
side of the certificates were forged, and, hence, should be nullified.10

Gilbert, however, withdrew the complaint, after the National Bureau of Investigation (NBI) submitted a
report to the RTC of Manila authenticating Gilbert’s signature in the endorsed certificates. 11 The NBI
report stated:

FINDINGS:

Comparative analysis of the specimens submitted under magnification using varied lighting
process and with the aid of photographic enlargements disclosed the presence of significant
and fundamental similarities in the personal handwriting habits existing between the
questioned signatures of "GILBERT G. GUY" and "EMMANUEL C. PARAS," on one hand, and
their corresponding standard specimen/exemplar signatures, on the other hand, such as in:

- Basic design of letters/elements;

- Manner of execution/line quality;

- Minute identifying details.

CONCLUSION:

A. The questioned and the standard specimen/exemplar signatures of Gilbert G. Guy were
written by one and the same person;

B. The questioned and the standard specimen/exemplar signatures of "EMMANUEL C.

PARAS" were written by one and the same person. (Emphasis supplied)12

The present controversy arose, when in 2008, three years after the complaint with the RTC of Manila
was withdrawn, Gilbert again filed a complaint, this time, with the RTC of Mandaluyong, captioned as
"Intra-Corporate Controversy: For the Declaration of Nullity of Fraudulent Transfers of Shares of
Stock Certificates, Fabricated Stock Certificates, Falsified General Information Sheets, Minutes of
121
Meetings, and Damages with Application for the Issuance of a Writ of Preliminary and Mandatory
Injunction," docketed as SEC-MC08-112, against his mother, Simny, his sisters, Geraldine, Gladys,
and the heirs of his late sister Grace.13

Gilbert alleged that he never signed any document which would justify and support the transfer of his
shares to his siblings and that he has in no way, disposed, alienated, encumbered, assigned or sold
any or part of his shares in GoodGold.14 He also denied the existence of the certificates of stocks.
According to him, "there were no certificates of stocks under his name for the shares of stock
subscribed by him were never issued nor delivered to him from the time of the inception of the
corporation."15

Gilbert added that the Amended General Information Sheets (GIS) of GoodGold for the years 2000 to
2004 which his siblings submitted to the Securities and Exchange Commission (SEC) were spurious
as these did not reflect his true shares in the corporation which supposedly totaled to 595,000
shares;16 that no valid stockholders’ annual meeting for the year 2004 was held, hence proceedings
taken thereon, including the election of corporate officers were null and void;17 and, that his siblings
are foreign citizens, thus, cannot own more than forty percent of the authorized capital stock of the
corporation.18

Gilbert also asked in his complaint for the issuance of a Writ of Preliminary and Mandatory Injunction
to protect his rights.19

In an Order dated 30 June 2008,20 the RTC denied Gilbert’s Motion for Injunctive Relief21 which
constrained him to file a motion for reconsideration, and, thereafter, a Motion for Inhibition against
Judge Edwin Sorongon, praying that the latter recuse himself from further taking part in the case.

Meanwhile, Gilbert’s siblings filed a manifestation claiming that the complaint is a nuisance and
harassment suit under Section 1(b), Rule 1 of the Interim Rules of Procedure on Intra-Corporate
Controversies.

In an Order dated 6 November 2008,22 the RTC denied the motion for inhibition. The RTC also
dismissed the case, declaring it a nuisance and harassment suit, viz.:

WHEREFORE, the court resolves:

(1) To DENY as it is hereby DENIED respondent’s Motion for Inhibition;

(2) To DENY as it is hereby DENIED respondent’s Motion for Reconsideration of the June 30, 2008
Order; and,

(3) To declare as it is herby declared the instant case as a nuisance or harassment suit. Accordingly,
pursuant to Section 1(b), Rule 1 of the Interim Rules of Procedure for Intra-Corporate Dispute, the
instant case is hereby DISMISSED. No pronouncement as to costs.23

This constrained Gilbert to assail the above Order before the Court of Appeals (CA). The petition for
review was docketed as CA-G.R. SP No. 106405.

In a Decision24 dated 27 May 2009, the CA upheld Judge Sorongon’s refusal to inhibit from hearing
the case on the ground that Gilbert failed to substantiate his allegation of Judge Sorongon’s partiality
and bias.25

122
The CA, in the same decision, also denied Gilbert’s Petition for the Issuance of Writ of Preliminary
Injunction for failure to establish a clear and unmistakable right that was violated as required under
Section 3, rule 58 of the 1997 Rules of Civil Procedure.26

The CA, however, found merit on Gilbert’s contention that the complaint should be heard on the
merits. It held that:

A reading of the Order, supra, dismissing the respondent’s complaint for being a harassment suit
revealed that the court a quo relied heavily on the pieces of documentary evidence presented by the
Petitioners to negate Respondent’s allegation of fraudulent transfer of shares of stock, fabrication of
stock certificates and falsification of General Information Sheets (GIS), inter alia. It bears emphasis
that the Respondent is even questioning the genuiness and authenticity of the Petitioner’s
documentary evidence. To our mind, only a full-blown trial on the merits can afford the determination
of the genuineness and authenticity of the documentary evidence and other factual issues which will
ultimately resolve whether there was indeed a transfer of shares of stock.27

Hence, these consolidated petitions.

G.R. No. 189486 is a Petition for Review under Rule 45 of the Rules of Court filed by Simny,
Geraldine, Gladys, and the heirs of the late Grace against Gilbert, which prays that this Court declare
Civil Case No. SEC-MC08-112, a harassment or nuisance suit.

Meanwhile, during the pendency of G.R. No. 189486, the trial court set the pre-trial conference on the
case subject of this controversy, constraining the petitioners to file a Motion to defer the pre-trial,
which was, however, denied by the court a quo in an Order dated 11 September 2009,28 viz.:

In a Resolution dated September 3, 2009, the Honorable Court of Appeals (CA) (Former Second
Division) denied the Motion for Partial Reconsideration filed [by petitioners] herein. Inasmuch as there
is no longer any impediment to proceed with the instant case and the fact that this court was
specifically directed by the May 27, 2009 Decision of the CA Second Division to proceed with the trial
on the merits with dispatch, this court resolves to deny the motion under consideration.

WHEREFORE, premises considered, the Motion to Defer Pre-Trial Conference and Further
Proceedings filed by petitioners is hereby DENIED. Set the pre-trial on October 20, 2009, at 8:30 in
the morning.

The denial of the petitioners’ motion to defer pre-trial, compelled them to file with this Court a Petition
for Certiorari with Urgent Application for the Issuance of TRO and/or A Writ of Preliminary Injunction,
docketed asG.R. No. 189699. Because of the pendency of the G.R. No. 189486 before us, the
petitioners deemed proper to question the said denial before us as an incident arising from the main
controversy.29

OUR RULING

Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors

or other persons may be classified into individual suits, class suits, and derivative suits. 30

An individual suit may be instituted by a stockholder against another stockholder for wrongs
committed against him personally, and to determine their individual rights 31 – this is an individual suit
between stockholders. But an individual suit may also be instituted against a corporation, the same

123
having a separate juridical personality, which by its own may be sued. It is of course, essential that
the suing stockholder has a cause of action against the corporation.32

Individual suits against another stockholder or against a corporation are remedies which an
aggrieved stockholder may avail of and which are recognized in our jurisdiction as embedded in the
Interim Rules on Intra-Corporate Controversy. Together with this right is the parallel obligation of a
party to comply with the compulsory joinder of indispensable parties whether they may be
stockholders or the corporation itself.

The absence of an indispensable

party in a case renders all
subsequent actions of the court null
and void for want of authority to act,
not only as to the absent parties but
even as to those present.33

It bears emphasis that this controversy started with Gilbert’s complaint filed with the RTC of
Mandaluyong City in his capacity as stockholder, director and Vice-President of GoodGold.34

Gilbert’s complaint essentially prayed for the return of his original 519,997 shares in GoodGold, by
praying that the court declare that "there were no valid transfers of the contested shares to
defendants and Francisco."35 It baffles this Court, however, that Gilbert omitted Francisco as
defendant in his complaint. While Gilbert could have opted to waive his shares in the name of
Francisco to justify the latter’s non-inclusion in the complaint, Gilbert did not do so, but instead,
wanted everything back and even wanted the whole transfer of shares declared fraudulent. This
cannot be done, without including Francisco as defendant in the original case. The transfer of the
shares cannot be, as Gilbert wanted, declared entirely fraudulent without including those of Francisco
who owns almost a third of the total number.

Francisco, in both the 2004 and 2008 complaints, is an indispensable party without whom no final
determination can be had for the following reasons: (a) the complaint prays that the shares now
under the name of the defendants and Francisco be declared fraudulent; (b) Francisco owns 195,000
shares some of which, Gilbert prays be returned to him; (c) Francisco signed the certificates of stocks
evidencing the alleged fraudulent shares previously in the name of Gilbert. The inclusion of the
shares of Francisco in the complaint makes Francisco an indispensable party. Moreover, the
pronouncement about the shares of Francisco would impact on the hereditary rights of the contesting
parties or on the conjugal properties of the spouses to the effect that Francisco, being husband of
Simny and father of the other contesting parties, must be included for, otherwise, in his absence,
there cannot be a determination between the parties already before the court which is effective,
complete, or equitable.

The definition in the Rules of Court, Section 7, Rule 3 thereof, of indispensable parties as "parties in
interest without whom no final determination can be had of an action" has been jurisprudentially
amplified. In Sps. Garcia v. Garcia, et.al.,36 this Court held that:

An indispensable party is a party who has such an interest in the controversy or subject matter that a
final adjudication cannot be made, in his absence, without injuring or affecting that interest, a party
who has not only an interest in the subject matter of the controversy, but also has an interest of such
nature that a final decree cannot be made without affecting his interest or leaving the controversy in
such a condition that its final determination may be wholly inconsistent with equity and good
124
conscience. It has also been considered that an indispensable party is a person in whose absence
there cannot be a determination between the parties already before the court which is effective,
complete, or equitable. Further, an indispensable party is one who must be included in an action
before it may properly go forward.

This was our pronouncements in Servicewide Specialists Inc. v. CA,37 Arcelona v. CA,38 and Casals
v. Tayud Golf and Country Club, Inc.39

Settled is the rule that joinder of indispensable parties is compulsory40 being a sine qua non for the
exercise of judicial power,41 and, it is precisely "when an indispensable party is not before the court
that the action should be dismissed" for such absence renders all subsequent actions of the court null
and void for want of authority to act, not only as to the absent parties but even as to those present.42

It bears emphasis that Gilbert, while suing as a stockholder against his co-stockholders, should have
also impleaded GoodGold as defendant. His complaint also prayed for the annulment of the 2004
stockholders’ annual meeting, the annulment of the 2004 election of the board of directors and of its
officers, the annulment of 2004 GIS submitted to the SEC, issuance of an order for the accounting of
all monies and rentals of GoodGold, and the issuance of a writ of preliminary and mandatory
injunction. We have made clear that GoodGold is a separate juridical entity distinct from its
stockholders and from its directors and officers. The trial court, acting as a special commercial court,
cannot settle the issues with finality without impleading GoodGold as defendant. Like Francisco, and
for the same reasons, GoodGold is an indispensable party which Gilbert should have impleaded as
defendant in his complaint.

Allegations of deceit, machination,

false pretenses, misrepresentation,
and threats are largely conclusions
of law that, without supporting
statements of the facts to which the
allegations of fraud refer, do not
sufficiently state an effective cause of
action.43

"In all averments of fraud or mistake, the circumstances constituting fraud or mistake must be stated
with particularity"44 to "appraise the other party of what he is to be called on to answer, and so that it
may be determined whether the facts and circumstances alleged amount to fraud."45 These
particulars would necessarily include the time, place and specific acts of fraud committed.46 "The
reason for this rule is that an allegation of fraud concerns the morality of the defendant’s conduct and
he is entitled to know fully the ground on which the allegations are made, so he may have every
opportunity to prepare his case to clear himself at the trial."47

The complaint of Gilbert states:

13. The said spurious Amended GIS for the years 2000, 2001, 2002, 2003, 2004 and also in another
falsified GIS for the year 2004, the petitioners indicated the following alleged stockholders of
GOODGOLD with their respective shareholdings, to wit:

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 NAME NO. OF SHARES

Francisco Guy Co Chia 195,000

Simny G. Guy 195,000

Gilbert G. Guy 65,000

Geraldine G. Guy 65,000

Grace G.-Cheu 65,000

Gladys G.Yao 65,000

Total 650,000

14. The above spurious GIS would show that form the original 519,997 shares of stocks owned by
the respondent, which is equivalent to almost 80% of the total subscriptions and/or the outstanding
capital stock of GOODGOLD, respondent’s subscription was drastically reduced to only 65,000
shares of stocks which is merely equivalent to only 10 percent of the outstanding capital stock of the
corporation.

15. Based on the spurious GIS, shares pertaining to Benjamin Lim and Paulino Delfin Pe were
omitted and the total corporate shares originally owned by incorporators including herein respondent
have been fraudulently transferred and distributed, as follows: x x x (Emphasis supplied)

xxxx

18. To date, respondent is completely unaware of any documents signed by him that would justify
and support the foregoing transfer of his shares to the defendants. Respondent strongly affirms that
he has not in any way, up to this date of filing the instant complaint, disposed, alienated,
encumbered, assigned or sold any or part of the shares of stocks of GOODGOLD corporation owned
by him and registered under his name under the books of the corporation.

19. Neither has respondent endorsed, signed, assigned any certificates of stock representing the
tangible evidence of his stocks ownership, there being no certificates of stocks issued by the
corporation nor delivered to him since its inception on June 6, 1988. Considering that the corporation
is merely a family corporation, plaintiff does not find the issuance of stock certificates necessary to
protect his corporate interest and he did not even demand for its issuance despite the fact that he
was the sole subscriber who actually paid his subscription at the time of incorporation.48

Tested against established standards, we find that the charges of fraud which Gilbert accuses his
siblings are not supported by the required factual allegations. In Reyes v. RTC of Makati, 49 which we
now reiterate, mutatis mutandis, while the complaint contained allegations of fraud purportedly
committed by his siblings, these allegations are not particular enough to bring the controversy within
the special commercial court’s jurisdiction; they are not statements of ultimate facts, but are mere
conclusions of law: how and why the alleged transfer of shares can be characterized as "fraudulent"
were not explained and elaborated on.50 As emphasized in Reyes:

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Not every allegation of fraud done in a corporate setting or perpetrated by corporate officers will bring
the case within the special commercial court’s jurisdiction. To fall within this jurisdiction, there must
be sufficient nexus showing that the corporation’s nature, structure, or powers were used to facilitate
the fraudulent device or scheme.51 (Emphasis supplied)

Significantly, no corporate power or office was alleged to have facilitated the transfer of Gilbert’s
shares. How the petitioners perpetrated the fraud, if ever they did, is an indispensable allegation
which Gilbert must have had alleged with particularity in his complaint, but which he failed to.

Failure to specifically allege the

fraudulent acts in intra-corporate
controversies is indicative of a
harassment or nuisance suit and may
be dismissed motu proprio.

In ordinary cases, the failure to specifically allege the fraudulent acts does not constitute a ground for
dismissal since such a defect can be cured by a bill of particulars.52 Thus:

Failure to allege fraud or mistake with as much particularity as is desirable is not fatal if the general
purport of the claim or defense is clear, since all pleadings should be so construed as to do
substantial justice. Doubt as to the meaning of the pleading may be resolved by seeking a bill of
particulars.

A bill of particulars may be ordered as to a defense of fraud or mistake if the circumstances

constituting fraud or mistake are not stated with the particularity required by the rule.53

The above-stated rule, however, does not apply to intra-corporate controversies. In Reyes,54 we
pronounced that "in cases governed by the Interim Rules of Procedure on Intra-Corporate
Controversies a bill of particulars is a prohibited pleading. It is essential, therefore, for the complaint
to show on its face what are claimed to be the fraudulent corporate acts if the complainant wishes to
invoke the court’s special commercial jurisdiction." This is because fraud in intra-corporate
controversies must be based on "devises and schemes employed by, or any act of, the board of
directors, business associates, officers or partners, amounting to fraud or misrepresentation which
may be detrimental to the interest of the public and/or of the stockholders, partners, or members of
any corporation, partnership, or association," as stated under Rule 1, Section 1 (a)(1) of the Interim
Rules. The act of fraud or misrepresentation complained of becomes a criterion in determining
whether the complaint on its face has merits, or within the jurisdiction of special commercial court, or
merely a nuisance suit.

It did not escape us that Gilbert, instead of particularly describing the fraudulent acts that he
complained of, just made a sweeping denial of the existence of stock certificates by claiming that
such were not necessary, GoodGold being a mere family corporation.55 As sweeping and bereft of
particulars is his claim that he "is unaware of any document signed by him that would justify and
support the transfer of his shares to herein petitioners."56 Even more telling is the contradiction
between the denial of the existence of stock certificates and the denial of the transfer of his shares of
stocks "under his name under the books of the corporations."

It is unexplained that while Gilbert questioned the authenticity of his signatures indorsing the stock
certificates, and that of Atty. Emmanuel Paras, the corporate secretary, he did not put in issue as
doubtful the signature of his father which also appeared in the certificate as President of the
127
corporation. Notably, Gilbert, during the entire controversy that started with his 2004 complaint, failed
to rebut the NBI Report which authenticated all the signatures appearing in the stock certificates.

Even beyond the vacant pleadings, its nature as nuisance is palpable. To recapitulate, it was only
after five years following the redistribution of GoodGold’s shares of stock, that Gilbert filed with the
RTC of Manila, a Complaint for the "Declaration of Nullity of Transfers of Shares in GoodGold and of
General Information Sheets and Minutes of Meeting, and for Damages with Application for a
Preliminary Injunctive Relief," against his mother, Simny, and his sisters, Geraldine, Grace, and
Gladys.57 Gilbert alleged, among others, that no stock certificate ever existed;58that his signature at
the back of the spurious Stock Certificate Nos. 004-014 which purportedly endorsed the same and
that of the corporate secretary, Emmanuel Paras, at the obverse side of the certificates were forged,
and, hence, should be nullified.59 Gilbert withdrew this complaint after the NBI submitted a report to
the RTC of Manila authenticating Gilbert’s signature in the endorsed certificates. And, it was only
after three years from the withdrawal of the Manila complaint, that Gilbert again filed in 2008 a
complaint also for declaration of nullity of the transfer of the shares of stock, this time with the RTC of
Mandaluyong. The caption of the complaint is "Intra-Corporate Controversy: For the Declaration of
Nullity of Fraudulent Transfers of Shares of Stock Certificates, Fabricated Stock Certificates, Falsified
General Information Sheets, Minutes of Meetings, and Damages with Application for the Issuance of
a Writ of Preliminary and Mandatory Injunction," docketed as SEC-MC08-112, against his mother,
Simny, his sisters, Geraldine, Gladys, and the heirs of his late sister Grace. 60 1âwphi1

When a stock certificate is endorsed

in blank by the owner thereof, it
constitutes what is termed as "street
certificate," so that upon its face, the
holder is entitled to demand its
transfer his name from the issuing
corporation.

With Gilbert’s failure to allege specific acts of fraud in his complaint and his failure to rebut the NBI
report, this Court pronounces, as a consequence thereof, that the signatures appearing on the stock
certificates, including his blank endorsement thereon were authentic. With the stock certificates
having been endorsed in blank by Gilbert, which he himself delivered to his parents, the same can be
cancelled and transferred in the names of herein petitioners.

In Santamaria v. Hongkong and Shanghai Banking Corp.,61 this Court held that when a stock
certificate is endorsed in blank by the owner thereof, it constitutes what is termed as "street
certificate," so that upon its face, the holder is entitled to demand its transfer into his name from the
issuing corporation. Such certificate is deemed quasi-negotiable, and as such the transferee thereof
is justified in believing that it belongs to the holder and transferor.1âwphi1

While there is a contrary ruling, as an exception to the general rule enunciated above, what the Court
held in Neugene Marketing Inc., et al., v CA,62 where stock certificates endorsed in blank were stolen
from the possession of the beneficial owners thereof constraining this Court to declare the transfer
void for lack of delivery and want of value, the same cannot apply to Gilbert because the stock
certificates which Gilbert endorsed in blank were in the undisturbed possession of his parents who
were the beneficial owners thereof and who themselves as such owners caused the transfer in their
names. Indeed, even if Gilbert’s parents were not the beneficial owners, an endorsement in blank of
the stock certificates coupled with its delivery, entitles the holder thereof to demand the transfer of
said stock certificates in his name from the issuing corporation.63
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Interestingly, Gilbert also used the above discussed reasons as his arguments in Gilbert Guy v. Court
of Appeals, et a.l,64 a case earlier decided by this Court. In that petition, Lincoln Continental, a
corporation purportedly owned by Gilbert, filed with the RTC, Branch 24, Manila, a Complaint for
Annulment of the Transfer of Shares of Stock against Gilbert’s siblings, including his mother, Simny.
The complaint basically alleged that Lincoln Continental owns 20,160 shares of stock of Northern
Islands; and that Gilbert’s siblings, in order to oust him from the management of Northern Islands,
falsely transferred the said shares of stock in his sisters’ names.65 This Court dismissed Gilbert’s
petition and ruled in favor of his siblings viz:

One thing is clear. It was established before the trial court, affirmed by the Court of Appeals, that
Lincoln Continental held the disputed shares of stock of Northern Islands merely in trust for the Guy
sisters. In fact, the evidence proffered by Lincoln Continental itself supports this conclusion. It bears
emphasis that this factual finding by the trial court was affirmed by the Court of Appeals, being
supported by evidence, and is, therefore, final and conclusive upon this Court.

Article 1440 of the Civil Code provides that:

"ART. 1440. A person who establishes a trust is called the trustor; one in whom confidence is
reposed as regards property for the benefit of another person is known as the trustee; and the person
for whose benefit the trust has been created is referred to as the beneficiary."

In the early case of Gayondato v. Treasurer of the Philippine Islands, this Court defines trust, in its
technical sense, as "a right of property, real or personal, held by one party for the benefit of another."
Differently stated, a trust is "a fiduciary relationship with respect to property, subjecting the person
holding the same to the obligation of dealing with the property for the benefit of another person."

Both Lincoln Continental and Gilbert claim that the latter holds legal title to the shares in question. But
record shows that there is no evidence to support their claim. Rather, the evidence on record clearly
indicates that the stock certificates representing the contested shares are in respondents'
possession. Significantly, there is no proof to support his allegation that the transfer of the shares of
stock to respondent sisters is fraudulent. As aptly held by the Court of Appeals, fraud is never
presumed but must be established by clear and convincing evidence. Gilbert failed to discharge this
burden. We agree with the Court of Appeals that respondent sisters own the shares of stocks, Gilbert
being their mere trustee. 66 (Underlining supplied).

This Court finds no cogent reason to divert from the above stated ruling, these two cases having
similar facts.

WHEREFORE, premises considered, the petitions in G.R. Nos. 189486 and 189699 are
hereby GRANTED. The Decision dated 27 May 2009 of the Court of Appeals in CA-G .R. SP No.
106405 and its Resolution dated 03 September 2009 are REVERSED and SET ASIDE. The
Court DECLARES that SEC-MC08-112 now pending before the Regional Trial Court, Branch 211,
Mandaluyong City, is a nuisance suit and hereby ORDERS it to IMMEDIATELY DISMISS the same
for reasons discussed herein.

SO ORDERED.

129
FUA CUN (alias Tua Cun), plaintiff-appellee, vs. RICARDO SUMMERS, in his capacity as Sheriff
ex-oficio of the City of Manila, and the CHINA BANKING CORPORATION, defendants-appellants.
G.R. No. L-19441 March 27, 1923 OSTRAND, J.:

It appears from the evidence that on August 26, 1920, one Chua Soco subscribed for five hundred
shares of stock of the defendant Banking Corporation at a par value of P100 per share, paying the
sum of P25,000, one-half of the subscription price, in cash, for which a receipt was issued in the
following terms:

This is to certify, That Chua Soco, a subscriber for five hundred shares of the capital stock of
the China Banking Corporation at its par value of P100 per share, has paid into the Treasury of
the Corporation, on account of said subscription and in accordance with its terms, the sum of
twenty-five thousand pesos (P25,000), Philippine currency.

Upon receipt of the balance of said subscription in accordance with the terms of the calls of the
Board of Directors, and surrender of this certificate, duly executed certificates for said five
hundred shares of stock will be issued to the order of the subscriber.

It is expressly understood that the total number of shares specified in this receipt is subject to
sale by the China Banking Corporation for the payment of any unpaid subscriptions, should the
subscriber fail to pay the whole or any part of the balance of his subscription upon 30 days'
notice issued therefor by the Board of Directors.

Witness our official signatures at Manila, P. I., this 25th day of August, 1920.

(Sgd.) MERVIN WEBSTER

Cashier

(Sgd.) DEE C. CHUAN

President

On May 18, 1921, Chua Soco executed a promissory note in favor of the plaintiff Fua Cun for the
sum of P25,000 payable in ninety days and drawing interest at the rate of 1 per cent per month,
securing the note with a chattel mortgage on the shares of stock subscribed for by Chua Soco, who
also endorsed the receipt above mentioned and delivered it to the mortgagee. The plaintiff thereupon
took the receipt to the manager of the defendant Bank and informed him of the transaction with Chua
Soco, but was told to await action upon the matter by the Board of Directors.

In the meantime Chua Soco appears to have become indebted to the China Banking Corporation in
the sum of P37,731.68 for dishonored acceptances of commercial paper and in an action brought
against him to recover this amount, Chua Soco's interest in the five hundred shares subscribed for
was attached and the receipt seized by the sheriff. The attachment was levied after the defendant
bank had received notice of the facts that the receipt had been endorsed over to the plaintiff.

Fua Cun thereupon brought the present action maintaining that by virtue of the payment of the one-
half of the subscription price of five hundred shares Chua Soco in effect became the owner of two
hundred and fifty shares and praying that his, the plaintiff's, lien on said shares, by virtue of the
chattel mortgage, be declared to hold priority over the claim of the defendant Banking Corporation;
that the defendants be ordered to deliver the receipt in question to him; and that he be awarded the
sum of P5,000 in damages for wrongful attachment.

130
The trial court rendered judgment in favor of the plaintiff declaring that Chua Soco, through the
payment of the P25,000, acquired the right to two hundred and fifty shares fully paid up, upon which
shares the plaintiff holds a lien superior to that of the defendant Banking Corporation and ordering
that the receipt be returned to said plaintiff. From this judgment the defendants appeal.

Though the court below erred in holding that Chua Soco, by paying one-half of the subscription price
of five hundred shares, in effect became the owner of two hundred and fifty shares, the judgment
appealed from is in the main correct.

The claim of the defendant Banking Corporation upon which it brought the action in which the writ of
attachment was issued, was for the non-payment of drafts accepted by Chua Soco and had no direct
connection with the shares of stock in question. At common law a corporation has no lien upon the
shares of stockholders for any indebtedness to the corporation (Jones on Liens, 3d ed., sec. 375)
and our attention has not been called to any statute creating such lien here. On the contrary, section
120 of the Corporation Act provides that "no bank organized under this Act shall make any loan or
discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any
such shares, unless such security or purchase shall be necessary to prevent loss upon a debt
previously contracted in good faith, and stock so purchased or acquired shall, within six months from
the time of its purchase, be sold or disposed of at public or private sale, or, in default thereof, a
receiver may be appointed to close up the business of the bank in accordance with law."

Section 35 of the United States National Banking Act of 1864 contains a similar provision and it has
been held in various decisions of the United States Supreme Court that a bank organized under that
Act can have no lien on its own stock for the indebtedness of the stockholders even when the by-laws
provide that the shares shall be transferable only on the books of the corporation and that no such
transfer shall be made if the holder of the shares is indebted to the corporation. (Jones on Liens, 3d
ed., sec. 384; First National Bank of South Bend vs. Lanier and Handy, 11 Wall., 369;
Bullard vs. National Eagle Bank, 18 Wall., 589; First National Bank of Xenia vs. Stewart and
McMillan, 107 U.S., 676.) The reasons for this doctrine are obvious; if banking corporations were
given a lien on their own stock for the indebtedness of the stockholders, the prohibition against
granting loans or discounts upon the security of the stock would become largely ineffective.

Turning now to the rights of the plaintiff in the stock in question, it is argued that the interest held by
Chua Soco was merely an equity which could not be made the subject of a chattel mortgage. Though
the courts have uniformly held that chattel mortgages on shares of stock and other choses in action
are valid as between the parties, there is still much to be said in favor of the defendants' contention
that the chattel mortgage here in question would not prevail over liens of third parties without notice;
an equity in shares of stock is of such an intangible character that it is somewhat difficult to see how it
can be treated as a chattel and mortgaged in such a manner that the recording of the mortgage will
furnish constructive notice to third parties. As said by the court in the case of Spalding vs. Paine's
Adm'r. (81 Ky., 416), in regard to a chattel mortgage of shares of stock:

These certificates of stock are in the pockets of the owner, and go with him where he may
happen to locate, as choses in action, or evidence of his right, without any means on the part
of those with whom he proposes to deal on the faith of such a security of ascertaining whether
or not this stock is in pledge or mortgaged to others. He finds the name of the owner on the
books of the company as a subscriber of paid-up stock, amounting to 180 shares, with the
certificates in his possession, pays for these certificates their full value, and has the transfer to
him made on the books of the company, thereby obtaining a perfect title. What other inquiry is
he to make, so as to make his investment certain and secure? Where is he to look, in order to
131
 ascertain whether or not this stock has been mortgaged? The chief office of the company may
be at one place to-day and at another tomorrow. The owner may have no fixed or permanent
abode, and with his notes in one pocket and his certificates of stock in the other — the one
evidencing the extent of his interest in the stock of the corporation, the other his right to money
owing him by his debtor, we are asked to say that the mortgage is effectual as to the one and
inoperative as to the other.

But a determination of this question is not essential in the present case. There can be no doubt that
an equity in shares of stock may be assigned and that the assignment is valid as between the parties
and as to persons to whom notice is brought home. Such an assignment exists here, though it was
made for the purpose of securing a debt. The endorsement to the plaintiff of the receipt above
mentioned reads:

For value received, I assign all my rights in these shares in favor of Mr. Tua Cun.

Manila, P. I., May 18, 1921.

(Sgd.) CHUA SOCO

This endorsement was accompanied by the delivery of the receipt to the plaintiff and further
strengthened by the execution of the chattel mortgage, which mortgage, at least, operated as a
conditional equitable assignment.

As against the rights of the plaintiff the defendant bank had, as we have seen, no lien unless by
virtue of the attachment. But the attachment was levied after the bank had received notice of the
assignment of Chua Soco's interests to the plaintiff and was therefore subject to the rights of the
latter. It follows that as against these rights the defendant bank holds no lien whatever.

As we have already stated, the court erred in holding the plaintiff as the owner of two hundred and
fifty shares of stock; "the plaintiff's rights consist in an equity in five hundred shares and upon
payment of the unpaid portion of the subscription price he becomes entitled to the issuance of
certificate for said five hundred shares in his favor."

The judgment appealed from is modified accordingly, and in all other respects it is affirmed, with the
costs against the appellants Banking Corporation. So ordered.

Araullo, C.J., Street, Malcolm, Avanceña, Villamor, Johns, and Romualdez, JJ., concur.

132
GONZALO CHUA GUAN, plaintiff-appellant, vs. SAMAHANG MAGSASAKA, INC., and
SIMPLICIO OCAMPO, ADRIANO G. SOTTO, and EMILIO VERGARA, as president, secretary
and treasurer respectively of the same, defendants-appellees.
G.R. No. L42091 November 2, 1935 BUTTE, J.:

This is an appeal from a judgment of the Court of First Instance of Nueva Ecija in an action for a writ
of mandamus. The case is remarkable for the following reason: that the parties entered into a
stipulation in which the defendants admitted all of the allegations of the complaint and the plaintiff
admitted all of the special defenses in the answer of the defendants, and on this stipulation they
submitted the case for decision.

The complaint alleges that the defendant Samahang Magsasaka, Inc., is a corporation duly
organized under the laws of the Philippine Islands with principal office in Cabanatuan, Nueva Ecija,
and that the individual defendants are the president, secretary and treasurer respectively of the
same; that on June 18, 1931, Gonzalo H. Co Toco was the owner of 5,894 shares of the capital stock
of the said corporation represented by nine certificates having a par value of P5 per share; that on
said date Gonzalo H. Co Toco, a resident of Manila, mortgaged said 5,894 shares to Chua Chiu to
guarantee the payment of a debt of P20,000 due on or before June 19, 1932. The said certificates of
stock were delivered with the mortgage to the mortgagee, Chua Chiu. The said mortgage was duly
registered in the office of the register of deeds of Manila on June 23, 1931, and in the office of the
said corporation on September 30, 1931.

On November 28, 1931, Chua Chiu assigned all his right and interest in the said mortgage to the
plaintiff and the assignment was registered in the office of the register of deeds in the City of Manila
on December 28, 1931, and in the office of the said corporation on January 4, 1932.

The debtor, Gonzalo H. Co Toco, having defaulted in the payment of said debt at maturity, the
plaintiff foreclosed said mortgage and delivered the certificates of stock and copies of the mortgage
and assignment to the sheriff of the City of Manila in order to sell the said shares at public auction.
The sheriff auctioned said 5,894 shares of stock on December 22, 1932, and the plaintiff having been
the highest bidder for the sum of P14,390, the sheriff executed in his favor a certificate of sale of said
shares.

The plaintiff tendered the certificates of stock standing in the name of Gonzalo H. Co Toco to the
proper officers of the corporation for cancellation and demanded that they issue new certificates in
the name of the plaintiff. The said officers (the individual defendants) refused and still refuse to issue
said new shares in the name of the plaintiff.

The prayer is that a writ of mandamus be issued requiring the defendants to transfer the said 5,894
shares of stock to the plaintiff by cancelling the old certificates and issuing new ones in their stead.

The special defenses set up in the answer are as follows: that the defendants refuse to cancel the
said certificates standing in the name of Gonzalo H. Co Toco on the books of the corporation and to
issue new ones in the name of the plaintiff because prior to the date when the plaintiff made his
demand, to wit, February 4, 1933, nine attachments had been issued and served and noted on the
books of the corporation against the shares of Gonzalo H. Co Toco and the plaintiff objected to
having these attachments noted on the new certificates which he demanded. These attachments
noted on the books of the corporation against the shares of Gonzalo H. Co Toco are as follows:

MISSING PAGES: 475-477.

133
It will be noted that the first eight of the said writs of attachment were served on the corporation and
noted on its records before the corporation received notice from the mortgagee Chua Chiu of the
mortgage of said shares dated June 18, 1931. No question is raised as to the validity of said
mortgage or of said writs of attachment and the sole question presented for decision is whether the
said mortgage takes priority over the said writs of attachment.

It is not alleged that the said attaching creditors had actual notice of the said mortgage and the
question therefore narrows itself down to this: Did the registration of said chattel mortgage in the
registry of chattel mortgages in the office of the register of deeds of Manila, under date of July 23,
1931, give constructive notice to the said attaching creditors?

In passing, let it be noted that the registration of the said chattel mortgage in the office of the
corporation was not necessary and had no legal effect. (Monserrat vs. Ceron, 58 Phil., 469.) The long
mooted question as to whether or not shares of a corporation could be hypothecated by placing a
chattel mortgage on the certificate representing such shares we now regard as settled by the case
of Monserrat vs. Ceron, supra. But that case did not deal with any question relating to the registration
of such a mortgage or the effect of such registration. Nothing appears in the record of that case even
tending to show that the chattel mortgage there involved was ever registered anywhere except in the
office of the corporation, and there was no question involved there as to the right of priority among
conflicting claims of creditors of the owner of the shares.

The Chattel Mortgage Law, Act No. 1508, as amended by Act No. 2496, contains the following
provision:

SEC. 4. A chattel mortgage shall not be valid against any person except the mortgagor, his
executors or administrators, unless the possession of the property is delivered to and retained
by the mortgagee or unless the mortgage is recorded in the office of the register of deeds of
the province in which the mortgagor resides at the time of making the same, or, if he resides
the Philippine Islands, in the province in which the property is situated: Provided,
however, That if the property is situated in a different province from that in which the mortgagor
resides, the mortgage shall be recorded in the office of the register of deeds of both the
province in which the mortgagor resides and that in which the property is situated, and for the
purposes of this Act the City of Manila Shall be deemed to be a province.

The practical application of the Chattel Mortgage Law to shares of stock of a corporation presents
considerable difficulty and we have obtained little aid from the decisions of other jurisdictions
because that form of mortgage is ill suited to the hypothecation of shares of stock and has been
rarely used elsewhere. In fact, it has been doubted whether shares of stock in a corporation are
chattels in the sense in which that word is used chattel mortgage statutes. This doubt is reflected in
our own decision in the case of Fua Cun vs. Summers and China Banking Corporation (44 Phil.,
705), in which we said:

". . . an equity in shares of stock is of such an intangible character that it is somewhat difficult to see
how it can be treated as a chattel and mortgaged in such a manner that the recording of the
mortgage will furnish constructive notice to third parties. . . ."And we held that the chattel mortgage
there involved: "at least operated as a conditional equitable assignment." In that case we quoted the
following from Spalding vs. Paine's Adm'r. (81 Ky., 416), with regard to a chattel mortgage of shares
of stock:

134
 "These certificates of stock are in the pockets of the owner, and go with him where he may
happen to locate, as choses in action, or evidence of his right, without any means on the part
of those with whom he proposes to deal on the faith of such a security of ascertaining whether
or not this stock is in pledge or mortgaged to others. He finds the name of the owner on the
books of the company as a subscriber of paid-up stock, amounting to 180 shares, with the
certificates in his possession, pays for these certificates their full value, and has the transfer to
him made on the books of the company, thereby obtaining a perfect title. What other inquiry is
he to make, so as to make his investment certain and secure? Where is he to look, in order to
ascertain whether or not this stock has been mortgaged? The chief office of the company may
be at one place today and at another tomorrow. The owner may have no fixed or permanent
abode, and with his notes in one pocket and his certificates of stock in the other — the one
evidencing the extent of his interest in the stock of the corporation, the other his right to money
owing him by his debtor, we are asked to say that the mortgage is effectual as to the one and
inoperative as to the other."

But the case of Fua Cun vs. Summers and China Banking Corporation, supra, did not decide the
question here presented and gave no light as to the registration of a chattel mortgage of shares of
stock of a corporation under the provisions of section 4 of the Chattel Mortgage Law, supra.

Section 4 of Act No. 1508 provides two ways for executing a valid chattel mortgage which shall be
effective against third persons. First, the possession of the property mortgage must be delivered to
and retained by the mortgagee; and, second, without such delivery the mortgage must be recorded in
the proper office or offices of the register or registers of deeds. If a chattel mortgage of shares of
stock of a corporation may validly be made without the delivery of possession of the property to the
mortgagee and the mere registration of the mortgage is sufficient to constructive notice to third
parties, we are confronted with the question as to the proper place of registration of such a mortgage.
Section 4 provides that in such a case the mortgage resides at the time of making the same or, if he
is a non-resident, in the province in which the property is situated; and it also provides that if the
property is situated in a different province from that in which the mortgagor resides the mortgage
shall be recorded both in the province of the mortgagor's residence and in the province where the
property is situated.

If with respect to a chattel mortgage of shares of stock of a corporation, registration in the province of
the owner's domicile should be sufficient, those who lend on such security would be confronted with
the practical difficulty of being compelled not only to search the records of every province in which the
mortgagor might have been domiciled but also every province in which a chattel mortgage by any
former owner of such shares might be registered. We cannot think that it was the intention of the
legislature to put this almost prohibitive impediment upon the hypothecation of shares of stock in view
of the great volume of business that is done on the faith of the pledge of shares of stock as collateral.

It is a common but not accurate generalization that the situs of shares of stock is at the domicile of
the owner. The term situs is not one of fixed of invariable meaning or usage. Nor should we lose sight
of the difference between the situs of the shares and the situs of the certificates of shares. The situs
of shares of stock for some purposes may be at the domicile of the owner and for others at the
domicile of the corporation; and even elsewhere. (Cf. Vidal vs. South American Securities Co., 276
Fed., 855; Black Eagle Min. Co. vs. Conroy, 94 Okla., 199; 221 Pac,, 425 Norrie vs. Kansas City
Southern Ry. Co., 7 Fed. [2d]. 158.) It is a general rule that for purposes of execution, attachment
and garnishment, it is not the domicile of the owner of a certificate but the domicile of the corporation
which is decisive. (Fletcher, Cyclopedia of the Law of Private Corporations, vol. 11, paragraph 5106.
Cf. sections 430 and 450, Code of Civil Procedure.)
135
By analogy with the foregoing and considering the ownership of shares in a corporation as property
distinct from the certificates which are merely the evidence of such ownership, it seems to us a
reasonable construction of section 4 of Act No. 1508 to hold that the property in the shares may be
deemed to be situated in the province in which the corporation has its principal office or place of
business. If this province is also the province of the owner's domicile, a single registration sufficient. If
not, the chattel mortgage should be registered both at the owner's domicile and in the province where
the corporation has its principal office or place of business. In this sense the property mortgaged is
not the certificate but the participation and share of the owner in the assets of the corporation.

Apart from the cumbersome and unusual method of hypothecating shares of stock by chattel
mortgage, it appears that in the present state of our law, the only safe way to accomplish the
hypothecation of share of stock of a Philippine corporation is for the creditor to insist on the
assignment and delivery of the certificate and to obtain the transfer of the legal title to him on the
books of the corporation by the cancellation of the certificate and the issuance of a new one to him.
From the standpoint of the debtor this may be unsatisfactory because it leaves the creditor as the
ostensible owner of the shares and the debtor is forced to rely upon the honesty and solvency of the
creditor. Of course, the mere possession and retention of the debtor's certificate by the creditor gives
some security to the creditor against an attempted voluntary transfer by the debtor, provided the by-
laws of the corporation expressly enact that transfers may be made only upon the surrender of the
certificate. It is to be noted, however, that section 35 of the Corporation Law (Act No. 1459) enacts
that shares of stock "may be transferred by delivery of the certificate endorsed by the owner or his
attorney in fact or other person legally authorized to make the transfer." The use of the verb "may"
does not exclude the possibility that a transfer may be made in a different manner, thus leaving the
creditor in an insecure position even though he has the certificate in his possession. Moreover, the
shares still standing in the name of the debtor on the books of the corporation will be liable to seizure
by attachment or levy on execution at the instance of other creditors. (Cf. Uy Piaoco vs. McMicking,
10 Phil., 286, and Uson vs. Diosomito, 61 Phil., 535.) This unsatisfactory state of our law is well
known to the bench and bar. (Cf. Fisher, The Philippine Law of Stock Corporations, pages 163-168.)
Loans upon stock securities should be facilitated in order to foster economic development. The
transfer by endorsement and delivery of a certificate with intention to pledge the shares covered
thereby should be sufficient to give legal effect to that intention and to consummate the juristic act
without necessity for registration.lawphil.net

We are fully conscious of the fact that our decisions in the case of Monserrat vs. Ceron, supra, and in
the present case have done little perhaps to ameliorate the present uncertain and unsatisfactory state
of our law applicable to pledges and chattel mortgages of shares of stock of Philippine corporations.
The remedy lies with the legislature.

In view of the premises, the attaching creditors are entitled to priority over the defectively registered
mortgage of the appellant and the judgment appealed from must be affirmed without special
pronouncement as to costs in this instance. 1

Malcolm, Villa-Real, Imperial, and Goddard, JJ., concur.

136
TORIBIA USON, plaintiff-appellee, vs. VICENTE DIOSOMITO, ET AL., defendants.
VICENTE DIOSOMITO, EMETERIO BARCELON, H.P.L. JOLLYE and NORTH ELECTRIC
COMPANY, INC., appellants. G.R. No. L-42135 June 17, 1935 BUTTE, J.:

This is an appeal from a decision of the Court of First Instance of Cavite involving the ownership of
seventy-five shares of stock in the North Electric Company, Inc. The plaintiff-appellee claims to be
the owner of these shares by virtue of purchase at a sheriff's sale for the sum of P2,617.18.

It appears that Toribia Uson had filed a civil action for debt in the Court of First Instance of Cavite,
No. 2525, against Vicente Diosomito and that upon institution of said action an attachment was duly
issued and levied upon the property of the defendant Diosomito, including seventy-five shares of the
North Electric Co., Inc., which stood in his name on the books of the company when the attachment
was levied on January 18, 1932. Subsequently, on June 23, 1932, in said civil case No. 2525, Toribia
Uson obtained judgment against the defendant Diosomito for the sum of P2,300 with interest and
costs. To satisfy said judgment, the sheriff sold said shares at public auction in accordance with law
on March 20, 1933. The plaintiff Toribia Uson was the highest bidder and said shares were
adjudicated to her. (See Exhibit K.) In the present action, H.P.L. Jollye claims to be the owner of said
75 shares of the North Electric Co., Inc., and presents a certificate of stock issued to him by the
company on February 13, 1933.

There is no dispute that the defendant Vicente Diosomito was the original owner of said shares of
stock, having a par value of P7,500, and that on February 3, 1931, he sold said shares to Emeterio
Barcelon and delivered to the latter the corresponding certificates Nos. 2 and 19. But Barcelon did
not present these certificates to the corporation for registration until the 16th of September, 1932,
when they were cancelled and a new certificate, No. 29, was issued in favor of Barcelon, who
transferred the same of the defendant H.P.L. Jollye to whom a new certificate No. 25 was issued on
February 13, 1933.

It will be seen, therefore, that the transfer of said shares by Vicente Diosomito, the judgment debtor in
suit No. 2525, to Barcelon was not registered and noted on the books of the corporation until
September 16, 1932, which was some nine months after the attachment had been levied on said
shares in civil case No. 2525 as above stated.

Thus arises in this case one of the most vexing questions in the law of corporations, namely, whether
a bona fide transfer of the shares of a corporation, not registered or noted on the books of the
corporation, is valid as against a subsequent lawful attachment of said shares, regardless of whether
the attaching creditor had actual notice of said transfer or not. This is the first case in which this
question has been squarely presented to us for decision. The case of Uy Piaco vs. McMicking (10
Phil., 286), decided in 1908, arose before the Philippine Corporation Law, Act No. 1459, took effect
(April 1, 1906). The cases of Fua Cun vs. Summer and China Banking Corporation, 44 Phil., 705
[1923] and Fleischer vs. Botica Nolasco Co., 47 Phil., 583 [1925] are not in point.

Section 35 of the Corporation Law is as follows:

SEC. 35. The capital stock of stock corporations shall be divided into shares for which
certificates signed by the president or the vice-president, countersigned by the secretary or
clerk and sealed with the by-laws. Shares of stock so issued are personal property and may be
transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other
person legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is entered and noted upon the books of the corporation
137
 so as to show the names of the parties to the transaction, the date of the transfer, the number
of the certificate, and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable
on the books of the corporation.

The sentence of the foregoing section immediately applicable in the present case is as follows:

No transfer, however, shall be valid, except as between the parties, until the transfer is entered
and noted upon the books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate, and the number of shares
transferred.

The appellants cites decision from a number of states of the American Union which hold that an
unregistered transfer is valid as against the lien of a subsequent attachment sued out by a creditor of
the assignor, whether such creditor has notice of the transfer or not. These decisions are founded
upon the theory that the attachment reaches only such title or interest as the defendant may have in
the property at the time of the levy; and if all title and interest had previously passed by assignment
from the debtor to a third person, the attaching creditor obtains nothing by the levy; that the owner of
shares of stock has the common law right to dispose of the same as personal property. But with the
exception of California, to which reference will be made later, none of the decisions cited by the
appellants construed statues identical with ours. Much of the confusion which is to be found in the
decision has arisen because the courts have failed to note the difference in the various statutes of the
American Union on the question considered here. For an illuminating discussion of this confusion the
following authorities may be consulted:

Fletcher, Cyclopedia of the Law of Private Corporations (1932), vol. 12, pages 358-389.
American and English Annotated Cases, vol. 21, pages 1391-1407.
American Law Review, vol. 35, pages 238-251. 55 Cent. L. J., 243-251.

The statutes on this point may be put roughly in three groups: First, those that provide, in substance,
that no transfer of shares is valid for any purpose unless registered on the books of the corporation.
This rule apparently once prevailed in Colorado and the District of Columbia both of which have since
amended it by statute. Second, that group which, like our own Act No. 1459, holds to the rule that no
transfer shall be valid except as between the parties until the transfer is duly registered. This group,
according to the best information available here, includes or has included the State of Arizona,
California, the Territory of Hawaii, Idaho, Iowa, Nevada, New Mexico, North Dakota, Oklahoma,
South Dakota, Washington, Wisconsin. The thirds group which includes the remaining jurisdictions
follows the rule and the doctrine invoked by the appellant in this case, which, by amendment of the
statutes, is becoming the prevailing rule in the United States.

The decision of the Supreme Court of California in the case of National Bank of the Pacific vs.
Western Pacific Railway Company (157 Cal., 573 [1910]; 108 Pac., 676), sitting in division of three,
construed section 324 of the Civil Code of California which is identical with section 35, supra, of the
Philippine Corporation Law. The court stressed the provision that the shares of stock in a corporation
are personal property and may be transferred by endorsement and delivery of the certificate. The
opinion also endeavors to distinguish the prior decisions of Weston vs. Bear River and Auburn Water
and Mining Co. (5 Cal., 186); Strout vs. Natoma Water and Mining Company (9 Cal., 78), and
Naglee vs. Pacific Wharf Company (20 Cal., 529), which are frequently cited in other jurisdictions as
sustaining the theory of the superiority of the attachment lien over the unregistered stock transfer.
138
(See Lyndonville National Bank vs. Folsom, 7 N.M., 611 [1894]; 38 Pac., 253.) The California
decision leaves us unconvinced that the statutes which fall in the second group above mentioned
should be given the same effect as the statute in the third group without any necessity for legislative
amendment.

We prefer to adopt the line followed by the Supreme Courts of Massachusetts and of Wisconsin.
(See Clews vs. Friedman, 182 Mass., 555; 66 N.E. 201, and In re Murphy, 51 Wis., 519; 8 N.W.,
419.)

In the latter case the court had under consideration a statute identical with our own section 35, supra,
and the court said:

We think the true meaning of the language is, and the obvious intention of the legislature in
using it was, that all transfers of shares should be entered, as here required, on the books of
the corporation. And it is equally clear to us that all transfers of shares not so entered
are invalid as to attaching or execution creditors of the assignors, as well as to the corporation
and to subsequent purchasers in good faith, and indeed, as to all persons interested, except
the parties to such transfers. All transfers not so entered on the books of the corporation are
absolutely void; not because they are without notice or fraudulent in law or fact, but because
they are made so void by statute.

Some of the states, including Wisconsin, which has held to the rather, strict but judicial interpretation
of the statutory language here in question have amended the statute so as to fall in line with the more
liberal and rational doctrine of the third group referred to above. This court still adheres to the
principle that its function is jus dicere non jus dare. To us the language of the legislature is plain to
the effect that the right of the owner of the shares of stock of a Philippine corporation to transfer the
same by delivery of the certificate, whether it be regarded as statutory on common law right, is limited
and restricted by the express provision that "no transfer, however, shall be valid, except as between
the parties, until the transfer is entered and noted upon the books of the corporation." Therefore, the
transfer of the 75 shares in the North Electric Company, Inc., made by the defendant Diosomito to the
defendant Barcelon was not valid as to the plaintiff-appellee, Toribia Uson, on January 18, 1932, the
date on which she obtained her attachment lien on said shares of stock which still stood in the name
of Diosomito on the books of the corporation.

We have considered the remaining assignments of error of the appellants and finding no merit in
them in results that the judgment must be affirmed with costs against the appellants.

Malcolm and Diaz, JJ., concur.

Goddard, J., I agree with Justice Hull.

Separate Opinions HULL, J., concurring:

I agree that the foregoing opinion is sound in reason and upon authority. But I think attention should
be called to the case of Lanci vs. Yangco (52 Phil., 563, 567); which involved a Torrens title and the
Land Registration Law, Act No. 496. The provisions of section 50 of Act No. 496 seem to me
analogous to those of section 35 of the Corporation Law, and consistency would indicate that the
judgments in the two cases should be similar.

139
ANTONIO ESCAÑO, plaintiff-appellee, vs. FILIPINAS MINING CORPORATION, ET
Al., defendants. STANDARD INVESTMENT OF THE PHILIPPINES, appellant.
G.R. No. L-49003 July 28, 1944 OZAETA, J.:

This case was submitted to and decided by the Court of First Instance of Manila upon an agreed
statement of facts which may be restated as follows:

On March 8, 1937, the plaintiff-appellee obtained judgment in the Court of First Instance of Manila
against Silverio Salvosa whereby the latter was ordered to transfer and deliver to the former 116
active shares and an undetermined number of shares in escrow of the Filipinas Mining Corporation
and to pay the sum of P500 as damages, with the proviso that the escrow shares shall be transferred
and delivered to the plaintiff only after they shall have been released by the company. On June 25,
1937, a writ of garnishment was served by the sheriff of Manila upon the Filipinas Mining Corporation
to satisfy the said judgment; and on July 29, 1937, the Filipinas Mining Corporation advised the
sheriff of Manila that according to its books the judgment debtor Silverio Salvosa was the registered
owner of 1,000 active shares and about 21,339 unissued shares held in escrow by the said
corporation. The sheriff sold the 1,000 active shares at public auction, realizing therefrom only the
sum of P10, which was applied in partial satisfaction of the judgment for damages in the sum of
P500.

The present case, which was instituted by Antonio Escaño against the Filipinas Mining Corporational
and the Standard Investment of the Philippines, relates to the escrow shares involved in the
garnishment proceeding above mentioned. It appears that after the complaint in the original case
of Escaño vs. Salvosa was filed but before judgment we as rendered therein, that lis to say, on
November 21, 1936, Silverio Salvosa sold to Jose P. Bengzon all his right, title, and interest in and to
18,580 shares of stock of the Filipinas Mining Corporation held in escrow which the said Salvosa was
entitled to receive, and which Bengzon in turn subsequently sold and transferred to the present
defendant-appellant, Standard Investment of the Philippines. Neither Salvosa's sale to Bengzon nor
Bengzon's sale to the Standard Investment of the Philippines was notified to and recorded in the
books of the Filipinas Mining Corporation until December 7, 1940, that is to say, more than three
years after the escrow shares in question were attached by garnishment served on the Filipinas
Mining Corporation as hereinbefore set forth. On January 24, 1941, the defendant Filipinas Mining
Corporation issued in favor of the defendant Standard Investment of the Philippines certificate of
stock for the 18,580 shares formerly held in escrow by Silverio Salvosa and which had been
adversely by the present plaintiff-appellee on the one hand and the Standard Investment of the
Philippines on the other, the first by virtue of garnishment proceedings and the second by virtue of
the sale made to it by Jose P. Bengzon as aforesaid.

The question to determine is whether the issuance by the Filipinas Mining Corporation of the said
18,580 shares of its stock to the Standard Investment of the Philippines was valid as against the
attaching judgment creditor of the original owner, Silverio Salvosa, namely, the present plaintiff-
appellee Antonio Escaño.

In addition to the above stipulated facts, the trial court found from the supplementary oral evidence
adduced by the plaintiff "that several promises were made by the secretary of the defendant Filipinas
Mining Corporation that as soon as the escrow shares pertaining to Silverio Salvosa were released
he (the secretary) would notify the plaintiff so that the latter might take the proper action for the
execution of the judgment rendered in the said case entitled "Antonio Escaño vs. Silverio Salvosa,"
civil case No. 50575 of the Court of First Instance of Manila. But the secretary, instead of complying

140
with his promises, issued the escrow shares to the defendant Standard Investment of the Philippines
. . ."

The trial court held that the transfer of the escrow shares in question from Salvosa to Bengzon and
from Bengzon to the Standard Investment of the Philippines, not having been recorded in the books
of the corporation as required by section 35 of the Corporation Law, could not prevail over the
garnishment previously made by the plaintiff of the said shares, and rendered judgment "ordering the
defendants Filipinas Mining Corporation and the Standard Investment of the Philippines to issue to
the plaintiff out of the escrow shares which formerly belonged to Silverio Salvosa, 4,152 shares of the
Filipinas Mining Corporation and to pay to him the dividends which have been and may be declared
on said shares until the delivery thereof to the plaintiff; and ordering the sheriff to levy execution on
the remaining shares which formerly belonged to Silverio Salvosa in order to satisfy the balance of
the judgment rendered in the civil case entitled "Antonio Escaño vs. Silverio Salvosa," civil case No.
50575 of the Court of First Instance of Manila, with costs against the defendants." From that
judgment the Standard Investment of the Philippines has appealed to this Court and makes the
following assignment of errors:

1. The trial court erred in holding that section 35 of Act 14599 and the doctrine laid down in the
case of Uson vs. Diosomito, 61 Phil., 535, are applicable to the case at bar.

2. The trial court erred in "ordering the sheriff to levy execution on the remaining shares of the
18,580 shares to satisfy the balance of the judgment rendered in civil case No. 50575 of the
Court of First Instance of Manila"; and in not holding that because of the delay or neglect for an
unreasonable length of time by the plaintiff to enforce his execution, the 18,580 shares affected
in this litigation has been discharged thru his waiver or abandonment.

1. Sections 431 and 432 of the Code of Civil Procedure (now sections 7 and 8 of Rule 59), which
were in force at the time the garnishment in question was served on the defendant Filipinas Mining
Corporation, provide as follows:

Sec. 431. Executing Order of Attachment as to debts and Credits. — Debts and credits, and
other personal property not capable of manual delivery, shall be attached by leaving with the
person owing such debts or having in his possession or under his control, such credits and
other personal property, a copy of the order of attachment and a notice that the debts owing by
him to the defendant, or the credits and other personal property in his possession or under his
control, belonging to the defendant, are attached in pursuance of such order.

Sec. 432. Effect of Attachment of Debts and Credits. — All persons having in their possession
or under their control any credits or other personal property belonging to the defendant, or
owing any debts to the defendant at the time of service upon them of a copy of the order of
attachment and notice as provided in the last section, shall be, unless such property be
delivered up or transferred, or such debts be paid to the clerk of the court in which the action is
pending, liable to the plaintiff for the amount of such credits, property, or debts, until the
attachment be discharged, or any judgment recovered by him be satisfied."

Under the section last above quoted, the Filipinas Mining Corporation became liable to the plaintiff for
the shares of stock mentioned in its return to the sheriff of July 29, 1937, wherein it informed the latter
in response to the notice of garnishment "that according to its books said Silverio Salvosa was the
registered owner of 1,000 active shares evidence by certificate of stock No. 235 and about 21,338
unissued shares held in escrow by the defendant Filipinas Mining Corporation."
141
Counsel for the appellant Standard Investment of the Philippines contends that a distinction should
be drawn between issued shares evidenced by certificates of stock and unissued shares held in
escrow, in that while the transfer of the former is subject to the restriction contained in section 35 of
the Corporation Law, that of the latter is not. The said section, insofar as pertinent here, reads as
follows:

. . . Shares of stock so issued are personal property and may be transferred by delivery of the
certificate indorsed by the owner or his attorney in fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as between the parties, until the
transfer is entered and noted upon the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of the certificate, and the number
of shares transferred.

It is admitted that under this legal provision and the decision of this Court in Uson vs. Diosomito, 61
Phil. 535, the transfer of duly issued shares of stock is not valid as against third parties and the
corporation until it is noted upon the books of the corporation; but it is contended that the transfer of
unissued shares of stock held in escrow is valid against the whole world although not notified to the
corporation and not noted upon its books. Since the sale, transfer, or assignment of unissued shares
of stock held in escrow is not specifically provided for by law, the question has to be resolved by
resorting to analogy. What is the reason of the law for requiring the recording upon the books of the
corporation of transfers of shares of stock as a condition precedent to their validity against the
corporation, and third parties? We imagine that it is (1) to enable the corporation to know at all times
who its actual stockholders are, because mutual rights and obligations exist between the corporation
and its stockholders; (2) to afford to the corporation an opportunity to object or refuse its consent to
the transfer in case it has any claim against the stock sought to be transferred, or for any other valid
reason; and (3) to avoid fictitious or fraudulent transfers. Do these reasons hold as to the transfer of
unissued shares held in escrow? To sustain appellant's contention is to declare that they do not. But
we see no valid reason for treating unissued shares held in escrow differently from issued shares
insofar as their sale and transfer is concerned. In both cases the corporation is entitled to know who
the actual owners of the shares are, and to object to the transfer upon any valid ground. Likewise, in
both cases the possibility of fictitious or fraudulent transfers exists. The only reason advanced by the
appellant for exempting the transfer of unissued shares from recording is that in case of unissued
shares there is no certificate number to be recorded. But that is a mere detail which does not affect
the reasons behind the rule. The lack of such detail does not make it impossible to record the transfer
upon the books of the corporation so as to show the names of the parties to the transaction, the date
of the transfer, and the number of shares transferred, which are the most essential data. As a matter
of fact, the defendant Filipinas Mining Corporation was able to take not of the transfer of the escrow
shares in question to the Standard Investment of the Philippines on December 7, 1940, without
knowing the certificate number that would correspond to said shares.

Moreover, it seems illogical and unreasonable to hold that inactive or unissued shares still held by the
corporation in escrow pending receipt of authorization from the Government to issue them, may be
negotiated or transferred unrestrictedly and more freely than active or issued shares evidenced by
certificates of stock.

We are, therefore, of the opinion and so hold that section 35 of the Corporation Law, which requires
the registration of transfers of shares stock upon the books of the corporation as a condition
precedent to their validity against the corporation and third parties, is also applicable to unissued
shares held by the corporation in escrow.

142
2. Under its second assignment of error appellant contends that appellee has been guilty of laches in
neglecting for an unreasonable length of time to enforce its levy on the 18,580 shares of stock in
question by having them sold at public auction, and that, consequently, said levy should be
considered discharged through waiver or abandonment. We find no factual basis for the alleged
laches and abandonment. The trial court found that the secretary of the defendant Filipinas Mining
Corporation had repeatedly promised the plaintiff that he would notify the latter as soon as the
escrow shares pertaining to Silverio Salvosa were released so that he ((plaintiff) might take the
proper action for the execution of his judgment. The Filipinas Mining Corporation having advised the
sheriff that it was holding the escrow shares of the judgment debtor Silverio Salvosa, the plaintiff as
execution creditor had the right to wait for the release or issuance of said shares before having the
same sold at public auction, so long as the period of five years within which to execution his judgment
had not yet lapsed. Moreover, the judgment itself provided "that the escrow shares shall be
transferred and delivered to the plaintiff only after they have been released by the company." It is
stated in the stipulation of facts that it was only after shares in favor of the Standard Investment of the
Philippines that the plaintiff Antonio Escaño came to know that Jose P. Bengzon and the Standard
Investment of the Philippines had acquired Silverio Salvosa's rights to the shares in question. Upon
these facts, together with the consideration that the delay had not in any way misled the appellant to
its prejudice, we find appellant's second assignment of error untenable.

The judgment appealed from is affirmed, with costs.

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RICARDO A. NAVA, petitioner-appellant. vs. PEERS MARKETING CORPORATION, RENATO R.
CUSI and AMPARO CUSI, respondents-appellees. G.R. No. L-28120 November 25, 1976
AQUINO, J:

This is a mandamus case, Teofilo Po as an incorporator subscribed to eighty shares of Peers

Marketing Corporation at one hundred pesos a share or a total par value of eight thousand pesos. Po
paid two thousand pesos or twenty-five percent of the amount of his subscription. No certificate of
stock was issued to him or, for that matter, to any incorporator, subscriber or stockholder.

On April 2, 1966 Po sold to Ricardo A. Nava for two thousand pesos twenty of his eighty shares. In
the deed of sale Po represented that he was "the absolute and registered owner of twenty shares" of
Peers Marketing Corporation.

Nava requested the officers of the corporation to register the sale in the books of the corporation. The
request was denied because Po has not paid fully the amount of his subscription. Nava was informed
that Po was delinquent in the payment of the balance due on his subscription and that the
corporation had a claim on his entire subscription of eighty shares which included the twenty shares
that had been sold to Nava.

On December 21, 1966 Nava filed this mandamus action in the Court of First Instance of Negros
Occidental, Bacolod City Branch to compel the corporation and Renato R. Cusi and Amparo Cusi, its
executive vice-president and secretary, respectively, to register the said twenty shares in Nava's
name in the corporation's transfer book.

The respondents in their answer pleaded the defense that no shares of stock against which the
corporation holds an unpaid claim are transferable in the books of the corporation.

After hearing, the trial court dismissed the petition. Nava appealed on the ground that the decision "is
contrary to law ". His sole assignment of error is that the trial court erred in applying the ruling in Fua
Cun vs. Summers and China Banking Corporation, 44 Phil. 705 to justify respondents' refusal in
registering the twenty shares in Nava's name in the books of the corporation.

The rule enunciated in the Fua Cun case is that payment of one-half of the subscription does not
entitle the subscriber to a certificate of stock for one-half of the number of shares subscribed.

Appellant Nava contends that the Fua Cun case was decided under section 36 of the Corporation
Law which provides that "no certificate of stock shall be issued to a subscriber as fully paid up until
the full par value thereof has been paid by him to the corporation". Section 36 was amended by Act
No. 3518. It is now section 37. Section 37 provides that "no certificate of stock shall be issued to a
subscriber as fully paid up until the full par value thereof, or the full subscription in case of no par
stock, has been paid by him to the corporation".

The issue is whether the officers of Peers Marketing Corporation can be compelled by mandamus to
enter in its stock and transfer book the sale made by Po to Nava of the twenty shares forming part of
Po's subscription of eighty shares, with a total par value of P8,000 and for which Po had paid only
P2,000, it being admitted that the corporation has an unpaid claim of P6,000 as the balance due on
Po's subscription and that the twenty shares are not covered by any stock certificate.

Apparently, no provision of the by-laws of the corporation covers that situation. The parties did not
bother to submit in evidence the by-laws nor invoke any of its provisions. The corporation can include

144
in its by-laws rules, not inconsistent with law, governing the transfer of its shares of stock (Sec. 137 ,
Act No. 1459; Fleischer vs. Botica Nolasco Co., 47 Phil. 583, 589).

We hold that the transfer made by Po to Nava is not the "alienation, sale, or transfer of stock" that is
supposed to be recorded in the stock and transfer book, as contemplated in section 52 of the
Corporation Law.

As a rule, the shares which may be alienated are those which are covered by certificates of stock, as
shown in the following provisions of the Corporation Law and as intimated in Hager vs. Bryan, 19
Phil. 138 (overruling the decision in Hager vs. Bryan, 21 Phil. 523. See 19 Phil. 616, notes, and
Hodges vs. Lezama, 14 SCRA 1030).

SEC. 35. The capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or the vice-president, countersigned by the
secretary or clerk and sealed with the seal of the corporation, shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property and may
be transferred by delivery of the certificate indorsed by the owner or his attorney in fact
or other person legally authorized to make the transfer. No transfer, however, shall be
valid, except as between the, parties, until the transfer is entered and noted upon the
books of the corporation so as to show the names of the parties to the transaction, the
date of the transfer, the number of the certificate, and the number of shares transferred.

No share of stock against which the corporation holds any unpaid claim shall be
transferable on the books of the corporation.

SEC. 36. (re voting trust agreement) ...

The certificates of stock so transferred shall be surrendered and cancelled, and new
certificates therefor issued to such person or persons, or corporation, as such trustee or
trustees, in which new certificates it shall appear that they are issued pursuant to said
agreement.

(In the case of nonstock corporations a membership certificate is usually issued. Lee E. Won vs.
Wack Wack Golf & Country Club, Inc., 104 Phil. 466; Wack Wack Golf & Country Club, Inc. vs. Won,
L-23851, March 26, 1976, 70 SCRA 165).

As prescribed in section 35, shares of stock may be transferred by delivery to the transferee of the
certificate properly indorsed. "Title may be vested in the transferee by delivery of the certificate with a
written assignment or indorsement thereof" (18 C.J.S. 928). There should be compliance with the
mode of transfer prescribed by law (18 C.J.S. 930).

The usual practice is for the stockholder to sign the form on the back of the stock certificate. The
certificate may thereafter be transferred from one person to another. If the holder of the certificate
desires to assume the legal rights of a shareholder to enable him to vote at corporate elections and to
receive dividends, he fills up the blanks in the form by inserting his own name as transferee. Then he
delivers the certificate to the secretary of the corporation so that the transfer may be entered in the
corporation's books. The certificate is then surrendered and a new one issued to the transferee.
(Hager vs. Bryan, 19 Phil. 138, 143-4).

145
That procedure cannot be followed in the instant case because, as already noted, the twenty shares
in question are not covered by any certificate of stock in Po's name. Moreover, the corporation has a
claim on the said shares for the unpaid balance of Po's subscription. A stock subscription is a
subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his
subscription as he would be to pay any other debt. The right of the corporation to demand payment is
no less incontestable. (Velasco vs. Poizat, 37 Phil. 802; Lumanlan vs. Cura, 59 Phil. 746).

A corporation cannot release an original subscriber from paying for his shares without a valuable
consideration (Philippine National Bank vs. Bitulok Sawmill, Inc.,
L-24177-85, June 29, 1968, 23 SCRA 1366) or without the unanimous consent of the stockholders
(Lingayen Gulf Electric Power Co., Inc. vs. Baltazar, 93 Phil 404).

Under the facts of this case, there is no clear legal duty on the part of the officers of the corporation to
register the twenty shares in Nava's name, Hence, there is no cause of action for mandamus.

Nava argues that under section 37 a certificate of stock may be issued for shares the par value of
which have already been paid for although the entire subscription has not been fully paid. He
contends that Peers Marketing Corporation should issue a certificate of stock for the twenty shares,
notwithstanding that Po had not paid fully his subscription for the eighty shares, because section 37
requires full payment for the subscription, as a condition precedent for the issuance of the certificate
of stock, only in the case of no par stock.

Nava relies on Baltazar v Lingayen Gulf Electric Power Co., Inc., L-16236-38, June 30, 1965, 14
SCRA 522, where it was held that section 37 "requires as a condition before a shareholder can vote
his shares that his full subscription be paid in the case of no par value stock; and in case of stock
corporation with par value, the stockholder can vote the shares fully paid by him only, irrespective of
the unpaid delinquent shares".

There is no parallelism between this case and the Baltazar case. It is noteworthy that in
the Baltazar case the stockholder, an incorporator, was the holder of a certificate of stock for the
shares the par value of which had been paid by him. The issue was whether the said shares had
voting rights although the incorporator had not paid fully the total amount of his subscription. That is
not the issue in this case.

In the Baltazar case, it was held that where a stockholder subscribed to a certain number of shares
with par value and he made a partial payment and was issued a certificate for the shares covered by
his partial payment, he is entitled to vote the said shares, although he has not paid the balance of his
subscription and a call or demand had been made for the payment of the par value of the delinquent
shares.

As already stressed, in this case no stock certificate was issued to Po. Without stock certificate,
which is the evidence of ownership of corporate stock, the assignment of corporate shares is
effective only between the parties to the transaction (Davis vs. Wachter, 140 So. 361).

The delivery of the stock certificate, which represents the shares to be alienated , is essential for the
protection of both the corporation and its stockholders (Smallwood vs. Moretti, 128 So. 2d 628).

In view of the foregoing considerations, the trial court's judgment dismissing the petition
for mandamus is affirmed. Costs against the petitioner-appellant. SO ORDERED.

146
BATANGAS LAGUNA TAYABAS BUS COMPANY, INC., DOLORES A. POTENCIANO, MAX
JOSEPH A. POTENCIANO, MERCEDELIN A. POTENCIANO, and DELFIN C.
YORRO, petitioners, vs. BENJAMIN M. BITANGA, RENATO L. LEVERIZA, LAUREANO A. SIY,
JAMES A. OLAYVAR, EDUARDO A. AZUCENA, MONINA GRACE S. LIM, and GEMMA M.
SANTOS, respondents. G.R. No. 137934 August 10, 2001

DANILO L. CONCEPCION, FE ELOISA GLORIA and EDIJER A. MARTINEZ, in their capacities

as ASSOCIATE COMMISSIONERS OF THE SECURITIES AND EXCHANGE COMMISSION,
BATANGAS LAGUNA TAYABAS BUS COMPANY, INC., MICHAEL A. POTENCIANO, CANDIDIO
A. POTENCIANO, HENRY JOHN A. POTENCIANO, REYNALDO MAGTIBAY, LORNA NAVARRO
and RESTITUTO BAYLON, petitioners, vs. THE COURT OF APPEALS, BATANGAS LAGUNA
TAYABAS BUS COMPANY, INC., BENJAMIN M. BITANGA, RENATO L. LEVERIZA, LAUREANO
A. SIY, JAMES A. OLAYVAR, EDUARDO A. AZUCENA, MONINA GRACE S. LIM, and GEMMA
M. SANTOS, respondents. G.R. No. 137936 August 10, 2001 YNARES-SANTIAGO, J.:

These cases involve the Batangas Laguna Tayabas Bus Company, Inc., which has been owned by
four generations of the Potenciano family. Immediately prior to the events leading to this controversy,
the Potencianos owned 87.5% of the outstanding capital stock of BLTB.1

On October 28, 1997, Dolores A. Potenciano, Max Joseph A. Potenciano, Mercedelin A. Potenciano,
Delfin C. Yorro, and Maya Industries, Inc., entered into a Sale and Purchase Agreement,2 whereby
they sold to BMB Property Holdings, Inc., represented by its President, Benjamin Bitanga, their
21,071,114 shares of stock in BLTB. The said shares represented 47.98% of the total outstanding
capital stock of BLTB.

The purchase price for the shares of stock was P72,076,425.00, the downpayment of which, in the
sum of P44,354,723.00, was made payable upon signing of Agreement, while the balance of
P27,721,702.00 was payable on November 26, 1997. The contracting parties stipulated that the
downpayment was conditioned upon receipt by the buyer of certain documents upon signing of the
Agreement, namely, the Secretary's Certificate stating that the Board of Directors of Maya Industries,
Inc. authorized the sale of its shares in BLTB and the execution of the Agreement, and designating
Dolores A. Potenciano as its Attorney-in-Fact; the Special Power of Attorney executed by each of the
sellers in favor of Dolores A. Potenciano for purposes of the Agreement; the undated written
resignation letters of the Directors of BLTB, except Henry John A. Potenciano, Michael A. Potericiano
and Candido A. Potenciano); a revocable proxy to vote the subject shares made by the sellers in
favor of the buyer; a Declaration of Trust made by the sellers in favor of the buyer acknowledging that
the subject shares shall be held in trust by the sellers for the buyer pending their transfer to the
latter's name; and the duly executed capital gains tax return forms covering the sale, indicating no
taxable gain on the same.3

Furthermore, the buyer guaranteed that it shall take over the management and operations of BLTB
but shall immediately surrender the same to the sellers in case it fails to pay the balance of the
purchase price on November 26, 1997.4

Barely a month after the Agreement was executed, on November 21, 1997, at a meeting of the
stockholders of BLTB, Benjamin Bitanga and Monina Grace Lim were elected as directors of the
corporation, replacing Dolores and Max Joseph Potenciano. Subsequently, on November 28, 1997,
another stockholders' meeting was held, wherein Laureano A. Siy and Renato L. Leveriza were
elected as directors, replacing Candido Potenciano and Delfin Yorro who had both resigned as such.
At the same meeting, the Board of Directors of BLTB elected the following officers: Benjamin Bitanga
147
as Chairman of the Board, President and Chief Executive Officer; Monina Grace Lim as Vice
President for Finance and Supply and Treasurer; James Olayvar as Vice President for Operations
and Maintenance: Eduardo Azucena as Vice President for Administration; Evelio Custodia as
Corporate Secretary; and Gemma Santos as Assistant Corporate Secretary.5

During a meeting of the Board of Directors on April 14, 1998, the newly elected directors of BLTB
scheduled the annual stockholders' meeting on May 19, 1998, to be held at the principal office of
BLTB in San Pablo, Laguna. Before the scheduled meeting, on May 16, 1998, Michael Potenciano
wrote Benjamin Bitanga, requesting for a postponement of the stockholders' meeting due to the
absence of a thirty-day advance notice. However, there was no response from Bitanga on whether or
not the request for postponement was favorably acted upon.

On the scheduled date of the meeting, May 19, 1998, a notice of postponement of the stockholders'
meeting was published in the Manila Bulletin. Inasmuch as there was no notice of postponement prior
to that, a total of two hundred eighty six stockholders, representing 87% of the shares of stock of
BLTB, arrived and attended the meeting. The majority of the stockholders present rejected the
postponement and voted to proceed with the meeting. The Potenciano group was re-elected to the
Board of Directors,6 and a new set of officers was thereafter elected.7

However, the Bitanga group refused to relinquish their positions and continued to act as directors and
officers of BLTB. The conflict between the Potencianos and the Bitanga group escalated to levels of
unrest and even violence among laborers and employees of the bus company.

On May 21, 1998, the Bitanga group filed with the Securities and Exchange Commission a Complaint
for Damages and Injunction, docketed as SEC Case No. 05-98-5973.8 Their prayer for the issuance
of a temporary restraining order was, however, denied at the ex-parte summary hearing conducted
by SEC Chairman Perfecto Yasay, Jr.

Likewise, the Potenciano group filed on May 25, 1998, a Complaint for Injunction and Damages with
Preliminary Injunction and Temporary Restraining Order with the SEC, docketed as SEC Case No.
05-98-5978.9 SEC Chairman Perfecto Yasay, Jr. issued a temporary restraining order enjoining the
Bitanga group from acting as officers and directors of BLTB.

On June 8, 1998, the Bitanga group filed another complaint with application for a writ of preliminary
injunction and prayer for temporary restraining order, seeking to annul the May 19, 1998
stockholders' meeting. The complaint was docketed as SEC Case No. 06-98-5994.

A Hearing Panel of the SEC conducted joint hearings of SEC Cases Nos. 05-98-5973 and 05-98-
5978. On June 17, 1998, the SEC Hearing Panel granted the Bitanga group's application for a writ of
preliminary injunction upon the posting of a bond in the amount of P20,000,000.00.10 It declared that
the May 19, 1998 stockholders' meeting was void on the grounds that, first, Michael Potenciano had
himself asked for its postponement due to improper notice; and, second, there was no quorum, since
BMB Holdings, Inc., represented by the Bitanga group, which then owned 50.26% of BLTB's shares
having purchased the same from the Potenciano group, was not present at the said meeting. The
Hearing Panel further held that the Bitanga Board remains the legitimate Board in a hold-over
capacity.

The Potenciano group filed a petition for certiorari11 with the SEC En Banc on June 29, 1998, seeking
a writ of preliminary injunction to restrain the implementation of the Hearing Panel's assailed Order.

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On July 21, 1998, the SEC En Banc set aside the June 17, 1998 Order of the Hearing Panel and
issued the writ of preliminary injunction prayed for.12

The Bitanga group immediately filed a petition for certiorari13 with the Court of Appeals on July 22,
1998, followed by a Supplemental Petition on August 10, 1998. The petition was docketed as CA-
G.R. SP No. 48374.

Meanwhile, on July 29, 1998, the SEC En Banc issued a writ of preliminary injunction against the
Bitanga group, after the Potencianos posted the required bond of P20,000,000.00.14

On November 23, 1998, the Court of Appeals rendered the now assailed Decision, reversing the
assailed Orders of the SEC En Banc and reinstating the Order of the Hearing Panel ordered dated
June 17, 1998.15 The Court of Appeals denied the Motions for Reconsideration in a Resolution dated
March 25, 1999.16

Petitioners Batangas Laguna Tayabas Bus Company, Inc., Dolores A. Potenciano, Max Joseph A.
Potenciano, Mercedelin A. Potenciano and Delfin C. Yorro filed the instant petition for review,
docketed as G.R. No. 137934, against respondents Benjamin M. Bitanga, Renato L. Leveriza,
Laureano A. Siy, James A. Olayvar, Eduardo A. Azucena, Monina Grace S. Lim and Gemma M.
Santos. Petitioners contend that —

WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS GRAVELY ERRED
WHEN IT DISREGARDED, CONTRARY TO WELL-ESTABLISHED JURISPRUDENCE, THE
FACTUAL FINDINGS OF THE SEC WHICH IS A SPECIALIZED QUASI-JUDICIAL AGENCY,
AND INVALIDATED THE PRELIMINARY INJUNCTION ISSUED BY THE LATTER. THE
COURT OF APPEALS COMMITTED REVERSIBLE ERROR BECAUSE THERE IS NO
SHOWING THAT THE SEC MADE ANY ERROR IN EITHER JURISDICTION OR
JUDGMENT.

II

WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
RULING THAT RESPONDENTS WERE DEPRIVED OF THEIR RIGHT TO DUE PROCESS
BECAUSE: (1) A FULL-BLOWN HEARING WAS CONDUCTED ON 6 JULY 1998 WHERE
THE PARTIES FULLY ARGUED THEIR POSITIONS AND WERE HEARD BY THE SEC EN
BANC; (2) THE LAW DOES NOT REQUIRE A SEPARATE HEARING FOR THE FIXING OF
THE AMOUNT OF THE INJUNCTION BOND; AND (3) IN ANY CASE, THE ALLEGED
FAILURE OF THE SEC TO FIX THE AMOUNT OF THE INJUNCTION BOND IN ITS 21 JULY
1998 ORDER AND SUBSEQUENT FIXING THEREOF IN ITS 26 JULY 1998 ORDER IS NOT
A FATAL ERROR.

III

WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
RULING THAT THE 21 JULY 1998 ORDER OF THE SEC RESOLVED THE MAIN CASE. THE
SEC, ACTING WITHIN THE BOUNDS OF ITS JURISDICTION, MERELY MADE A
PRELIMINARY EVALUATION TO RESOLVE THE PRAYER FOR PRELIMINARY
INJUNCTION, WHICH, BY ITS VERY NATURE, IS AN ANCILLARY REMEDY. THE MAIN

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 PETITION REMAINS PENDING BEFORE THE SEC FOR THE RESOLUTION OF ITS
MERITS.17

Another petition for review, docketed as G.R. No. 137936, was filed by petitioners Danilo L.
Concepcion, Fe Eloisa Gloria and Edijer A. Martinez, in their capacities as Associate Commissioners
of the Securities and Exchange Commission, Batangas Laguna Tayabas Bus Company, Inc., Dolores
A. Potenciano, Max Joseph A. Potenciano, Michael A. Potenciano, Mercedelin A. Potenciano,
Candido A. Potenciano, Henry John A. Potenciano, Delfin C. Yorro, Reynaldo Magtibay, Lorna
Navarro and Restituto Baylon based on the following grounds:

THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN HOLDING

THAT THE JULY 21, 1998 ORDER OF THE SEC IN SEC EN BANC CASE NO. 611
RESOLVED THE MAIN CASE.

II

THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN HOLDING

THAT THE PRIVATE RESPONDENTS WERE DENIED THEIR RIGHT TO DUE PROCESS.

III

THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE SEC ORDER
OF JULY 21, 1998 IS VALID AND IN DISREGARDING THE FACTUAL FINDINGS OF THE
SEC.18

The two petitions for review were consolidated.

We find that the petitions are impressed with merit. Contrary to the findings of the Court of Appeals,
the Bitanga group was not deprived of due process when the SEC En Banc issued its Order dated
July 21, 1998.

Due process, in essence, is simply an opportunity to be heard.19 It cannot be denied that in the case
at bar, a hearing on the prayer for injunction was held on July 9, 1998. Both parties were represented
at the said hearing, and the Bitanga group presented its arguments in opposition to the injunctive
relief. This alone negates any proposition that the Bitanga group was denied due process.

In applications for preliminary injunction, the requirement of hearing and prior notice before injunction
may issue has been relaxed to the point that not all petitions for preliminary injunction must undergo
a trial-type hearing, it being hornbook doctrine that a formal or trial-type is not at all times and in all
instances essential to due process. Due process simply means giving every contending party the
opportunity to be heard and the court to consider every piece of evidence presented in their favor.
Accordingly, this Court has recently rejected a claim of denial of due process where such claimant
was given the opportunity to be heard, having submitted his counter-affidavit and memorandum in
support of his position.20

Much ado has been made over the fact that the injunction order was issued with "deliberate speed"
even before the Bitanga group filed its Comment to the Potenciano group's Petition. However, the
said Comment is rather directed to the petition of the Potenciano group; it is not essential to the

150
resolution of the prayer for injunction. The Rules of Court do not require that issues be joined before
preliminary injunction may issue. Preliminary injunction may be granted at any stage of an action or
proceeding prior to the judgment or final order, ordering a party or a court, agency or a person to
refrain from a particular act or acts. For as long as the requisites for its issuance are present in the
case, the injunctive writ was properly issued.21

Respondents argue that the SEC En Banc's July 21, 1998 Order amounted to a ruling on the main
case. We disagree.

A reading of the said Order readily reveals that it merely delved on the propriety of granting a writ of
preliminary injunction against the Bitanga group. The main case is far from being disposed of as
there are several issues still awaiting resolution, including, whether or not the Bitanga group has
taken funds and assets of BLTB and if so, in what amount and consisting of what assets; and
whether or not the Potenciano group is entitled to the payment of exemplary damages, attorney's
fees and costs of suit. There is no merit, therefore, in the statement that the SEC En Banc's ruling is
a prejudgment of the main case, as several matters need yet to be addressed.

The fact that the aforesaid Order was merely provisional in character may be gleaned from the very
nature of the injunctive writ granted. Generally, injunction is a preservative remedy for the protection
of one's substantive right or interest. It is not a cause of action in itself but merely a provisional
remedy, an adjunct to a main suit.22 Thus, it has been held that an order granting a writ of preliminary
injunction is an interlocutory order.23 As distinguished from a final order which disposes of the subject
matter in its entirety or terminates a particular proceeding or action, leaving nothing else to be done
but to enforce by execution what has been determined by the court, an interlocutory order does not
dispose of a case completely, but leaves something more to be adjudicated upon.24

In the case at bar, it cannot be said that the July 21, 1998 Order of the SEC En Banc terminated the
Potenciano group's petition in its entirety. As mentioned above, there remain several issues which
have yet to be resolved and adjudicated upon by the SEC.

The next issue — whether or not the SEC En Banc committed error in jurisdiction as to entitle the
Bitanga group to the extraordinary remedy of certiorari — should likewise be resolved in the negative.

In the July 21, 1998 Order of the SEC En Banc, the validity of the BLTB stockholders' meeting held
on May 19, 1998 was sustained, in light of the time-honored doctrine in corporation law that a transfer
of shares is not valid unless recorded in the books of the corporation. The SEC En Banc went on to
rule that —

It is not disputed that the transfer of the shares of the group of Dolores Potenciano to the
Bitanga group has not yet been recorded in the books of the corporation. Hence, the group of
Dolores Potenciano, in whose names those shares still stand, were the ones entitled to attend
and vote at the stockholders' meeting of the BLTB on 19 May 1998. This being the case, the
Hearing Panel committed grave abuse of discretion in holding otherwise and in concluding that
there was no quorum in said meeting.25

Based on the foregoing premises, the SEC En Banc issued a writ of preliminary injunction against the
Bitanga group. In so ruling, the SEC En Banc merely exercised its wisdom and competence as a
specialized administrative agency specifically tasked to deal with corporate law issues. We are in full
accord with the SEC En Banc on this matter. Indeed, until registration is accomplished, the transfer,
though valid between the parties, cannot be effective as against the corporation. Thus, the
151
unrecorded transferee, the Bitanga group in this case, cannot vote nor be voted for. The purpose of
registration, therefore, is two-fold: to enable the transferee to exercise all the rights of a stockholder,
including the right to vote and to be voted for, and to inform the corporation of any change in share
ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a
stockholder.26 Until challenged in a proper proceeding, a stockholder of record has a right to
participate in any meeting;27 his vote can be properly counted to determine whether a stockholders'
resolution was approved, despite the claim of the alleged transferee.28 On the other hand, a person
who has purchased stock, and who desires to be recognized as a stockholder for the purpose of
voting, must secure such a standing by having the transfer recorded on the corporate books.29 Until
the transfer is registered, the transferee is not a stockholder but an outsider.30

We find no error either in jurisdiction or judgment on the part of the SEC En Banc, since its
conclusions of law were anchored on established principles and jurisprudence.

Indeed, nowhere in the Bitanga group's petition for certiorari before the Court of Appeals was it
shown that the SEC En Banc committed such patent, gross and prejudicial errors of law or fact, or a
capricious disregard of settled law and jurisprudence, as to amount to a grave abuse of discretion or
lack of jurisdiction on its part. Absent such showing, neither the Court of Appeals nor this Court
should engage in a review of the facts found nor even of the law as interpreted or applied by the SEC
En Banc, for the writ of certiorari is an extraordinary remedy, and certiorari jurisdiction is not to be
equated with appellate jurisdiction. The main thrust of a petition for certiorari under Rule 65 of the
Rules of Court is only the correction of errors of jurisdiction including the commission of grave abuse
of discretion amounting to lack or excess of jurisdiction. However, for this Court or the Court of
Appeals to properly exercise the power of judicial review over a decision of an administrative agency,
such as the SEC, it must first be shown that the tribunal, board or officer exercising judicial or quasi
judicial functions has indeed acted without or in excess of its or his jurisdiction, and that there is no
appeal, or any plain, speedy and adequate remedy in the ordinary course of law. In the absence of
any showing of lack of jurisdiction or grave abuse tantamount to lack or excess of jurisdiction, judicial
review may not be had over an administrative agency's decision.31 We have gone over the records of
the case at bar and we see no cogent reason to hold that the SEC En Banc had abused its
discretion.

Moreover, it is a fundamental rule that factual findings of quasi-judicial agencies like the SEC, if
supported by substantial evidence, are generally accorded not only great respect but even finality,
and are binding upon this Court, unless petitioner is able to show that it had arbitrarily disregarded
evidence before it or had misapprehended evidence to such an extent as to compel a contrary
conclusion if such evidence had been properly appreciated. This rule is rooted in the doctrine that this
Court is not a trier of facts, as well as in the respect to be accorded the determinations made by
administrative bodies in general on matters falling within their respective fields of specialization or
expertise.32

In light of all the foregoing, we find that the Court of Appeals erred in granting the extraordinary
remedy of certiorari to the Bitanga group. It is elementary that a special civil action for certiorari is
limited to correcting errors of jurisdiction or grave abuse of discretion.33 None of these have been
found to obtain in the petition before the Court of Appeals. What is more, it is also settled that the
issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights
of a party in a pending case is entirely within the discretion of the court taking cognizance of the case,
the only limitation being that this discretion should be exercised based upon the grounds and in the
manner provided by law. The exercise of sound judicial discretion by the lower court in injunctive
matters should not be interfered with except in cases of manifest abuse.34
152
WHEREFORE, in view of all the foregoing, the instant petitions for review are GRANTED. The
Decision of the Court of Appeals dated November 23, 1998 in CA-G.R. SP No. 48374 and its
resolution dated March 25, 1999 are SET ASIDE. The Orders of the SEC En Banc dated July 21,
1998 and July 27, 1998 in SEC Case No. EB 611 are ordered REINSTATED. SO ORDERED.

Separate Opinions PUNO, J., dissenting:

I respectfully submit that the Decision of the Court of Appeals issuing a writ of injunction to enjoin the
Potenciano group from acting as officers and directors of the Batangas Laguna Tayabas Bus Co.,
Inc. (BLTB) is in order. It appears from the facts that the election of the Potenciano group into the
Board of Directors of BLTB during the stockholders' meeting held on May 19, 1998 was void for lack
of quorum. It is not disputed that the Bitanga group has acquired 50.26% of the outstanding capital
stock of BLTB after Dolores Potenciano, Max Joseph Potenciano, Mercedelin Potenciano, Delfin
Yorro and Maya Industries, Inc. sold 21,071,114 shares (representing 47.98% of the outstanding
capital stock of the corporation) to BMB Property Holdings, Inc. represented by its President,
Benjamin M. Bitanga, and the other minority stockholders sold 991,176 shares also to BMB Property
Holdings, Inc. The Potenciano group cannot justify the participation of Dolores Potenciano, et al. in
the said meeting by invoking Section 63 of the Corporation Code and arguing that the sale of the
shares of stocks to BMB Property Holdings, Inc. was not recorded in the books of the corporation.
Section 63 of the Corporation Code provides:

"SECTION 63. Certificate of stock and transfer of shares — x x x No transfer, however, shall
be valid, except as between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred.

Under this provision, the sale of the stocks shall not be recognized as valid unless registered in the
books of the corporation, but only insofar as third persons, including the corporation, are
concerned.1 The reasons behind the registration requirement are:

(1) to enable the corporation to know at all times who its actual stockholders are, because
mutual rights and obligations exist between the corporation and its stockholders;
(2) to afford to the corporation an opportunity to object or refuse its consent to the transfer in
case it has any claim against the stock sought to be transferred, or for any other valid reason;
and
(3) to avoid fictitious or fraudulent transfers.2

The rule is intended to protect the interest of the corporation and third persons who may be
prejudiced by the transfer of the shares of stocks. It follows, therefore, that as between the parties to
the sale, the transfer shall be valid even if not recorded in the books of the corporation.3

The present controversy involves only the sellers and buyer of the BLTB shares of stock — the
Potencianos and Bitanga. It has not been shown that either the corporation or third persons are
involved in the sale. Thus, the sellers, the Potencianos, cannot deny that they no longer have rights
as shareholders as they have already relinquished said rights to the buyer, Bitanga, pursuant to the
contract of sale. Unless the sale of the shares is annulled, the rights of the buyer under the contract
must be respected and upheld. I vote to DENY the petitions.

153
NEMESIO GARCIA, petitioner, vs. NICOLAS JOMOUAD, Ex-officio Provincial Sheriff of Cebu
and SPOUSES JOSE ATINON & SALLY ATINON, respondents.
G.R. No. 133969 January 26, 2000 KAPUNAN, J.:

In this petition for review on certiorari, Nemesio Garcia (herein petitioner) seeks the reversal of the
Decision, dated 27 October 1997, of the Court of Appeals in CA G.R. CV No. 52255 and its
Resolution, dated 22 April 1998, denying petitioner's motion for reconsideration of said decision.

Petitioner filed with the Regional Trial Court, Branch 23 of Cebu, an action for injunction with prayer
for preliminary injunction against respondents spouses Jose and Sally Atinon and Nicolas
Jomouad, ex-officio sheriff of Cebu. Said action stemmed from an earlier case for collection of sum of
money, docketed as Civil Case No. CEB-10433, before the RTC, Branch 10 of Cebu, filed by the
spouses Atinon against Jaime Dico. In that case (collection of sum of money), the trial court rendered
judgment ordering Dico to pay the spouses Atinon the sum of P900,000.00 plus interests. After said
judgment became final and executory, respondent sheriff proceeded with its execution. In the course
thereof, the Proprietary Ownership Certificate (POC) No. 0668 in the Cebu Country Club, which was
in the name of Dico, was levied on and scheduled for public auction. Claiming ownership over the
subject certificate, petitioner filed the aforesaid action for injunction with prayer for preliminary
injunction to enjoin respondents from proceeding with the auction.

After trial, the lower court rendered its Decision, dated 28 July 1995, dismissing petitioner's complaint
for injunction for lack of merit. On appeal, the CA affirmed in toto the decision of the RTC upon
finding that it committed no reversible error in rendering the same. Hence, this petition.1âwphi1.nêt

Petitioner avers that Dico, the judgment debtor of the spouses Atinon, was employed as manager of
his (petitioner's) Young Auto Supply. In order to assist him in entertaining clients, petitioner "lent" his
POC, then bearing the number 1459, in the Cebu Country Club to Dico so the latter could enjoy the
"signing" privileges of its members. The Club issued POC No. 0668 in the name of Dico. Thereafter,
Dico resigned as manager of petitioner's business. Upon demand of petitioner, Dico returned POC
No. 0668 to him. Dico then executed a Deed of Transfer, dated 18 November 1992, covering the
subject certificate in favor of petitioner. The Club was furnished with a copy of said deed but the
transfer was not recorded in the books of the Club because petitioner failed to present proof of
payment of the requisite capital gains tax.

In assailing the decision of the CA, petitioner mainly argues that the appellate court erroneously
relied on Section 63 of the Corporation Code in upholding the levy on the subject certificate to satisfy
the judgment debt of Dico in Civil Case No. CEB-14033. Petitioner contends that the subject stock of
certificate, albeit in the name of Dico, cannot be levied upon the execution to satisfy his judgment
debt because even prior to the institution of the case for collection of sum of money against him:

1. The spouses Atinon had knowledge that Dico already conveyed back the ownership of the
subject, certificate to petitioner;

2. Dico executed a deed of transfer, dated 18 November 1992, covering the subject certificate
in favor of petitioner and the Club was furnished with a copy thereof; and

3. Dico resigned as a proprietary member of the Club and his resignation was accepted by the
board of directors at their meeting on 4 May 1993.

The petition is without merit.

154
Sec. 63 of the Corporation Code reads:

Sec. 63 Certificate of stock and transfer of shares. — The capital stock of corporations shall be
divided into shares for which certificates signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates indorsed
by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the parties, until the transfer is recorded in
the books of the corporation showing the names of the parties to the transaction, the date of
the transfer, the number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.

The sole issue in this case is similar to that raised in Uson vs. Diosomito,1 i.e., "whether a bona
fide transfer of the shares of a corporation, not registered or noted in the books of the corporation, is
valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching
creditor had actual notice of said transfer or not."2 In that case, we held that the attachment prevails
over the unrecorded transfer stating thus —

[w]e think that the true meaning of the language is, and the obvious intention of the legislature
in using it was, that all transfers of shares should be entered, as here required, on the books of
the corporation. And it is equally clear to us that all transfers of shares not so entered are
invalid as to attaching or execution creditors of the assignors, as well as to the corporation and
to subsequent purchasers in good faith, and, indeed, as to all persons interested, except the
parties to such transfers. All transfers not so entered on the books of the corporation are
absolutely void; not because they are without notice or fraudulent in law or fact, but because
they are made so void by statute.3

Applying the foregoing jurisprudence in this case, we hold that the transfer of the subject certificate
made by Dico to petitioner was not valid as to the spouses Atinon, the judgment creditors, as the
same still stood in the name of Dico, the judgment debtor, at the time of the levy on execution. In
addition, as correctly ruled by the CA, the entry in the minutes of the meeting of the Club's board of
directors noting the resignation of Dico as proprietary member thereof does not constitute compliance
with Section 63 of the Corporation Code. Said provision of law strictly requires the recording of the
transfer in the books of the corporation, and not elsewhere, to be valid as against third parties.
Accordingly, the CA committed no reversible error in rendering the assailed decision.

IN VIEW OF THE FOREGOING, the Court RESOLVED to DENY the petition.

SO ORDERED.1âwphi1.nêt

155
CHEMPHIL EXPORT & IMPORT CORPORATION (CEIC), petitioner, vs. THE HONORABLE
COURT OF APPEALS JAIME Y. GONZALES, as Assignee of the Bank of the Philippine Islands
(BPI), RIZAL COMMERCIAL BANKING CORPORATION (RCBC), LAND BANK OF THE
PHILIPPINES (LBP), PHILIPPINE COMMERCIAL & INTERNATIONAL BANK (PCIB) and THE
PHILIPPINE INVESTMENT SYSTEM ORGANIZATION (PISO), respondents. G.R. Nos. 112438-39
December 12, 1995

PHILIPPINE COMMERCIAL INDUSTRIAL BANK (AND ITS ASSIGNEE JAIME Y.

GONZALES) petitioner, vs. HONORABLE COURT OR APPEALS and CHEMPHIL EXPORT AND
IMPORT CORPORATION (CEIC), respondents. G.R. No. 113394 December 12, 1995
KAPUNAN, J.:

Before us is a legal tug-of-war between the Chemphil Export and Import Corporation (hereinafter
referred to as CEIC), on one side, and the PISO and Jaime Gonzales as assignee of the Bank of the
Philippine Islands (BPI), Rizal Commercial Banking Corporation (RCBC), Land Bank of the
Philippines (LBP) and Philippine Commercial International Bank (PCIB), on the other (hereinafter
referred to as the consortium), over 1,717,678 shares of stock (hereinafter referred to as the
"disputed shares") in the Chemical Industries of the Philippines (Chemphil/CIP).

Our task is to determine who is the rightful owner of the disputed shares.

Pursuant to our resolution dated 30 May 1994, the instant case is a consolidation of two petitions for
review filed before us as follows:

In G.R. Nos. 112438-39, CEIC seeks the reversal of the decision of the Court of Appeals (former
Twelfth Division) promulgated on 30 June 1993 and its resolution of 29 October 1993, denying
petitioner's motion for reconsideration in the consolidated cases entitled "Dynetics, Inc., et al. v.
PISO, et al." (CA-G.R. No. 20467) and "Dynetics, Inc., et al. v. PISO, et al.; CEIC, Intervenor-
Appellee" (CA-G.R. CV No. 26511).

The dispositive portion of the assailed decision reads, thus:

WHEREFORE, this Court resolves in these consolidated cases as follows:

1. The Orders of the Regional Trial Court, dated March 25, 1988, and May 20, 1988,
subject of CA-G.R. CV No. 10467, are SET ASIDE and judgment is hereby rendered in
favor of the consortium and against appellee Dynetics, Inc., the amount of the judgment,
to be determined by Regional Trial Court, taking into account the value of assets that the
consortium may have already recovered and shall have recovered in accordance with
the other portions of this decision.

2. The Orders of the Regional Trial Court dated December 19, 1989 and March 5, 1990
are hereby REVERSED and SET ASIDE and judgment is hereby rendered confirming
the ownership of the consortium over the Chemphil shares of stock, subject of CA-G.R.
CV No. 26511, and the Order dated September 4, 1989, is reinstated. No
pronouncement as to costs. SO ORDERED. 1

In G.R. No. 113394, PCIB and its assignee, Jaime Gonzales, ask for the annulment of the Court of
Appeals' decision (former Special Ninth Division) promulgated on 26 March 1993 in "PCIB v. Hon.
Job B. Madayag & CEIC" (CA-G.R. SP NO. 20474) dismissing the petition for certiorari, prohibition

156
and mandamus filed by PCIB and of said court's resolution dated 11 January 1994 denying their
motion for reconsideration of its decision.2

The antecedent facts leading to the aforementioned controversies are as follows:

On September 25, 1984, Dynetics, Inc. and Antonio M. Garcia filed a complaint for declaratory relief
and/or injunction against the PISO, BPI, LBP, PCIB and RCBC or the consortium with the Regional
Trial Court of Makati, Branch 45 (Civil Case No. 8527), seeking judicial declaration, construction and
interpretation of the validity of the surety agreement that Dynetics and Garcia had entered into with
the consortium and to perpetually enjoin the latter from claiming, collecting and enforcing any
purported obligations which Dynetics and Garcia might have undertaken in said agreement.3

The consortium filed their respective answers with counterclaims alleging that the surety agreement
in question was valid and binding and that Dynetics and Garcia were liable under the terms of the
said agreement. It likewise applied for the issuance of a writ of preliminary attachment against
Dynetics and Garcia.4

Seven months later, or on 23 April 1985, Dynetics, Antonio Garcia and Matrix Management & Trading
Corporation filed a complaint for declaratory relief and/or injunction against the Security Bank & Trust
Co. (SBTC case) before the Regional Trial Court of Makati, Branch 135 docketed as Civil Case No.
10398.5

On 2 July 1985, the trial court granted SBTC's prayer for the issuance of a writ of preliminary
attachment and on 9 July 1985, a notice of garnishment covering Garcia's shares in CIP/Chemphil
(including the disputed shares) was served on Chemphil through its then President. The notice of
garnishment was duly annotated in the stock and transfer books of Chemphil on the same date.6

On 6 September 1985, the writ of attachment in favor of SBTC was lifted. However, the same was
reinstated on 30 October 1985.7

In the meantime, on 12 July 1985, the Regional Trial Court in Civil Case No. 8527 (the consortium
case) denied the application of Dynetics and Garcia for preliminary injunction and instead granted the
consortium's prayer for a consolidated writ of preliminary attachment. Hence, on 19 July 1985, after
the consortium had filed the required bond, a writ of attachment was issued and various real and
personal properties of Dynetics and Garcia were garnished, including the disputed shares. 8 This
garnishment, however, was not annotated in Chemphil's stock and transfer book.

On 8 September 1987, PCIB filed a motion to dismiss the complaint of Dynetics and Garcia for lack
of interest to prosecute and to submit its counterclaims for decision, adopting the evidence it had
adduced at the hearing of its application for preliminary attachment.9

On 25 March 1988, the Regional Trial Court dismissed the complaint of Dynetics and Garcia in Civil
Case No. 8527, as well as the counterclaims of the consortium, thus:

Resolving defendant's, Philippine Commercial International Bank, MOTION TO DISMISS

WITH MOTION TO SUBMIT DEFENDANT PCIBANK's COUNTERCLAIM FOR
DECISION, dated September 7, 1987:

(1) The motion to dismiss is granted; and the instant case is hereby ordered dismissed
pursuant to Sec. 3, Rule 17 of the Revised Rules of Court, plaintiff having failed to

157
 comply with the order dated July 16, 1987, and having not taken further steps to
prosecute the case; and

(2) The motion to submit said defendant's counterclaim for decision is denied; there is no
need; said counterclaim is likewise dismissed under the authority of Dalman vs. City
Court of Dipolog City, L-63194, January 21, 1985, wherein the Supreme Court stated
that if the civil case is dismissed, so also is the counterclaim filed therein. "A person
cannot eat his cake and have it at the same time" (p. 645, record, Vol. I).10

The motions for reconsideration filed by the consortium were, likewise, denied by the trial court in its
order dated 20 May 1988:

The Court could have stood pat on its order dated 25 March 1988, in regard to which the
defendants-banks concerned filed motions for reconsideration. However, inasmuch as
plaintiffs commented on said motions that: "3). In any event, so as not to unduly
foreclose on the rights of the respective parties to refile and prosecute their respective
causes of action, plaintiffs manifest their conformity to the modification of this Honorable
Court's order to indicate that the dismissal of the complaint and the counterclaims is
without prejudice." (p. 2, plaintiffs' COMMENT etc. dated May 20, 1988). The Court is
inclined to so modify the said order.

WHEREFORE , the order issued on March 25, 1988, is hereby modified in the sense
that the dismissal of the complaint as well as of the counterclaims of defendants RCBC,
LBP, PCIB and BPI shall be considered as without prejudice (p. 675, record, Vol. I).11

Unsatisfied with the aforementioned order, the consortium appealed to the Court of Appeals,
docketed as CA-G.R. CV No. 20467.

On 17 January 1989 during the pendency of consortium's appeal in CA-G.R. CV No. 20467, Antonio
Garcia and the consortium entered into a Compromise Agreement which the Court of Appeals
approved on 22 May 1989 and became the basis of its judgment by compromise. Antonio Garcia was
dropped as a party to the appeal leaving the consortium to proceed solely against Dynetics, Inc.12 On
27 June 1989, entry of judgment was made by the Clerk of Court.13

Hereunder quoted are the salient portions of said compromise agreement:

3. Defendants, in consideration of avoiding an extended litigation, having agreed to limit

their claim against plaintiff Antonio M. Garcia to a principal sum of P145 Million
immediately demandable and to waive all other claims to interest, penalties, attorney's
fees and other charges. The aforesaid compromise amount of indebtedness of P145
Million shall earn interest of eighteen percent (18%) from the date of this Compromise.

4. Plaintiff Antonio M. Garcia and herein defendants have no further claims against each
other.

5. This Compromise shall be without prejudice to such claims as the parties herein may
have against plaintiff Dynetics, Inc.

6. Plaintiff Antonio M. Garcia shall have two (2) months from date of this Compromise
within which to work for the entry and participation of his other creditor, Security Bank

158
 and Trust Co., into this Compromise. Upon the expiration of this period, without Security
Bank and Trust Co. having joined, this Compromise shall be submitted to the Court for
its information and approval (pp. 27, 28-31, rollo, CA-G.R. CV No. 10467).14

It appears that on 15 July 1988, Antonio Garcia under a Deed of Sale transferred to Ferro Chemicals,
Inc. (FCI) the disputed shares and other properties for P79,207,331.28. It was agreed upon that part
of the purchase price shall be paid by FCI directly to SBTC for whatever judgment credits that may be
adjudged in the latter's favor and against Antonio Garcia in the aforementioned SBTC case.15

On 6 March 1989, FCI, through its President Antonio M. Garcia, issued a Bank of America Check No.
860114 in favor of SBTC in the amount of P35,462,869.62. 16 SBTC refused to accept the check
claiming that the amount was not sufficient to discharge the debt. The check was thus consigned by
Antonio Garcia and Dynetics with the Regional Trial Court as payment of their judgment debt in the
SBTC case.17

On 26 June 1989, FCI assigned its 4,119,614 shares in Chemphil, which included the disputed
shares, to petitioner CEIC. The shares were registered and recorded in the corporate books of
Chemphil in CEIC's name and the corresponding stock certificates were issued to it.18

Meanwhile, Antonio Garcia, in the consortium case, failed to comply with the terms of the
compromise agreement he entered into with the consortium on 17 January 1989. As a result, on 18
July 1989, the consortium filed a motion for execution which was granted by the trial court on 11
August 1989. Among Garcia's properties that were levied upon on execution were his 1,717,678
shares in Chemphil (the disputed shares) previously garnished on 19 July 1985.19

On 22 August 1989, the consortium acquired the disputed shares of stock at the public auction sale
conducted by the sheriff for P85,000,000.00. 20 On same day, a Certificate of Sale covering the
disputed shares was issued to it.

On 30 August 1989,21 the consortium filed a motion (dated 29 August 1989) to order the corporate
secretary of Chemphil to enter in its stock and transfer books the sheriff's certificate of sale dated 22
August 1989, and to issue new certificates of stock in the name of the banks concerned. The trial
court granted said motion in its order dated 4 September 1989, thus:

For being legally proper, defendant's MOTION TO ORDER THE CORPORATE

SECRETARY OF CHEMICAL INDUSTRIES OF THE PHILS., INC. (CHEMPIL) TO
ENTER IN THE STOCK AND TRANSFER BOOKS OF CHEMPHIL THE SHERIFF'S
CERTIFICATE OF SALE DATED AUGUST 22, 1989 AND TO ISSUE NEW
CERTIFICATES OF STOCK IN THE NAME OF THE DEFENDANT BANKS, dated
August 29, 1989, is hereby granted.

WHEREFORE, the corporate secretary of the aforesaid corporation, or whoever is acting

for and in his behalf, is hereby ordered to (1) record and/or register the Certificate of
Sale dated August 22, 1989 issued by Deputy Sheriff Cristobal S. Jabson of this Court;
(2) to cancel the certificates of stock of plaintiff Antonio M. Garcia and all those which
may have subsequently been issued in replacement and/or in substitution thereof; and
(3) to issue in lieu of the said shares new shares of stock in the name of the defendant
Banks, namely, PCIB, BPI, RCBC, LBP and PISO bank in such proportion as their
respective claims would appear in this suit (p. 82, record, Vol. II).22

159
On 26 September 1989, CEIC filed a motion to intervene (dated 25 September 1989) in the
consortium case seeking the recall of the abovementioned order on grounds that it is the rightful
owner of the disputed shares.23 It further alleged that the disputed shares were previously owned by
Antonio M. Garcia but subsequently sold by him on 15 July 1988 to Ferro Chemicals, Inc. (FCI) which
in turn assigned the same to CEIC in an agreement dated 26 June 1989.

On 27 September 1989, the trial court granted CEIC's motion allowing it to intervene, but limited only
to the incidents covered by the order dated 4 September 1989. In the same order, the trial court
directed Chemphil's corporate secretary to temporarily refrain from implementing the 4 September
1989
order.24

On 2 October 1989, the consortium filed their opposition to CEIC's motion for intervention alleging
that their attachment lien over the disputed shares of stocks must prevail over the private sale in
favor of the CEIC considering that said shares of stock were garnished in the consortium's favor as
early as 19 July 1985.25

On 4 October 1989, the consortium filed their opposition to CEIC's motion to set aside the 4
September 1989 order and moved to lift the 27 September 1989 order. 26

On 12 October 1989, the consortium filed a manifestation and motion to lift the 27 September 1989
order, to reinstate the 4 September 1989 order and to direct CEIC to surrender the disputed stock
certificates of Chemphil in its possession within twenty-four (24) hours, failing in which the President,
Corporate Secretary and stock and transfer agent of Chemphil be directed to register the names of
the banks making up the consortium as owners of said shares, sign the new certificates of stocks
evidencing their ownership over said shares and to immediately deliver the stock certificates to
them.27

Resolving the foregoing motions, the trial court rendered an order dated 19 December 1989, the
dispositive portion of which reads as follows:

WHEREFORE, premises considered, the Urgent Motion dated September 25, 1989 filed
by CEIC is hereby GRANTED. Accordingly, the Order of September 4, 1989, is hereby
SET ASIDE, and any and all acts of the Corporate Secretary of CHEMPHIL and/or
whoever is acting for and in his behalf, as may have already been done, carried out or
implemented pursuant to the Order of September 4, 1989, are hereby nullified.

PERFORCE, the CONSORTIUM'S Motions dated October 3, 1989 and October 11,
1989, are both hereby denied for lack of merit.

The Cease and Desist Order dated September 27, 1989, is hereby AFFIRMED and
made PERMANENT. SO ORDERED.28

In so ruling, the trial court ratiocinated in this wise:

After careful and assiduous consideration of the facts and applicable law and
jurisprudence, the Court holds that CEIC's Urgent Motion to Set Aside the Order of
September 4, 1989 is impressed with merit. The CONSORTIUM has admitted that the
writ of attachment/garnishment issued on July 19, 1985 on the shares of stock belonging
to plaintiff Antonio M. Garcia was not annotated and registered in the stock and transfer

160
 books of CHEMPHIL. On the other hand, the prior attachment issued in favor of SBTC
on July 2, 1985 by Branch 135 of this Court in Civil Case No. 10398, against the same
CHEMPHIL shares of Antonio M. Garcia, was duly registered and annotated in the stock
and transfer books of CHEMPHIL. The matter of non-recording of the Consortium's
attachment in Chemphil's stock and transfer book on the shares of Antonio M. Garcia
assumes significance considering CEIC's position that FCI and later CEIC acquired the
CHEMPHIL shares of Antonio M. Garcia without knowledge of the attachment of the
CONSORTIUM. This is also important as CEIC claims that it has been subrogated to the
rights of SBTC since CEIC's predecessor-in-interest, the FCI, had paid SBTC the
amount of P35,462,869.12 pursuant to the Deed of Sale and Purchase of Shares of
Stock executed by Antonio M. Garcia on July 15, 1988. By reason of such payment, sale
with the knowledge and consent of Antonio M. Garcia, FCI and CEIC, as party-in-interest
to FCI, are subrogated by operation of law to the rights of SBTC. The Court is not
unaware of the citation in CEIC's reply that "as between two (2) attaching creditors, the
one whose claims was first registered on the books of the corporation enjoy priority."
(Samahang Magsasaka, Inc. vs. Chua Gan, 96 Phil. 974.)

The Court holds that a levy on the shares of corporate stock to be valid and binding on
third persons, the notice of attachment or garnishment must be registered and annotated
in the stock and transfer books of the corporation, more so when the shares of the
corporation are listed and traded in the stock exchange, as in this case. As a matter of
fact, in the CONSORTIUM's motion of August 30, 1989, they specifically move to "order
the Corporate Secretary of CHEMPHIL to enter in the stock and transfer books of
CHEMPHIL the Sheriff's Certificate of Sale dated August 22, 1989." This goes to show
that, contrary to the arguments of the CONSORTIUM, in order that attachment,
garnishment and/or encumbrances affecting rights and ownership on shares of a
corporation to be valid and binding, the same has to be recorded in the stock and
transfer books.

Since neither CEIC nor FCI had notice of the CONSORTIUM's attachment of July 19,
1985, CEIC's shares of stock in CHEMPHIL, legally acquired from Antonio M. Garcia,
cannot be levied upon in execution to satisfy his judgment debts. At the time of the
Sheriff's levy on execution, Antonio M. Garcia has no more in CHEMPHIL which could
be levied upon.29

On 23 January 1990, the consortium and PCIB filed separate motions for reconsideration of the
aforestated order which were opposed by petitioner
CEIC.30

On 5 March 1990, the trial court denied the motions for

reconsideration.31

On 16 March 1990, the consortium appealed to the Court of Appeals (CA-G.R. No. 26511). In its
Resolution dated 9 August 1990, the Court of Appeals consolidated CA-G.R. No. 26511 with CA-G.R.
No. 20467.32

The issues raised in the two cases, as formulated by the Court of Appeals, are as follows:

161
 WHETHER OR NOT, UNDER THE PECULIAR CIRCUMSTANCES OF THE CASE,
THE TRIAL COURT ERRED IN DISMISSING THE COUNTERCLAIMS OF THE
CONSORTIUM IN CIVIL CASE NO. 8527;

II

WHETHER OR NOT THE DISMISSAL OF CIVIL CASE NO. 8527 RESULTED IN THE
DISCHARGE OF THE WRIT OF ATTACHMENT ISSUED THEREIN EVEN AS THE
CONSORTIUM APPEALED THE ORDER DISMISSING CIVIL CASE NO. 8527;

III

WHETHER OR NOT THE JUDGMENT BASED ON COMPROMISE RENDERED BY

THIS COURT ON MAY 22, 1989 HAD THE EFFECT OF DISCHARGING THE
ATTACHMENTS ISSUED IN CIVIL CASE NO. 8527;

IV

WHETHER OR NOT THE ATTACHMENT OF SHARES OF STOCK, IN ORDER TO

BIND THIRD PERSONS, MUST BE RECORDED IN THE STOCK AND TRANSFER
BOOK OF THE CORPORATION; AND

WHETHER OR NOT FERRO CHEMICALS, INC. (FCI), AND ITS SUCCESSOR-IN-

INTEREST, CEIC, WERE SUBROGATED TO THE RIGHTS OF SECURITY BANK &
TRUST COMPANY (SBTC) IN A SEPARATE CIVIL ACTION. (This issue appears to be
material as SBTC is alleged to have obtained an earlier attachment over the same
Chemphil shares that the consortium seeks to recover in the case at bar).33

On 6 April 1990, the PCIB separately filed with the Court of Appeals a petition for certiorari,
prohibition and mandamus with a prayer for the issuance of a writ of preliminary injunction (CA-G.R.
No. SP-20474), likewise, assailing the very same orders dated 19 December 1989 and 5 March
1990, subject of CA-G.R. No. 26511.34

On 30 June 1993, the Court of Appeals (Twelfth Division) in CA-G.R. No. 26511 and CA-G.R. No.
20467 rendered a decision reversing the orders of the trial court and confirming the ownership of the
consortium over the disputed shares. CEIC's motion for reconsideration was denied on 29 October
1993.35

In ruling for the consortium, the Court of Appeals made the following ratiocination:36

On the first issue, it ruled that the evidence offered by the consortium in support of its
counterclaims, coupled with the failure of Dynetics and Garcia to prosecute their case,
was sufficient basis for the RTC to pass upon and determine the consortium's
counterclaims.

The Court of Appeals found no application for the ruling in Dalman v. City Court of
Dipolog, 134 SCRA 243 (1985) that "a person cannot eat his cake and have it at the
same time. If the civil case is dismissed, so also is the counterclaim filed therein"
because the factual background of the present action is different. In the instant case,
162
both Dynetics and Garcia and the consortium presented testimonial and documentary
evidence which clearly should have supported a judgment on the merits in favor of the
consortium. As the consortium correctly argued, the net atrocious effect of the Regional
Trial Court's ruling is that it allows a situation where a party litigant is forced to plead and
prove compulsory counterclaims only to be denied those counterclaims on account of
the adverse party's failure to prosecute his case. Verily, the consortium had no
alternative but to present its counterclaims in Civil Case No. 8527 since its counterclaims
are compulsory in nature.

On the second issue, the Court of Appeals opined that unless a writ of attachment is
lifted by a special order specifically providing for the discharge thereof, or unless a case
has been finally dismissed against the party in whose favor the attachment has been
issued, the attachment lien subsists. When the consortium, therefore, took an appeal
from the Regional Trial Court's orders of March 25, 1988 and May 20, 1988, such appeal
had the effect of preserving the consortium's attachment liens secured at the inception of
Civil Case No. 8527, invoking the rule in Olib v. Pastoral, 188 SCRA 692 (1988) that
where the main action is appealed, the attachment issued in the said main case is also
considered appealed.

Anent the third issue, the compromise agreement between the consortium and Garcia
dated 17 January 1989 did not result in the abandonment of its attachment lien over his
properties. Said agreement was approved by the Court of Appeals in a Resolution dated
22 May 1989. The judgment based on the compromise agreement had the effect of
preserving the said attachment lien as security for the satisfaction of said judgment
(citing BF Homes, Inc. v. CA, 190 SCRA 262, [1990]).

As to the fourth issue, the Court of Appeals agreed with the consortium's position that
the attachment of shares of stock in a corporation need not be recorded in the
corporation's stock and transfer book in order to bind third persons.

Section 7(d), Rule 57 of the Rules of Court was complied with by the consortium
(through the Sheriff of the trial court) when the notice of garnishment over the Chemphil
shares of Garcia was served on the president of Chemphil on July 19, 1985. Indeed, to
bind third persons, no law requires that an attachment of shares of stock be recorded in
the stock and transfer book of a corporation. The statement attributed by the Regional
Trial Court to the Supreme Court in Samahang Magsasaka, Inc. vs. Gonzalo Chua
Guan, G.R. No. L-7252, February 25, 1955 (unreported), to the effect that "as between
two attaching creditors, the one whose claim was registered first on the books of the
corporation enjoys priority," is an obiter dictum that does not modify the procedure laid
down in Section 7(d), Rule 57 of the Rules of Court.

Therefore, ruled the Court of Appeals, the attachment made over the Chemphil shares in
the name of Garcia on July 19, 1985 was made in accordance with law and the lien
created thereby remained valid and subsisting at the time Garcia sold those shares to
FCI (predecessor-in-interest of appellee CEIC) in 1988.

Anent the last issue, the Court of Appeals rejected CEIC's subrogation theory based on
Art. 1302 (2) of the New Civil Code stating that the obligation to SBTC was paid by
Garcia himself and not by a third party (FCI).

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 The Court of Appeals further opined that while the check used to pay SBTC was a FCI
corporate check, it was funds of Garcia in FCI that was used to pay off SBTC. That the
funds used to pay off SBTC were funds of Garcia has not been refuted by FCI or CEIC.
It is clear, therefore, that there was an attempt on the part of Garcia to use FCI and CEIC
as convenient vehicles to deny the consortium its right to make itself whole through an
execution sale of the Chemphil shares attached by the consortium at the inception of
Civil Case No. 8527. The consortium, therefore, is entitled to the issuance of the
Chemphil shares of stock in its favor. The Regional Trial Court's order of September 4,
1989, should, therefore, be reinstated in toto.

Accordingly, the question of whether or not the attachment lien in favor of SBTC in the
SBTC case is superior to the attachment lien in favor of the consortium in Civil Case No.
8527 becomes immaterial with respect to the right of intervenor-appellee CEIC. The said
issue would have been relevant had CEIC established its subrogation to the rights of
SBTC.

On 26 March 1993, the Court of Appeals (Special Ninth Division) in CA-G.R. No. SP 20474 rendered
a decision denying due course to and dismissing PCIB's petition for certiorari on grounds that PCIB
violated the rule against forum-shopping and that no grave abuse of discretion was committed by
respondent Regional Trial Court in issuing its assailed orders dated 19 December 1989 and 5 March
1990. PCIB's motion for reconsideration was denied on 11 January 1994.37

On 7 July 1993, the consortium, with the exception of PISO, assigned without recourse all its rights
and interests in the disputed shares to Jaime Gonzales.38

On 3 January 1994, CEIC filed the instant petition for review docketed as G.R. Nos. 112438-39 and
assigned the following errors:

I.

THE RESPONDENT COURT OF APPEALS GRAVELY ERRED IN SETTING ASIDE

AND REVERSING THE ORDERS OF THE REGIONAL TRIAL COURT DATED
DECEMBER 5, 1989 AND MARCH 5, 1990 AND IN NOT CONFIRMING PETITIONER'S
OWNERSHIP OVER THE DISPUTED CHEMPHIL SHARES AGAINST THE
FRIVOLOUS AND UNFOUNDED CLAIMS OF THE CONSORTIUM.

II.

THE RESPONDENT COURT OF APPEALS GRAVELY ERRED:

(1) In not holding that the Consortium's attachment over the disputed
Chemphil shares did not vest any priority right in its favor and cannot bind
third parties since admittedly its attachment on 19 July 1985 was not
recorded in the stock and transfer books of Chemphil, and subordinate to
the attachment of SBTC which SBTC registered and annotated in the stock
and transfer books of Chemphil on 2 July 1985, and that the Consortium's
attachment failed to comply with Sec. 7(d), Rule 57 of the Rules as
evidenced by the notice of garnishment of the deputy sheriff of the trial court
dated 19 July 1985 (annex "D") which the sheriff served on a certain Thelly
Ruiz who was neither President nor managing agent of Chemphil;
164
 (2) In not applying the case law enunciated by this Honorable Supreme
Court in Samahang Magsasaka, Inc. vs. Gonzalo Chua Guan, 96 Phil. 974
that as between two attaching creditors, the one whose claim was
registered first in the books of the corporation enjoys priority, and which
respondent Court erroneously characterized as mere obiter dictum;

(3) In not holding that the dismissal of the appeal of the Consortium from the
order of the trial court dismissing its counterclaim against Antonio M. Garcia
and the finality of the compromise agreement which ended the litigation
between the Consortium and Antonio M. Garcia in the Dynetics
case had ipso jure discharged the Consortium's purported attachment over
the disputed shares.

III.

THE RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING

THAT CEIC HAD BEEN SUBROGATED TO THE RIGHTS OF SBTC SINCE CEIC'S
PREDECESSOR IN INTEREST HAD PAID SBTC PURSUANT TO THE DEED OF
SALE AND PURCHASE OF STOCK EXECUTED BY ANTONIO M. GARCIA ON JULY
15, 1988, AND THAT BY REASON OF SUCH PAYMENT, WITH THE CONSENT AND
KNOWLEDGE OF ANTONIO M. GARCIA, FCI AND CEIC, AS PARTY IN INTEREST
TO FCI, WERE SUBROGATED BY OPERATION OF LAW TO THE RIGHTS OF SBTC.

IV.

THE RESPONDENT COURT OF APPEALS GRAVELY ERRED AND MADE

UNWARRANTED INFERENCES AND CONCLUSIONS, WITHOUT ANY SUPPORTING
EVIDENCE, THAT THERE WAS AN ATTEMPT ON THE PART OF ANTONIO M.
GARCIA TO USE FCI AND CEIC AS CONVENIENT VEHICLES TO DENY THE
CONSORTIUM ITS RIGHTS TO MAKE ITSELF WHOLE THROUGH AN EXECUTION
OF THE CHEMPHIL SHARES PURPORTEDLY ATTACHED BY THE CONSORTIUM
ON 19 JULY 1985. 39

On 2 March 1994, PCIB filed its own petition for review docketed as G.R. No. 113394 wherein it
raised the following issues:

I. RESPONDENT COURT OF APPEALS COMMITTED SERIOUS ERROR IN

RENDERING THE DECISION AND RESOLUTION IN QUESTION (ANNEXES A AND
B) IN DEFIANCE OF LAW AND JURISPRUDENCE BY FINDING RESPONDENT CEIC
AS HAVING BEEN SUBROGATED TO THE RIGHTS OF SBTC BY THE PAYMENT BY
FCI OF GARCIA'S DEBTS TO THE LATTER DESPITE THE FACT THAT —

A. FCI PAID THE SBTC DEBT BY VIRTUE OF A CONTRACT BETWEEN

FCI AND GARCIA, THUS, LEGAL SUBROGATION DOES NOT ARISE;

B. THE SBTC DEBT WAS PAID BY GARCIA HIMSELF AND NOT BY FCI,
HENCE, SUBROGATION BY PAYMENT COULD NOT HAVE OCCURRED;

C. FCI DID NOT ACQUIRE ANY RIGHT OVER THE DISPUTED SHARES
AS SBTC HAD NOT YET LEVIED UPON NOR BOUGHT THOSE SHARES

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 ON EXECUTION. ACCORDINGLY, WHAT FCI ACQUIRED FROM SBTC
WAS SIMPLY A JUDGMENT CREDIT AND AN ATTACHMENT LIEN TO
SECURE ITS SATISFACTION.

II. RESPONDENT COURT OF APPEALS COMMITTED SERIOUS ERROR IN

SUSTAINING THE ORDERS OF THE TRIAL COURT DATED DECEMBER 19, 1989
AND MARCH 5, 1990 WHICH DENIED PETITIONER'S OWNERSHIP OVER THE
DISPUTED SHARES NOTWITHSTANDING PROVISIONS OF LAW AND EXTANT
JURISPRUDENCE ON THE MATTER THAT PETITIONER AND THE CONSORTIUM
HAVE PREFERRED SENIOR RIGHTS THEREOVER.

III. RESPONDENT COURT OF APPEAL COMMITTED SERIOUS ERROR IN

CONCLUDING THAT THE DISMISSAL OF THE COMPLAINT AND THE
COUNTERCLAIM IN CIVIL CASE NO. 8527 ALSO RESULTED IN THE DISCHARGE
OF THE WRIT OF ATTACHMENT DESPITE THE RULINGS OF THIS HONORABLE
COURT IN BF HOMES VS. COURT OF APPEALS, G.R. NOS. 76879 AND 77143,
OCTOBER 3, 1990, 190 SCRA 262, AND IN OLIB VS. PASTORAL, G.R. NO. 81120,
AUGUST 20, 1990, 188 SCRA 692 TO THE CONTRARY.

IV. RESPONDENT COURT OF APPEALS EXCEEDED ITS JURISDICTION IN RULING

ON THE MERITS OF THE MAIN CASE NOTWITHSTANDING THAT THOSE
MATTERS WERE NOT ON APPEAL BEFORE IT.

V. RESPONDENT COURT OF APPEALS COMMITTED SERIOUS ERROR IN

HOLDING THAT PETITIONER IS GUILTY OF FORUM SHOPPING DESPITE THE
FACT THAT SC CIRCULAR NO. 28-91 WAS NOT YET IN FORCE AND EFFECT AT
THE TIME THE PETITION WAS FILED BEFORE RESPONDENT APPELLATE COURT,
AND THAT ITS COUNSEL AT THAT TIME HAD ADEQUATE BASIS TO BELIEVE
THAT CERTIORARI AND NOT AN APPEAL OF THE TRIAL COURT'S ORDERS WAS
THE APPROPRIATE RELIEF.40

As previously stated, the issue boils down to who is legally entitled to the disputed shares of
Chemphil. We shall resolve this controversy by examining the validity of the claims of each party and,
thus, determine whose claim has priority.

CEIC's claim

CEIC traces its claim over the disputed shares to the attachment lien obtained by SBTC on 2 July
1985 against Antonio Garcia in Civil Case No. 10398. It avers that when FCI, CEIC's predecessor-in-
interest, paid SBTC the due obligations of Garcia to the said bank pursuant to the Deed of Absolute
Sale and Purchase of Shares of Stock,41 FCI, and later CEIC, was subrogated to the rights of SBTC,
particularly to the latter's aforementioned attachment lien over the disputed shares.

CEIC argues that SBTC's attachment lien is superior as it was obtained on 2 July 1985, ahead of the
consortium's purported attachment on 19 July 1985. More importantly, said CEIC lien was duly
recorded in the stock and transfer books of Chemphil.

CEIC's subrogation theory is unavailing.

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By definition, subrogation is "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 conventional. Legal subrogation is that which
takes place without agreement but by operation of law because of certain acts; this is the subrogation
referred to in article 1302. Conventional subrogation is that which takes place by agreement of the
parties . . ."42

CEIC's theory is premised on Art. 1302 (2) of the Civil Code which states:

Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor's
knowledge;

(2) When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor;

(3) When, even without the knowledge of the debtor, a person interested in the fulfillment
of the obligation pays, without prejudice to the effects of confusion as to the latter's
share. (Emphasis ours.)

Despite, however, its multitudinous arguments, CEIC presents an erroneous interpretation of the
concept of subrogation. An analysis of the situations involved would reveal the clear inapplicability of
Art. 1302 (2).

Antonio Garcia sold the disputed shares to FCI for a consideration of P79,207,331.28. FCI, however,
did not pay the entire amount to Garcia as it was obligated to deliver part of the purchase price
directly to SBTC pursuant to the following stipulation in the Deed of Sale:

Manner of Payment

Payment of the Purchase Price shall be made in accordance with the following order of
preference provided that in no instance shall the total amount paid by the Buyer exceed
the Purchase Price:

a. Buyer shall pay directly to the Security Bank and Trust Co. the amount determined by
the Supreme Court as due and owing in favor of the said bank by the Seller.

The foregoing amount shall be paid within fifteen (15) days from the date the decision of
the Supreme Court in the case entitled "Antonio M. Garcia, et al. vs. Court of Appeals, et
al." G.R. Nos. 82282-83 becomes final and executory. 43 (Emphasis ours.)

Hence, when FCI issued the BA check to SBTC in the amount of P35,462,869.62 to pay Garcia's
indebtedness to the said bank, it was in effect paying with Garcia's money, no longer with its own,
because said amount was part of the purchase price which FCI owed Garcia in payment for the sale
of the disputed shares by the latter to the former. The money "paid" by FCI to SBTC, thus properly
belonged to Garcia. It is as if Garcia himself paid his own debt to SBTC but through a third party —
FCI.

It is, therefore, of no consequence that what was used to pay SBTC was a corporate check of FCI.
As we have earlier stated, said check no longer represented FCI funds but Garcia's money, being as

167
it was part of FCI's payment for the acquisition of the disputed shares. The FCI check should not be
taken at face value, the attendant circumstances must also be considered.

The aforequoted contractual stipulation in the Deed of Sale dated 15 July 1988 between Antonio
Garcia and FCI is nothing more but an arrangement for the sake of convenience. Payment was to be
effected in the aforesaid manner so as to prevent money from changing hands needlessly. Besides,
the very purpose of Garcia in selling the disputed shares and his other properties was to "settle
certain civil suits filed against him."44

Since the money used to discharge Garcia's debt rightfully belonged to him, FCI cannot be
considered a third party payor under Art. 1302 (2). It was but a conduit, or as aptly categorized by
respondents, merely an agent as defined in Art. 1868 of the Civil Code:

Art. 1868. By the contract of agency a person binds himself to render some service or to
do something in representation or on behalf of another, with the consent or authority of
the latter.

FCI was merely fulfilling its obligation under the aforementioned Deed of Sale.

Additionally, FCI is not a disinterested party as required by Art. 1302 (2) since the benefits of the
extinguishment of the obligation would redound to none other but itself. 45 Payment of the judgment
debt to SBTC resulted in the discharge of the attachment lien on the disputed shares purchased by
FCI. The latter would then have a free and "clean" title to said shares.

In sum, CEIC, for its failure to fulfill the requirements of Art. 1302 (2), was not subrogated to the rights
of SBTC against Antonio Garcia and did not acquire SBTC's attachment lien over the disputed
shares which, in turn, had already been lifted or discharged upon satisfaction by Garcia, through FCI,
of his debt to the said bank.46

The rule laid down in the case of Samahang Magsasaka, Inc. v. Chua Guan,47 that as between two
attaching creditors the one whose claim was registered ahead on the books of the corporation enjoys
priority, clearly has no application in the case at bench. As we have amply discussed, since CEIC
was not subrogated to SBTC's right as attaching creditor, which right in turn, had already terminated
after Garcia paid his debt to SBTC, it cannot, therefore, be categorized as an attaching creditor in the
present controversy. CEIC cannot resurrect and claim a right which no longer exists. The issue in the
instant case, then, is priority between an attaching creditor (the consortium) and a purchaser
(FCI/CEIC) of the disputed shares of stock and not between two attaching creditors — the subject
matter of the aforestated Samahang Magsasaka case.

CEIC, likewise, argues that the consortium's attachment lien over the disputed Chemphil shares is
null and void and not binding on third parties due to the latter's failure to register said lien in the stock
and transfer books of Chemphil as mandated by the rule laid down by the Samahang Magsasaka
v. Chua Guan.48

The attachment lien acquired by the consortium is valid and effective. Both the Revised Rules of
Court and the Corporation Code do not require annotation in the corporation's stock and transfer
books for the attachment of shares of stock to be valid and binding on the corporation and third party.

Section 74 of the Corporation Code which enumerates the instances where registration in the stock
and transfer books of a corporation provides:

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 Sec. 74. Books to be kept; stock transfer agent. —

Stock corporations must also keep a book to be known as the stock and transfer book, in
which must be kept a record of all stocks in the names of the stockholders alphabetically
arranged; the installments paid and unpaid on all stock for which subscription has been
made, and the date of payment of any settlement; a statement of every alienation, sale
or transfer of stock made, the date thereof, and by and to whom made; and such other
entries as the by-laws may prescribe. The stock and transfer book shall be kept in the
principal office of the corporation or in the office of its stock transfer agent and shall be
open for inspection by any director or stockholder of the corporation at reasonable hours
on business days. (Emphasis ours.)

Section 63 of the same Code states:

Sec. 63. Certificate of stock and transfer of shares. — The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or
vice-president, countersigned by the secretary or assistant secretary, and sealed with
the seal of the corporation shall be issued in accordance with the by-laws. Shares of
stock so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation so as to
show the names of the parties to the transaction, the date of the transfer, the number of
the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. (Emphasis ours.)

Are attachments of shares of stock included in the term "transfer" as provided in Sec. 63 of the
Corporation Code? We rule in the negative. As succinctly declared in the case of Monserrat
v. Ceron,49 "chattel mortgage over shares of stock need not be registered in the corporation's stock
and transfer book inasmuch as chattel mortgage over shares of stock does not involve a "transfer of
shares," and that only absolute transfers of shares of stock are required to be recorded in the
corporation's stock and transfer book in order to have "force and effect as against third persons."

The word "transferencia" (transfer) is defined by the "Diccionario de la Academia de la

Lengua Castellana" as "accion y efecto de transfeir" (the act and effect of transferring);
and the verb "transferir", as "ceder or renunciar en otro el derecho o dominio que se
tiene sobre una cosa, haciendole dueno de ella" (to assign or waive the right in, or
absolute ownership of, a thing in favor of another, making him the owner thereof).

In the Law Dictionary of "Words and Phrases", third series, volume 7, p. 5867, the word
"transfer" is defined as follows:

"Transfer" means any act by which property of one person is vested in

another, and "transfer of shares", as used in Uniform Stock Transfer Act
(Comp. St. Supp. 690), implies any means whereby one may be divested of
and another acquire ownership of stock. (Wallach vs. Stein [N.J.], 136 A.,
209, 210.)

169
 In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac., 14, 17; 34 Okl.,
662; 46 L.R.A. [N.S.], 455), cited in Words and Phrases, second series, vol. 4, p. 978,
the following appears:

A "transfer" is the act by which the owner of a thing delivers it to another

with the intent of passing the rights which he has in it to the latter, and a
chattel mortgage is not within the meaning of such term.

Although the Monserrat case refers to a chattel mortgage over shares of stock, the same may be
applied to the attachment of the disputed shares of stock in the present controversy since an
attachment does not constitute an absolute conveyance of property but is primarily used as a means
"to seize the debtor's property in order to secure the debt or claim of the creditor in the event that a
judgment is rendered."51

Known commentators on the Corporation Code expound, thus:

Shares of stock being personal property, may be the subject matter of pledge and chattel
mortgage. Such collateral transfers are however not covered by the registration
requirement of Section 63, since our Supreme Court has held that such provision applies
only to absolute transfers thus, the registration in the corporate books of pledges and
chattel mortgages of shares cannot have any legal effect. 52 (Emphasis ours.)

The requirement that the transfer shall be recorded in the books of the corporation to be
valid as against third persons has reference only to absolute transfers or absolute
conveyance of the ownership or title to a share.

Consequently, the entry or notation on the books of the corporation of pledges and
chattel mortgages on shares is not necessary to their validity (although it is advisable to
do so) since they do not involve absolute alienation of ownership of stock (Monserrat vs.
Ceron, 58 Phil. 469 [1933]; Chua Guan vs. Samahang Magsasaka, Inc., 62 Phil. 472
[1935].) To affect third persons, it is enough that the date and description of the shares
pledged appear in a public instrument. (Art. 2096, Civil Code.) With respect to a chattel
mortgage constituted on shares of stock, what is necessary is its registration in the
Chattel Mortgage Registry. (Act No. 1508 and Art. 2140, Civil Code.)53

CEIC's reliance on the Samahang Magsasaka case is misplaced. Nowhere in the said decision was it
categorically stated that annotation of the attachment in the corporate books is mandatory for its
validity and for the purpose of giving notice to third persons.

The only basis, then, for petitioner CEIC's claim is the Deed of Sale under which it purchased the
disputed shares. It is, however, a settled rule that a purchaser of attached property acquires it subject
to an attachment legally and validly levied thereon.54

Our corollary inquiry is whether or not the consortium has indeed a prior valid and existing
attachment lien over the disputed shares.

Jaime Gonzales' /Consortium's Claim

Is the consortium's attachment lien over the disputed shares valid?

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CEIC vigorously argues that the consortium's writ of attachment over the disputed shares of
Chemphil is null and void, insisting as it does, that the notice of garnishment was not validly served
on the designated officers on 19 July 1985.

To support its contention, CEIC presented the sheriff's notice of garnishment55 dated 19 July 1985
which showed on its face that said notice was received by one Thelly Ruiz who was neither the
president nor managing agent of Chemphil. It makes no difference, CEIC further avers, that Thelly
Ruiz was the secretary of the President of Chemphil, for under the above-quoted provision she is not
among the officers so authorized or designated to be served with the notice of garnishment.

We cannot subscribe to such a narrow view of the rule on proper service of writs of attachment.

A secretary's major function is to assist his or her superior. He/she is in effect an extension of the
latter. Obviously, as such, one of her duties is to receive letters and notices for and in behalf of her
superior, as in the case at bench. The notice of garnishment was addressed to and was actually
received by Chemphil's president through his secretary who formally received it for him. Thus, in one
case,56 we ruled that the secretary of the president may be considered an "agent" of the corporation
and held that service of summons on him is binding on the corporation.

Moreover, the service and receipt of the notice of garnishment on 19 July 1985 was duly
acknowledged and confirmed by the corporate secretary of Chemphil, Rolando Navarro and his
successor Avelino Cruz through their respective certifications dated 15 August 198957 and 21 August
1989.58

We rule, therefore, that there was substantial compliance with Sec. 7(d), Rule 57 of the Rules of
Court.

Did the compromise agreement between Antonio Garcia and the consortium discharge the latter's
attachment lien over the disputed shares?

CEIC argues that a writ of attachment is a mere auxiliary remedy which, upon the dismissal of the
case, dies a natural death. Thus, when the consortium entered into a compromise
agreement, 59 which resulted in the termination of their case, the disputed shares were released from
garnishment.

We disagree. To subscribe to CEIC's contentions would be to totally disregard the concept and
purpose of a preliminary attachment.

A writ of preliminary attachment is a provisional remedy issued upon order of the court
where an action is pending to be levied upon the property or properties of the defendant
therein, the same to be held thereafter by the Sheriff as security for the satisfaction of
whatever judgment might be secured in said action by the attaching creditor against the
defendant.60 (Emphasis ours.)

Attachment is a juridical institution which has for its purpose to secure the outcome of
the trial, that is, the satisfaction of the pecuniary obligation really contracted by a person
or believed to have been contracted by him, either by virtue of a civil obligation
emanating from contract or from law, or by virtue of some crime or misdemeanor that he
might have committed, and the writ issued, granted it, is executed by attaching and

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 safely keeping all the movable property of the defendant, or so much thereof may be
sufficient to satisfy the plaintiff's demands . . .61 (Emphasis ours.)

The chief purpose of the remedy of attachment is to secure a contingent lien on

defendant's property until plaintiff can, by appropriate proceedings, obtain a judgment
and have such property applied to its satisfaction, or to make some provision for
unsecured debts in cases where the means of satisfaction thereof are liable to be
removed beyond the jurisdiction, or improperly disposed of or concealed, or otherwise
placed beyond the reach of creditors.62 (Emphasis ours.)

We reiterate the rule laid down in BF Homes, Inc. v. CA 63 that an attachment lien continues until the
debt is paid, or sale is had under execution issued on the judgment or until judgment is satisfied, or
the attachment discharged or vacated in the same manner provided by law. We expounded in said
case that:

The appointment of a rehabilitation receiver who took control and custody of BF has not
necessarily secured the claims of Roa and Mendoza. In the event that the receivership is
terminated with such claims not having been satisfied, the creditors may also find
themselves without security therefor in the civil action because of the dissolution of the
attachment. This should not be permitted. Having previously obtained the issuance of
the writ in good faith, they should not be deprived of its protection if the rehabilitation
plan does not succeed and the civil action is resumed.

As we ruled in Government of the Philippine Islands v. Mercado:

Attachment is in the nature of a proceeding in rem. It is against the

particular property. The attaching creditor thereby acquires specific lien
upon the attached property which ripens into a judgment against
the res when the order of sale is made. Such a proceeding is in effect a
finding that the property attached is an indebted thing and a virtual
condemnation of it to pay the owner's debt. The law does not provide the
length of time an attachment lien shall continue after the rendition of
judgment, and it must therefore necessarily continue until the debt is paid,
or sale is had under execution issued on the judgment or until judgment is
satisfied, or the attachment discharged or vacated in some manner provided
by law.

It has been held that the lien obtained by attachment stands upon as high
equitable grounds as a mortgage lien:

The lien or security obtained by an attachment even before judgment, is a

fixed and positive security, a specific lien, and, although whether it will ever
be made available to the creditor depends on contingencies, its existence is
in no way contingent, conditioned or inchoate. It is a vested interest, an
actual and substantial security, affording specific security for satisfaction of
the debt put in suit, which constitutes a cloud on the legal title, and is as
specific as if created by virtue of a voluntary act of the debtor and stands
upon as high equitable grounds as a mortgage. (Corpus Juris Secundum,
433, and authorities therein cited.)

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The case at bench admits of a peculiar character in the sense that it involves a compromise
agreement. Nonetheless, the rule established in the aforequoted cases still applies, even more so
since the terms of the agreement have to be complied with in full by the parties thereto. The parties to
the compromise agreement should not be deprived of the protection provided by an attachment lien
especially in an instance where one reneges on his obligations under the agreement, as in the case
at bench, where Antonio Garcia failed to hold up his own end of the deal, so to speak.

Moreover, a violation of the terms and conditions of a compromise agreement entitles the aggrieved
party to a writ of execution.

In Abenojar & Tana v. CA, et al., 64 we held:

The non-fulfillment of the terms and conditions of a compromise agreement approved by

the Court justifies execution thereof and the issuance of the writ for said purpose is the
Court's ministerial duty enforceable by mandamus.

Likewise we ruled in Canonizado v. Benitez:65

A judicial compromise may be enforced by a writ of execution. If a party fails or refuses

to abide by the compromise, the other party may enforce the compromise or regard it as
rescinded and insist upon his original demand.

If we were to rule otherwise, we would in effect create a back door by which a debtor can easily
escape his creditors. Consequently, we would be faced with an anomalous situation where a debtor,
in order to buy time to dispose of his properties, would enter into a compromise agreement he has no
intention of honoring in the first place. The purpose of the provisional remedy of attachment would
thus be lost. It would become, in analogy, a declawed and toothless tiger.

From the foregoing, it is clear that the consortium and/or its assignee Jaime Gonzales have the better
right over the disputed shares. When CEIC purchased the disputed shares from Antonio Garcia on
15 July 1988, it took the shares subject to the prior, valid and existing attachment lien in favor of and
obtained by the consortium.

Forum Shopping in G.R. No. 113394

We uphold the decision of the Court of Appeals finding PCIB guilty of forum-shopping.66

The Court of Appeals opined:

True it is, that petitioner PCIB was not a party to the appeal made by the four other
banks belonging to the consortium, but equally true is the rule that where the rights and
liabilities of the parties appealing are so interwoven and dependent on each other as to
be inseparable, a reversal of the appealed decision as to those who appealed, operates
as a reversal to all and will inure to the benefit of those who did not join the appeal
(Tropical Homes vs. Fortun, 169 SCRA 80, p. 90, citing Alling vs. Wenzel, 133 111. 264-
278; 4 C.J. 1206). Such principal, premised upon communality of interest of the parties,
is recognized in this jurisdiction (Director of Lands vs. Reyes, 69 SCRA 415). The four
other banks which were part of the consortium, filed their notice of appeal under date of
March 16, 1990, furnishing a copy thereof upon the lawyers of petitioner. The petition
for certiorari in the present case was filed on April 10, 1990, long after the other

173
 members of the consortium had appealed from the assailed order of December 19,
1989.

We view with skepticism PCIB's contention that it did not join the consortium because it "honestly
believed that certiorari was the more efficacious and speedy relief available under the
circumstances."67 Rule 65 of the Revised Rules of Court is not difficult to understand. Certiorari is
available only if there is no appeal or other plain, speedy and adequate remedy in the ordinary
course of law. Hence, in instituting a separate petition for certiorari, PCIB has deliberately resorted to
forum-shopping.

PCIB cannot hide behind the subterfuge that Supreme Court Circular 28-91 was not yet in force when
it filed the certiorari proceedings in the Court of Appeals. The rule against forum-shopping has long
been established.68Supreme Court Circular 28-91 merely formalized the prohibition and provided the
appropriate penalties against transgressors.

It alarms us to realize that we have to constantly repeat our warning against forum-shopping. We
cannot over-emphasize its ill-effects, one of which is aptly demonstrated in the case at bench where
we are confronted with two divisions of the Court of Appeals issuing contradictory decisions 69 one in
favor of CEIC and the other in favor of the consortium/Jaime Gonzales.

Forum-shopping or the act of a party against whom an adverse judgment has been rendered in one
forum, of seeking another (and possibly favorable) opinion in another forum (other than by appeal or
the special civil action of certiorari), or the institution of two (2) or more actions or proceedings
grounded on the same cause on the supposition that one or the other court would make a favorable
disposition,70 has been characterized as an act of malpractice that is prohibited and condemned as
trifling with the Courts and abusing their processes. It constitutes improper conduct which tends to
degrade the administration of justice. It has also been aptly described as deplorable because it adds
to the congestion of the already heavily burdened dockets of the
courts.71

WHEREFORE, premises considered the appealed decision in G.R. Nos. 112438-39 is hereby
AFFIRMED and the appealed decision in G.R. No. 113394, insofar as it adjudged the CEIC the
rightful owner of the disputed shares, is hereby REVERSED. Moreover, for wantonly resorting to
forum-shopping, PCIB is hereby REPRIMANDED and WARNED that a repetition of the same or
similar acts in the future shall be dealt with more severely. SO ORDERED.

174
MR HOLDINGS, LTD., petitioner, vs. SHERIFF CARLOS P. BAJAR, SHERIFF FERDINAND M.
JANDUSAY, SOLIDBANK CORPORATION, AND MARCOPPER MINING
CORPORATION, respondents. G.R. No. 138104 April 11, 2002
SANDOVAL-GUTIERREZ, J.:

In the present Petition for Review on Certiorari, petitioner MR Holdings, Ltd. assails
the a) Decision1 dated January 8, 1999 of the Court of Appeals in CA-G.R. SP No. 49226 finding no
grave abuse of discretion on the part of Judge Leonardo P. Ansaldo of the Regional Trial Court
(RTC), Branch 94, Boac, Marinduque, in denying petitioner’s application for a writ of preliminary
injunction;2 and b) Resolution3 dated March 29, 1999 denying petitioner’s motion for reconsideration.

The facts of the case are as follows:

Under a "Principal Loan Agreement"4 and "Complementary Loan Agreement,"5 both dated November
4, 1992, Asian Development Bank (ADB), a multilateral development finance institution, agreed to
extend to Marcopper Mining Corporation (Marcopper) a loan in the aggregate amount of
US$40,000,000.00 to finance the latter’s mining project at Sta. Cruz, Marinduque. The principal loan
of US$ 15,000,000.00 was sourced from ADB’s ordinary capital resources, while the complementary
loan of US$ 25,000,000.00 was funded by the Bank of Nova Scotia, a participating finance institution.

On even date, ADB and Placer Dome, Inc., (Placer Dome), a foreign corporation which owns 40% of
Marcopper, executed a "Support and Standby Credit Agreement" whereby the latter agreed to
provide Marcopper with cash flow support for the payment of its obligations to ADB.

To secure the loan, Marcopper executed in favor of ADB a "Deed of Real Estate and Chattel
Mortgage"6 dated November 11, 1992, covering substantially all of its (Marcopper’s) properties and
assets in Marinduque. It was registered with the Register of Deeds on November 12, 1992.

When Marcopper defaulted in the payment of its loan obligation, Placer Dome, in fulfillment of its
undertaking under the "Support and Standby Credit Agreement," and presumably to preserve its
international credit standing, agreed to have its subsidiary corporation, petitioner MR Holding, Ltd.,
assumed Marcopper’s obligation to ADB in the amount of US$ 18,453,450.02. Consequently, in an
"Assignment Agreement"7 dated March 20, 1997, ADB assigned to petitioner all its rights, interests
and obligations under the principal and complementary loan agreements, ("Deed of Real Estate and
Chattel Mortgage," and "Support and Standby Credit Agreement"). On December 8, 1997, Marcopper
likewise executed a "Deed of Assignment"8 in favor of petitioner. Under its provisions, Marcopper
assigns, transfers, cedes and conveys to petitioner, its assigns and/or successors-in-interest all of its
(Marcopper’s) properties, mining equipment and facilities, to wit:

Land and Mining Rights

Building and Other Structures

Other Land Improvements

Machineries & Equipment, and Warehouse Inventory

Mine/Mobile Equipment

Transportation Equipment and Furniture & Fixtures

175
Meanwhile, it appeared that on May 7, 1997, Solidbank Corporation (Solidbank) obtained a Partial
Judgment9against Marcopper from the RTC, Branch 26, Manila, in Civil Case No. 96-80083 entitled
"Solidbank Corporation vs. Marcopper Mining Corporation, John E. Loney, Jose E. Reyes and
Teodulo C. Gabor, Jr.," the decretal portion of which reads:

"WHEREFORE, PREMISES CONSIDERED, partial judgment is hereby rendered ordering

defendant Marcopper Mining Corporation, as follows:

1. To pay plaintiff Solidbank the sum of Fifty Two Million Nine Hundred Seventy
Thousand Pesos Seven Hundred Fifty Six and 89/100 only (PHP 52,970,756.89), plus
interest and charges until fully paid;

2. To pay an amount equivalent to Ten Percent (10%) of above-stated amount as

attorney’s fees; and

3. To pay the costs of suit. "SO ORDERED."

Upon Solidbank’s motion, the RTC of Manila issued a writ of execution pending appeal directing
Carlos P. Bajar, respondent sheriff, to require Marcopper "to pay the sums of money to satisfy the
Partial Judgment."10 Thereafter, respondent Bajar issued two notices of levy on Marcopper’s personal
and real properties, and over all its stocks of scrap iron and unserviceable mining
equipment.11 Together with sheriff Ferdinand M. Jandusay (also a respondent) of the RTC, Branch
94, Boac, Marinduque, respondent Bajar issued two notices setting the public auction sale of the
levied properties on August 27, 1998 at the Marcopper mine site.12

Having learned of the scheduled auction sale, petitioner served an "Affidavit of Third-Party
Claim"13 upon respondent sheriffs on August 26, 1998, asserting its ownership over all Marcopper’s
mining properties, equipment and facilities by virtue of the "Deed of Assignment."

Upon the denial of its "Affidavit of Third–Party Claim" by the RTC of Manila,14 petitioner commenced
with the RTC of Boac, Marinduque, presided by Judge Leonardo P. Ansaldo, a complaint for
reivindication of properties, etc., with prayer for preliminary injunction and temporary restraining order
against respondents Solidbank, Marcopper, and sheriffs Bajar and Jandusay.15 The case was
docketed as Civil Case No. 98-13.

In an Order16 dated October 6, 1998, Judge Ansaldo denied petitioner’s application for a writ of
preliminary injunction on the ground that a) petitioner has no legal capacity to sue, it being a foreign
corporation doing business in the Philippines without license; b) an injunction will amount "to staying
the execution of a final judgment by a court of co-equal and concurrent jurisdiction;" and c) the
validity of the "Assignment Agreement" and the "Deed of Assignment" has been "put into serious
question by the timing of their execution and registration."

Unsatisfied, petitioner elevated the matter to the Court of Appeals on a Petition for Certiorari,
Prohibition and Mandamus, docketed therein as CA-G.R. SP No. 49226. On January 8, 1999, the
Court of Appeals rendered a Decision holding that Judge Ansaldo did not commit grave abuse of
discretion in denying petitioner’s prayer for a writ of preliminary injunction, ratiocinating as follows:

"Petitioner contends that it has the legal capacity to sue and seek redress from Philippine
courts as it is a non-resident foreign corporation not doing business in the Philippines and
suing on isolated transactions.

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"We agree with the finding of the respondent court that petitioner is not suing on an isolated
transaction as it claims to be, as it is very obvious from the deed of assignment and its
relationships with Marcopper and Placer Dome, Inc. that its unmistakable intention is to
continue the operations of Marcopper and shield its properties/assets from the reach of
legitimate creditors, even those holding valid and executory court judgments against it. There is
no other way for petitioner to recover its huge financial investments which it poured into
Marcopper’s rehabilitation and the local situs where the Deeds of Assignment were executed,
without petitioner continuing to do business in the country.

"While petitioner may just be an assignee to the Deeds of Assignment, it may still
fall within the meaning of "doing business" in light of the Supreme Court ruling in
the case of Far East International Import and Export Corporation vs. Nankai Kogyo
Co., 6 SCRA 725, that:

‘Where a single act or transaction however is not merely incidental or casual but
indicates the foreign corporation’s intention to do other business in the Philippines,
said single act or transaction constitutes doing or engaging in or transacting business
in the Philippines.’

"Furthermore, the court went further by declaring that even a single act may constitute
doing business if it is intended to be the beginning of a series of transactions. (Far East
International Import and Export Corporation vs. Nankai Kogyo Co. supra).

"On the issue of whether petitioner is the bona fide owner of all the mining facilities and
equipment of Marcopper, petitioner relies heavily on the Assignment Agreement allegedly
executed on March 20, 1997 wherein all the rights and interest of Asian Development Bank
(ADB) in a purported Loan Agreement were ceded and transferred in favor of the petitioner as
assignee, in addition to a subsequent Deed of Assignment dated December 28, 1997
conveying absolutely all the properties, mining equipment and facilities of Marcopper in favor of
petitioner.

"The Deeds of Assignment executed in favor of petitioner cannot be binding on the judgment
creditor, private respondent Solidbank, under the general legal principle that contracts can only
bind the parties who had entered into it, and it cannot favor or prejudice a third person (Quano
vs. Court of Appeals, 211 SCRA 40). Moreover, by express stipulation, the said deeds shall be
governed, interpreted and construed in accordance with laws of New York.1âwphi1.nêt

"The Deeds of Assignment executed by Marcopper, through its President, Atty. Teodulo
C. Gabor, Jr., were clearly made in bad faith and in fraud of creditors, particularly private
respondent Solidbank. The first Assignment Agreement purportedly executed on March
20, 1997 was entered into after Solidbank had filed on September 19, 1996 a case
against Marcopper for collection of sum of money before Branch 26 of the Regional Trial
Court docketed as Civil Case No. 96-80083. The second Deed of Assignment purportedly
executed on December 28, 1997 was entered into by President Gabor after Solidbank
had filed its Motion for Partial Summary Judgment, after the rendition by Branch 26 of
the Regional Trial Court of Manila of a Partial Summary Judgment and after the said trial
court had issued a writ of execution, and which judgment was later affirmed by the
Court of Appeals. While the assignments (which were not registered with the Registry of
Property as required by Article 1625 of the new Civil Code) may be valid between the parties
thereof, it produces no effect as against third parties. The purported execution of the Deeds of
177
 Assignment in favor of petitioner was in violation of Article 1387 of the New Civil Code x x x."
(Emphasis Supplied)

Hence, the present Petition for Review on Certiorari by MR Holdings, Ltd. moored on the following
grounds:

"A. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE ERROR IN

COMPLETELY DISREGARDING AS A MATERIAL FACT OF THE CASE THE EXISTENCE
OF THE PRIOR, REGISTERED 1992 DEED OF REAL ESTATE AND CHATTEL
MORTGAGE CREATING A LIEN OVER THE LEVIED PROPERTIES, SUBJECT OF THE
ASSIGNMENT AGREEMENT DATED MARCH 20, 1997, THUS, MATERIALLY
CONTRIBUTING TO THE SAID COURT’S MISPERCEPTION AND MISAPPRECIATION OF
THE MERITS OF PETITIONER’S CASE.

B. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE ERROR IN

MAKING A FACTUAL FINDING THAT THE SAID ASSIGNMENT AGREEMENT IS NOT
REGISTERED, THE SAME BEING CONTRARY TO THE FACTS ON RECORD, THUS,
MATERIALLY CONTRIBUTING TO THE SAID COURT’S MISPERCEPTION AND
MISAPPRECIATION OF THE MERITS OF PETITIONER’S CASE.

C. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE ERROR IN

MAKING A FACTUAL FINDING ON THE EXISTENCE OF AN ATTACHMENT ON THE
PROPERTIES SUBJECT OF INSTANT CASE, THE SAME BEING CONTRARY TO THE
FACTS ON RECORD, THUS, MATERIALLY CONTRIBUTING TO THE SAID COURT’S
MISPERCEPTION AND MISAPPRECIATION OF THE MERITS OF PETITIONER’S CASE.

D. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE ERROR IN

HOLDING THAT THE SAID ASSIGNMENT AGREEMENT AND THE DEED OF
ASSIGNMENT ARE NOT BINDING ON RESPONDENT SOLIDBANK WHO IS NOT A
PARTY THERETO, THE SAME BEING CONTRARY TO LAW AND ESTABLISHED
JURISPRUDENCE ON PRIOR REGISTERED MORTGAGE LIENS AND ON PREFERENCE
OF CREDITS.

E. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE ERROR IN

FINDING THAT THE AFOREMENTIONED ASSIGNMENT AGREEMENT AND DEED OF
ASSIGNMENT ARE SHAM, SIMULATED, OF DUBIOUS CHARACTER, AND WERE MADE
IN BAD FAITH AND IN FRAUD OF CREDITORS, PARTICULARLY RESPONDENT
SOLIDBANK, THE SAME BEING IN COMPLETE DISREGARD OF, VIZ: (1) THE LAW AND
ESTABLISHED JURISPRUDENCE ON PRIOR, REGISTERED MORTGAGE LIENS AND ON
PREFERENCE OF CREDITS, BY REASON OF WHICH THERE EXISTS NO CAUSAL
CONNECTION BETWEEN THE SAID CONTRACTS AND THE PROCEEDINGS IN CIVIL
CASE NO. 96-80083; (2) THAT THE ASIAN DEVELOPMENT BANK WILL NOT OR COULD
NOT HAVE AGREED TO A SHAM; SIMULATED, DUBIOUS AND FRAUDULENT
TRANSACTION; AND (3) THAT RESPONDENT SOLIDBANK’S BIGGEST STOCKHOLDER,
THE BANK OF NOVA SCOTIA, WAS A MAJOR BENEFICIARY OF THE ASSIGNMENT
AGREEMENT IN QUESTION.

F. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE ERROR IN

HOLDING THAT PETITIONER IS WITHOUT LEGAL CAPACITY TO SUE AND SEEK
REDRESS FROM PHILIPPINE COURTS, IT BEING THE CASE THAT SECTION 133 OF
178
 THE CORPORATION CODE IS WITHOUT APPLICATION TO PETITIONER, AND IT BEING
THE CASE THAT THE SAID COURT MERELY RELIED ON SURMISES AND
CONJECTURES IN OPINING THAT PETITIONER INTENDS TO DO BUSINESS IN THE
PHILIPPINES.

G. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE ERROR IN

HOLDING THAT RESPONDENT MARCOPPER, PLACER DOME, INC., AND PETITIONER
ARE ONE AND THE SAME ENTITY, THE SAME BEING WITHOUT FACTUAL OR LEGAL
BASIS.

H. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE ERROR IN

HOLDING PETITIONER GUILTY OF FORUM SHOPPING, IT BEING CLEAR THAT
NEITHER LITIS PENDENTIA NOR RES JUDICATA MAY BAR THE INSTANT
REIVINDICATORY ACTION, AND IT BEING CLEAR THAT AS THIRD-PARTY CLAIMANT,
THE LAW AFFORDS PETITIONER THE RIGHT TO FILE SUCH REIVINDICATORY ACTION.

I. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE ERROR IN

RENDERING A DECISION WHICH IN EFFECT SERVES AS JUDGMENT ON THE MERITS
OF THE CASE.

J. THE SHERIFF’S LEVY AND SALE, THE SHERIFF’S CERTIFICATE OF SALE DATED
OCTOBER 12, 1998, THE RTC-MANILA ORDER DATED FEBRUARY 12, 1999, AND THE
RTC-BOAC ORDER DATED NOVEMBER 25, 1998 ARE NULL AND VOID.

K. THE HONORABLE COURT OF APPEALS COMMITS A REVERSIBLE ERROR IN

AFFIRMING THE DENIAL BY THE RTC-BOAC OF PETITIONER’S APPLICATION FOR
PRELIMINARY INJUNCTION, THE SAME BEING IN TOTAL DISREGARD OF
PETITIONER’S RIGHT AS ASSIGNEE OF A PRIOR, REGISTERED MORTGAGE LIEN, AND
IN DISREGARD OF THE LAW AND JURISPRUDENCE ON PREFERENCE OF CREDIT."

In its petition, petitioner alleges that it is not "doing business" in the Philippines and characterizes its
participation in the assignment contracts (whereby Marcopper’s assets where transferred to it) as
mere isolated acts that cannot foreclose its right to sue in local courts. Petitioner likewise maintains
that the two assignment contracts, although executed during the pendency of Civil Case No. 96-
80083 in the RTC of Manila, are not fraudulent conveyances as they were supported by valuable
considerations. Moreover, they were executed in connection with prior transactions that took place as
early as 1992 which involved ADB, a reputable financial institution. Petitioner further claims that when
it paid Marcopper’s obligation to ADB, it stepped into the latter’s shoes and acquired its (ADB’S)
rights, titles, and interests under the "Deed of Real Estate and Chattel Mortgage." Lastly, petitioner
asserts its existence as a corporation, separate and distinct from Placer Dome and Marcopper.

In its comment, Solidbank avers that: a) petitioner is "doing business" in the Philippines and this is
evidenced by the "huge investment" it poured into the assignment contracts; b) granting that
petitioner is not doing business in the Philippines, the nature of its transaction reveals an "intention to
do business" or "to begin a series of transaction" in the country; c) petitioner, Marcopper and Placer
Dome are one and the same entity, petitioner being then a wholly-owned subsidiary of Placer Dome,
which, in turn, owns 40% of Marcopper; d) the timing under which the assignments contracts were
executed shows that petitioner’s purpose was to defeat any judgment favorable to it (Solidbank);
and e) petitioner violated the rule on forum shopping since the object of Civil Case No. 98-13 (at

179
RTC, Boac, Marinduque) is similar to the other cases filed by Marcopper in order to forestall the sale
of the levied properties.

Marcopper, in a separate comment, states that it is merely a nominal party to the present case and
that its principal concerns are being ventilated in another case.

The petition is impressed with merit.

Crucial to the outcome of this case is our resolution of the following issues: 1) Does petitioner have
the legal capacity to sue? 2) Was the Deed of Assignment between Marcopper and petitioner
executed in fraud of creditors? 3) Are petitioner MR Holdings, Ltd., Placer Dome, and Marcopper one
and the same entity? and 4) Is petitioner guilty of forum shopping?

We shall resolve the issues in seriatim.

The Court of Appeals ruled that petitioner has no legal capacity to sue in the Philippine courts
because it is a foreign corporation doing business here without license. A review of this ruling does
not pose much complexity as the principles governing a foreign corporation’s right to sue in local
courts have long been settled by our Corporation Law.17 These principles may be condensed in three
statements, to wit: a) if a foreign corporation does business in the Philippines without a license,
it cannot sue before the Philippine courts;18 b) if a foreign corporation is not doing business in the
Philippines, it needs no license to sue before Philippine courts on an isolated transaction19 or on a
cause of action entirely independent of any business transaction;20 and c) if a foreign
corporation does business in the Philippines with the required license, it can sue before Philippine
courts on any transaction. Apparently, it is not the absence of the prescribed license but the "doing
(of) business" in the Philippines without such license which debars the foreign corporation from
access to our courts.21

The task at hand requires us to weigh the facts vis-à-vis the established principles. The question
whether or not a foreign corporation is doing business is dependent principally upon the facts and
circumstances of each particular case, considered in the light of the purposes and language of the
pertinent statute or statutes involved and of the general principles governing the jurisdictional
authority of the state over such corporations.22

Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the Philippines," is silent as
to what constitutes doing" or "transacting" business in the Philippines. Fortunately, jurisprudence has
supplied the deficiency and has held that the term "implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of
some of the functions normally incident to, and in progressive prosecution of, the purpose and object
for which the corporation was organized."23In Mentholatum Co. Inc., vs. Mangaliman,24 this Court laid
down the test to determine whether a foreign company is "doing business," thus:

" x x x The true test, however, seems to be whether the foreign corporation is continuing
the body or substance of the business or enterprise for which it was organized or
whether it has substantially retired from it and turned it over to another. (Traction Cos.
vs. Collectors of Int. Revenue [C.C.A., Ohio], 223 F. 984,987.) x x x."

180
The traditional case law definition has metamorphosed into a statutory definition, having been
adopted with some qualifications in various pieces of legislation in our jurisdiction. For instance,
Republic Act No. 7042, otherwise known as the "Foreign Investment Act of 1991," defines "doing
business" as follows:

"d) The phrase ‘doing business’ shall include soliciting orders, service contracts, opening
offices, whether called ‘liaison’ offices or branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay in the country for a period or
periods totalling one hundred eight(y) (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity, or corporation in the
Philippines; and any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or works; or the
exercise of some of the functions normally incident to, and in progressive prosecution
of, commercial gain or of the purpose and object of the business organization; Provided,
however, That the phrase ‘doing business’ shall not be deemed to include mere investment as
a shareholder by a foreign entity in domestic corporations duly registered to do business,
and/or the exercise of rights as such investor, nor having a nominee director or officer to
represent its interests in such corporation, nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own account."
(Emphasis supplied)25

Likewise, Section 1 of Republic Act No. 5455,26 provides that:

"SECTION. 1. Definition and scope of this Act. - (1) x x x the phrase ‘doing business’ shall
include soliciting orders, purchases, service contracts, opening offices, whether called ‘liaison’
offices or branches; appointing representatives or distributors who are domiciled in the
Philippines or who in any calendar year stay in the Philippines for a period or periods totaling
one hundred eighty days or more; participating in the management, supervision or control of
any domestic business firm, entity or corporation in the Philippines; and any other act or acts
that imply a continuity of commercial dealings or arrangements, and contemplate to that
extent the performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of, commercial gain or of the
purpose and object of the business organization."

There are other statutes27 defining the term "doing business" in the same tenor as those above-
quoted, and as may be observed, one common denominator among them all is the concept of
"continuity."

In the case at bar, the Court of Appeals categorized as "doing business" petitioner’s participation
under the "Assignment Agreement" and the "Deed of Assignment." This is simply untenable. The
expression "doing business" should not be given such a strict and literal construction as to make it
apply to any corporate dealing whatever.28 At this early stage and with petitioner’s acts or
transactions limited to the assignment contracts, it cannot be said that it had performed acts intended
to continue the business for which it was organized. It may not be amiss to point out that the
purpose or business for which petitioner was organized is not discernible in the records. No
effort was exerted by the Court of Appeals to establish the nexus between petitioner’s
business and the acts supposed to constitute "doing business." Thus, whether the
assignment contracts were incidental to petitioner’s business or were continuation thereof is
beyond determination. We cannot apply the case cited by the Court of Appeals, Far East Int’l
Import and Export Corp. vs. Nankai Kogyo Co., Ltd.,29 which held that a single act may still constitute
181
"doing business" if "it is not merely incidental or casual, but is of such character as distinctly to
indicate a purpose on the part of the foreign corporation to do other business in the state." In said
case, there was an express admission from an official of the foreign corporation that he was sent to
the Philippines to look into the operation of mines, thereby revealing the foreign corporation’s desire
to continue engaging in business here. But in the case at bar, there is no evidence of similar desire or
intent. Unarguably, petitioner may, as the Court of Appeals suggested, decide to operate
Marcopper’s mining business, but, of course, at this stage, that is a mere speculation. Or it may
decide to sell the credit secured by the mining properties to an offshore investor, in which case the
acts will still be isolated transactions. To see through the present facts an intention on the part of
petitioner to start a series of business transaction is to rest on assumptions or probabilities
falling short of actual proof. Courts should never base its judgments on a state of facts so
inadequately developed that it cannot be determined where inference ends and conjecture
begins.

Indeed, the Court of Appeals’ holding that petitioner was determined to be "doing business" in the
Philippines is based mainly on conjectures and speculation. In concluding that the "unmistakable
intention" of petitioner is to continue Marcopper’s business, the Court of Appeals hangs on the
wobbly premise that "there is no other way for petitioner to recover its huge financial investments
which it poured into Marcopper’s rehabilitation without it (petitioner) continuing Marcopper’s business
in the country."30 This is a mere presumption. Absent overt acts of petitioner from which we may
directly infer its intention to continue Marcopper’s business, we cannot give our concurrence.
Significantly, a view subscribed upon by many authorities is that the mere ownership by a foreign
corporation of a property in a certain state, unaccompanied by its active use in furtherance of the
business for which it was formed, is insufficient in itself to constitute doing business.31 In Chittim
vs. Belle Fourche Bentonite Products Co.,32 it was held that even if a foreign corporation
purchased and took conveyances of a mining claim, did some assessment work thereon, and
endeavored to sell it, its acts will not constitute the doing of business so as to subject the
corporation to the statutory requirements for the transacting of business. On the same vein,
petitioner, a foreign corporation, which becomes the assignee of mining properties, facilities and
equipment cannot be automatically considered as doing business, nor presumed to have the
intention of engaging in mining business.

One important point. Long before petitioner assumed Marcopper’s debt to ADB and became their
assignee under the two assignment contracts, there already existed a "Support and Standby Credit
Agreement" between ADB and Placer Dome whereby the latter bound itself to provide cash flow
support for Marcopper’s payment of its obligations to ADB. Plainly, petitioner’s payment of US$
18,453,450.12 to ADB was more of a fulfillment of an obligation under the "Support and Standby
Credit Agreement" rather than an investment. That petitioner had to step into the shoes of ADB as
Marcopper’s creditor was just a necessary legal consequence of the transactions that transpired.
Also, we must hasten to add that the "Support and Standby Credit Agreement" was executed four (4)
years prior to Marcopper’s insovency, hence, the alleged "intention of petitioner to continue
Marcopper’s business" could have no basis for at that time, Marcopper’s fate cannot yet be
determined.

In the final analysis, we are convinced that petitioner was engaged only in isolated acts or
transactions. Single or isolated acts, contracts, or transactions of foreign corporations are not
regarded as a doing or carrying on of business. Typical examples of these are the making of a single
contract, sale, sale with the taking of a note and mortgage in the state to secure payment therefor,
purchase, or note, or the mere commission of a tort.33 In these instances, there is no purpose to do
any other business within the country.
182
 II

Solidbank contends that from the chronology and timing of events, it is evident that there existed a
pre-set pattern of response on the part of Marcopper to defeat whatever court ruling that may be
rendered in favor of Solidbank.

We are not convinced. While it may appear, at initial glance, that the assignment contracts are in the
nature of fraudulent conveyances, however, a closer look at the events that transpired prior to the
execution of those contracts gives rise to a different conclusion. The obvious flaw in the Court of
Appeals’ Decision lies in its constricted view of the facts obtaining in the case. In its factual narration,
the Court of Appeals definitely left out some events. We shall see later the significance of those
events.

Article 1387 of the Civil Code of the Philippines provides:

"Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of creditors, when the donor did not reserve
sufficient property to pay all debts contracted before the donation.

Alienations by onerous title are also presumed fraudulent when made by persons
against whom some judgment has been rendered in any instance or some writ of
attachment has been issued. The decision or attachment need not refer to the property
alienated, and need not have been obtained by the party seeking rescission.

In addition to these presumptions, the design to defraud creditors may be proved in any other
manner recognized by law and of evidence.

This article presumes the existence of fraud made by a debtor. Thus, in the absence of satisfactory
evidence to the contrary, an alienation of a property will be held fraudulent if it is made after a
judgment has been rendered against the debtor making the alienation. 34 This presumption of fraud is
not conclusive and may be rebutted by satisfactory and convincing evidence. All that is necessary
is to establish affirmatively that the conveyance is made in good faith and for a sufficient and
valuable consideration.35

The "Assignment Agreement" and the "Deed of Assignment" were executed for valuable
considerations. Patent from the "Assignment Agreement" is the fact that petitioner assumed the
payment of US$ 18,453,450.12 to ADB in satisfaction of Marcopper’s remaining debt as of March 20,
1997.36 Solidbank cannot deny this fact considering that a substantial portion of the said payment, in
the sum of US$ 13,886,791.06, was remitted in favor of the Bank of Nova Scotia, its major
stockholder.37

The facts of the case so far show that the assignment contracts were executed in good faith. The
execution of the "Assignment Agreement" on March 20, 1997 and the "Deed of Assignment" on
December 8,1997 is not the alpha of this case. While the execution of these assignment contracts
almost coincided with the rendition on May 7, 1997 of the Partial Judgment in Civil Case No. 96-
80083 by the Manila RTC, however, there was no intention on the part of petitioner to defeat
Solidbank’s claim. It bears reiterating that as early as November 4, 1992, Placer Dome had already
bound itself under a "Support and Standby Credit Agreement" to provide Marcopper with cash flow
support for the payment to ADB of its obligations. When Marcopper ceased operations on account of
disastrous mine tailings spill into the Boac River and ADB pressed for payment of the loan, Placer
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Dome agreed to have its subsidiary, herein petitioner, paid ADB the amount of US $18,453,450.12.
Thereupon, ADB and Marcopper executed, respectively, in favor of petitioner an "Assignment
Agreement" and a "Deed of Assignment." Obviously, the assignment contracts were connected with
transactions that happened long before the rendition in 1997 of the Partial Judgment in Civil Case
No. 96-80083 by the Manila RTC. Those contracts cannot be viewed in isolation. If we may add, it is
highly inconceivable that ADB, a reputable international financial organization, will connive with
Marcopper to feign or simulate a contract in 1992 just to defraud Solidbank for its claim four years
thereafter. And it is equally incredible for petitioner to be paying the huge sum of US $ 18,453,450.12
to ADB only for the purpose of defrauding Solidbank of the sum of ₱52,970,756.89.

It is said that the test as to whether or not a conveyance is fraudulent is -- does it prejudice the rights
of creditors?38 We cannot see how Solidbank’s right was prejudiced by the assignment contracts
considering that substantially all of Marcopper’s properties were already covered by the registered
"Deed of Real Estate and Chattel Mortgage" executed by Marcopper in favor of ADB as early as
November 11, 1992. As such, Solidbank cannot assert a better right than ADB, the latter being a
preferred creditor. It is basic that mortgaged properties answer primarily for the mortgaged credit, not
for the judgment credit of the mortgagor’s unsecured creditor. Considering that petitioner assumed
Marcopper’s debt to ADB, it follows that Solidbank’s right as judgment creditor over the subject
properties must give way to that of the former.1âwphi1.nêt

III

The record is lacking in circumstances that would suggest that petitioner corporation, Placer Dome
and Marcopper are one and the same entity. While admittedly, petitioner is a wholly-owned
subsidiary of Placer Dome, which in turn, which, in turn, was then a minority stockholder of
Marcopper, however, the mere fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being treated as one entity. If used to
perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of
the parent corporation as well as the subsidiary will be confined to those arising in their respective
business.39

The recent case of Philippine National Bank vs. Ritratto Group Inc.,40 outlines the circumstances
which are useful in the determination of whether a subsidiary is but a mere instrumentality of the
parent-corporation, to wit:

(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is
described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation’s own.
(i) The parent corporation uses the property of the subsidiary as its own.

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 (j) The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary, but take their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.

In this catena of circumstances, what is only extant in the records is the matter of stock
ownership. There are no other factors indicative that petitioner is a mere instrumentality of
Marcopper or Placer Dome. The mere fact that Placer Dome agreed, under the terms of the
"Support and Standby Credit Agreement" to provide Marcopper with cash flow support in paying its
obligations to ADB, does not mean that its personality has merged with that of Marcopper. This
singular undertaking, performed by Placer Dome with its own stockholders in Canada and elsewhere,
is not a sufficient ground to merge its corporate personality with Marcopper which has its own set of
shareholders, dominated mostly by Filipino citizens. The same view applies to petitioner’s payment of
Marcopper’s remaining debt to ADB.

With the foregoing considerations and the absence of fraud in the transaction of the three foreign
corporations, we find it improper to pierce the veil of corporate fiction – that equitable doctrine
developed to address situations where the corporate personality of a corporation is abused or used
for wrongful purposes.

IV

On the issue of forum shopping, there could have been a violation of the rules thereon if petitioner
and Marcopper were indeed one and the same entity. But since petitioner has a separate personality,
it has the right to pursue its third-party claim by filing the independent reivindicatory action with the
RTC of Boac, Marinduque, pursuant to Rule 39, Section 16 of the 1997 Rules of Civil Procedures.
This remedy has been recognized in a long line of cases decided by this Court.41 In Rodriguez vs.
Court of Appeals,42 we held:

". . . It has long been settled in this jurisdiction that the claim of ownership of a third party over
properties levied for execution of a judgment presents no issue for determination by the court
issuing the writ of execution.
. . .Thus, when a property levied upon by the sheriff pursuant to a writ of execution is claimed
by third person in a sworn statement of ownership thereof, as prescribed by the rules, an
entirely different matter calling for a new adjudication arises. And dealing as it does with
the all important question of title, it is reasonable to require the filing of proper pleadings and
the holding of a trial on the matter in view of the requirements of due process.
. . . In other words, construing Section 17 of Rule 39 of the Revised Rules of Court (now
Section 16 of the 1997 Rules of Civil Procedure), the rights of third-party claimants over certain
properties levied upon by the sheriff to satisfy the judgment may not be taken up in the case
where such claims are presented but in a separate and independent action instituted by the
claimants." (Emphasis supplied)

This "reivindicatory action" has for its object the recovery of ownership or possession of the property
seized by the sheriff, despite the third party claim, as well as damages resulting therefrom, and it may
be brought against the sheriff and such other parties as may be alleged to have connived with him in
the supposedly wrongful execution proceedings, such as the judgment creditor himself. Such action
is an entirely separate and distinct action from that in which execution has been issued. Thus,
there being no identity of parties and cause of action between Civil Case No. 98-13 (RTC, Boac) and
those cases filed by Marcopper, including Civil Case No. 96-80083 (RTC, Manila) as to give rise
to res judicata or litis pendentia, Solidbank’s allegation of forum-shopping cannot prosper.43
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All considered, we find petitioner to be entitled to the issuance of a writ of preliminary injunction.
Section 3, Rule 58 of the 1997 Rules of Civil Procedure provides:

"SEC. 3 Grounds for issuance of preliminary injunction. – A preliminary injunction may be

granted when it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief
consists in restraining the commission or continuance of the act or acts complained of, or in
requiring the performance of an act or acts, either for a limited period or perpetually;
(b) That the commission, continuance or non-performance of the acts or acts complained of
during the litigation would probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is
procuring or suffering to be done, some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding, and tending to render the
judgment ineffectual."

Petitioner’s right to stop the further execution of the properties covered by the assignment contracts
is clear under the facts so far established. An execution can be issued only against a party and not
against one who did not have his day in court.44 The duty of the sheriff is to levy the property of the
judgment debtor not that of a third person. For, as the saying goes, one man’s goods shall not be
sold for another man's debts.45 To allow the execution of petitioner’s properties would surely work
injustice to it and render the judgment on the reivindicatory action, should it be favorable, ineffectual.
In Arabay, Inc., vs. Salvador,46 this Court held that an injunction is a proper remedy to prevent a
sheriff from selling the property of one person for the purpose of paying the debts of another; and that
while the general rule is that no court has authority to interfere by injunction with the judgments or
decrees of another court of equal or concurrent or coordinate jurisdiction, however, it is not so when a
third-party claimant is involved. We quote the instructive words of Justice Querube C. Makalintal
in Abiera vs. Court of Appeals,47 thus:

"The rationale of the decision in the Herald Publishing Company case48 is peculiarly applicable
to the one before Us, and removes it from the general doctrine enunciated in the decisions
cited by the respondents and quoted earlier herein.

1. Under Section 17 of Rule 39 a third person who claims property levied upon on execution
may vindicate such claim by action. Obviously a judgment rendered in his favor, that is,
declaring him to be the owner of the property, would not constitute interference with the powers
or processes of the court which rendered the judgment to enforce which the execution was
levied. If that be so – and it is so because the property, being that of a stranger, is not
subject to levy – then an interlocutory order such as injunction, upon a claim and prima
facie showing of ownership by the claimant, cannot be considered as such interference
either."

WHEREFORE, the petition is GRANTED. The assailed Decision dated January 8, 1999 and the
Resolution dated March 29, 1999 of the Court of Appeals in CA G.R. No. 49226 are set aside. Upon
filing of a bond of ₱1,000,000.00, respondent sheriffs are restrained from further implementing the
writ of execution issued in Civil Case No. 96-80083 by the RTC, Branch 26, Manila, until further
orders from this Court. The RTC, Branch 94, Boac, Marinduque, is directed to dispose of Civil Case
No. 98-13 with dispatch. SO ORDERED.

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FUA CUN (alias Tua Cun), plaintiff-appellee, vs. RICARDO SUMMERS, in his capacity as Sheriff
ex-oficio of the City of Manila, and the CHINA BANKING CORPORATION, defendants-appellants.
G.R. No. L-19441 March 27, 1923 OSTRAND, J.:

It appears from the evidence that on August 26, 1920, one Chua Soco subscribed for five hundred
shares of stock of the defendant Banking Corporation at a par value of P100 per share, paying the
sum of P25,000, one-half of the subscription price, in cash, for which a receipt was issued in the
following terms:

This is to certify, That Chua Soco, a subscriber for five hundred shares of the capital stock of
the China Banking Corporation at its par value of P100 per share, has paid into the Treasury of
the Corporation, on account of said subscription and in accordance with its terms, the sum of
twenty-five thousand pesos (P25,000), Philippine currency.

Upon receipt of the balance of said subscription in accordance with the terms of the calls of the
Board of Directors, and surrender of this certificate, duly executed certificates for said five
hundred shares of stock will be issued to the order of the subscriber.

It is expressly understood that the total number of shares specified in this receipt is subject to
sale by the China Banking Corporation for the payment of any unpaid subscriptions, should the
subscriber fail to pay the whole or any part of the balance of his subscription upon 30 days'
notice issued therefor by the Board of Directors.

Witness our official signatures at Manila, P. I., this 25th day of August, 1920.

(Sgd.) MERVIN WEBSTER

Cashier

(Sgd.) DEE C. CHUAN

President

On May 18, 1921, Chua Soco executed a promissory note in favor of the plaintiff Fua Cun for the
sum of P25,000 payable in ninety days and drawing interest at the rate of 1 per cent per month,
securing the note with a chattel mortgage on the shares of stock subscribed for by Chua Soco, who
also endorsed the receipt above mentioned and delivered it to the mortgagee. The plaintiff thereupon
took the receipt to the manager of the defendant Bank and informed him of the transaction with Chua
Soco, but was told to await action upon the matter by the Board of Directors.

In the meantime Chua Soco appears to have become indebted to the China Banking Corporation in
the sum of P37,731.68 for dishonored acceptances of commercial paper and in an action brought
against him to recover this amount, Chua Soco's interest in the five hundred shares subscribed for
was attached and the receipt seized by the sheriff. The attachment was levied after the defendant
bank had received notice of the facts that the receipt had been endorsed over to the plaintiff.

Fua Cun thereupon brought the present action maintaining that by virtue of the payment of the one-
half of the subscription price of five hundred shares Chua Soco in effect became the owner of two
hundred and fifty shares and praying that his, the plaintiff's, lien on said shares, by virtue of the
chattel mortgage, be declared to hold priority over the claim of the defendant Banking Corporation;
that the defendants be ordered to deliver the receipt in question to him; and that he be awarded the
sum of P5,000 in damages for wrongful attachment.

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The trial court rendered judgment in favor of the plaintiff declaring that Chua Soco, through the
payment of the P25,000, acquired the right to two hundred and fifty shares fully paid up, upon which
shares the plaintiff holds a lien superior to that of the defendant Banking Corporation and ordering
that the receipt be returned to said plaintiff. From this judgment the defendants appeal.

Though the court below erred in holding that Chua Soco, by paying one-half of the subscription price
of five hundred shares, in effect became the owner of two hundred and fifty shares, the judgment
appealed from is in the main correct.

The claim of the defendant Banking Corporation upon which it brought the action in which the writ of
attachment was issued, was for the non-payment of drafts accepted by Chua Soco and had no direct
connection with the shares of stock in question. At common law a corporation has no lien upon the
shares of stockholders for any indebtedness to the corporation (Jones on Liens, 3d ed., sec. 375)
and our attention has not been called to any statute creating such lien here. On the contrary, section
120 of the Corporation Act provides that "no bank organized under this Act shall make any loan or
discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any
such shares, unless such security or purchase shall be necessary to prevent loss upon a debt
previously contracted in good faith, and stock so purchased or acquired shall, within six months from
the time of its purchase, be sold or disposed of at public or private sale, or, in default thereof, a
receiver may be appointed to close up the business of the bank in accordance with law."

Section 35 of the United States National Banking Act of 1864 contains a similar provision and it has
been held in various decisions of the United States Supreme Court that a bank organized under that
Act can have no lien on its own stock for the indebtedness of the stockholders even when the by-laws
provide that the shares shall be transferable only on the books of the corporation and that no such
transfer shall be made if the holder of the shares is indebted to the corporation. (Jones on Liens, 3d
ed., sec. 384; First National Bank of South Bend vs. Lanier and Handy, 11 Wall., 369;
Bullard vs. National Eagle Bank, 18 Wall., 589; First National Bank of Xenia vs. Stewart and
McMillan, 107 U.S., 676.) The reasons for this doctrine are obvious; if banking corporations were
given a lien on their own stock for the indebtedness of the stockholders, the prohibition against
granting loans or discounts upon the security of the stock would become largely ineffective.

Turning now to the rights of the plaintiff in the stock in question, it is argued that the interest held by
Chua Soco was merely an equity which could not be made the subject of a chattel mortgage. Though
the courts have uniformly held that chattel mortgages on shares of stock and other choses in action
are valid as between the parties, there is still much to be said in favor of the defendants' contention
that the chattel mortgage here in question would not prevail over liens of third parties without notice;
an equity in shares of stock is of such an intangible character that it is somewhat difficult to see how it
can be treated as a chattel and mortgaged in such a manner that the recording of the mortgage will
furnish constructive notice to third parties. As said by the court in the case of Spalding vs. Paine's
Adm'r. (81 Ky., 416), in regard to a chattel mortgage of shares of stock:

These certificates of stock are in the pockets of the owner, and go with him where he may
happen to locate, as choses in action, or evidence of his right, without any means on the part
of those with whom he proposes to deal on the faith of such a security of ascertaining whether
or not this stock is in pledge or mortgaged to others. He finds the name of the owner on the
books of the company as a subscriber of paid-up stock, amounting to 180 shares, with the
certificates in his possession, pays for these certificates their full value, and has the transfer to
him made on the books of the company, thereby obtaining a perfect title. What other inquiry is
he to make, so as to make his investment certain and secure? Where is he to look, in order to
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 ascertain whether or not this stock has been mortgaged? The chief office of the company may
be at one place to-day and at another tomorrow. The owner may have no fixed or permanent
abode, and with his notes in one pocket and his certificates of stock in the other — the one
evidencing the extent of his interest in the stock of the corporation, the other his right to money
owing him by his debtor, we are asked to say that the mortgage is effectual as to the one and
inoperative as to the other.

But a determination of this question is not essential in the present case. There can be no doubt that
an equity in shares of stock may be assigned and that the assignment is valid as between the parties
and as to persons to whom notice is brought home. Such an assignment exists here, though it was
made for the purpose of securing a debt. The endorsement to the plaintiff of the receipt above
mentioned reads:

For value received, I assign all my rights in these shares in favor of Mr. Tua Cun.

Manila, P. I., May 18, 1921.

(Sgd.) CHUA SOCO

This endorsement was accompanied by the delivery of the receipt to the plaintiff and further
strengthened by the execution of the chattel mortgage, which mortgage, at least, operated as a
conditional equitable assignment.

As against the rights of the plaintiff the defendant bank had, as we have seen, no lien unless by
virtue of the attachment. But the attachment was levied after the bank had received notice of the
assignment of Chua Soco's interests to the plaintiff and was therefore subject to the rights of the
latter. It follows that as against these rights the defendant bank holds no lien whatever.

As we have already stated, the court erred in holding the plaintiff as the owner of two hundred and
fifty shares of stock; "the plaintiff's rights consist in an equity in five hundred shares and upon
payment of the unpaid portion of the subscription price he becomes entitled to the issuance of
certificate for said five hundred shares in his favor."

The judgment appealed from is modified accordingly, and in all other respects it is affirmed, with the
costs against the appellants Banking Corporation. So ordered.

Araullo, C.J., Street, Malcolm, Avanceña, Villamor, Johns, and Romualdez, JJ., concur.

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