This is an action by the judgment creditor of a corporation against certain of its value two hundred and fifty thousand
sand dollars, and if any criticism is to be made
stockholders, seeking to collect from them what are claimed to be unpaid
balances on the par value of their shares.
The plaintiff had judgment, and the defendants appeal.
No contention is made that the plaintiff's claim against the corporation is not
valid. The sole point in the case is as to whether or not the defendants are
required, because of that claim, to make up any difference which may exist
between what was actually paid in on their stock and its par value.
Upon this point, the complaint alleged simply that the defendants were
subscribers and stockholders of the corporation in amounts specified, and that
only twenty-five cents on the dollar had been paid in on the par value of their
shares. The answers of the defendants, in addition to some other defenses,
denied that they were either subscribers or stockholders, or that the full par
value of their stock had not been paid.
As to the issue presented by the latter denial, the court found in effect that only
five-twelfths of the par value had been paid. This finding is attacked as not
supported by the evidence, but we think the evidence is ample. The stock had a
par value of a dollar a share, and the shares which it was claimed the
defendants owned, and which in fact they did own, were part of a lot of 599,995
shares issued as fully paid up, but in consideration for the transfer to the
company of certain unpatented mining claims with the improvements upon
them. These claims had been previously worked and abandoned by another
company, and then relocated by one Knapp, who had been interested in the
former company and was one of the promoters of the present debtor company.
The history, character, and condition of these claims were such that it is well-nigh
incredible that they had an actual immediate value of six hundred thousand, less
five, dollars, or that the directors of the company believed they had any such
value. The directors may have thought that there was a chance of the claims
becoming of that value upon development and consequent demonstration of
what they actually contained, but there is a very great difference between
capitalizing a mining company upon the basis of what it is hoped its ground may
be worth when developed, and capitalizing it on the basis of what its ground is
actually worth undeveloped.
When the capital of a corporation is paid in in something other than money, the
thing accepted in lieu of money must be reasonably near its equivalent, and while
the hopes or prospects for a property affect its immediate cash value, it is that
cash value, and not the future value of the property if the hopes or prospects are
realized, which must be taken as the basis of capitalization. ( Herron v. Shaw,165
Cal. 668, 674, [Ann. Cas. 1915A, 1265, 133 P. 488].) In this case, the court found
that the directors of the company did not believe the claims to exceed in actual
of the finding, it is that it is too favorable to the defendants, that the figure found
is too great, rather than it is too small.
As to the other denial mentioned, namely, that the defendants were neither
subscribers nor stockholders of the debtor company, it was admitted at the trial
that the defendants were stockholders almost from the inception of the
company. It was insisted, however, on the part of the defendants throughout the
trial that they were not subscribers. As to the plaintiff, the cause was tried
throughout upon the theory that it made no difference whether the defendants
were subscribers or not, that the simple facts that they were stockholders and
that the shares they held, although issued as fully paid, were in fact issued for
property which the directors did not believe was equal in value to the par value
of the shares, were enough to warrant judgment against them. Apparently,
judging by what took place at the trial, the court itself accepted this theory, and
upon it gave judgment for the plaintiff.
It should be said, however, that the court went further than merely finding that
the defendants were stockholders, and made a finding as to how they acquired
their stock in the first instance. The finding is that the mining claims were
transferred to the company by Knapp as the trustee of certain stockholders of
the company which had formerly owned them, that the stock to be issued in
consideration for such claims was issued to such stockholders upon instructions
from Knapp, and that the stock of the defendants was acquired by them in that
manner. [2] It is to be noted, however, that such a finding would not make either
Knapp or the defendants subscribers to the stock. It does not find that either
subscribed to the stock and then transferred the claims in payment of such
subscription or subscriptions. At most, the finding is one that Knapp, and through
Knapp the defendants, purchased stock from the company in consideration of
the transfer of the claims. The difference between subscribing for stock and then
paying the subscription either in money or property and a direct purchase of
stock without any antecedent obligation, a purchase of treasury stock in other
words, is manifest. It is to be said that there was an omnibus finding that all of
the allegations of the complaint are true, but if this finding is not to be
disregarded upon the point of the defendants being subscribers because
inconsistent with the special finding under discussion, it is as to that point not
supported by the evidence, something which will plainly appear when we come
to a discussion of the evidence. The case, then, is not one where the defendants
are liable as subscribers, but one where, if they are liable at all, it is as
stockholders.
It is also to be noted that unless the defendants are to be held liable merely
because they were stockholders, and upon the theory that nothing more was
necessary to establish their liability, the finding under discussion is not supported
by any allegation in the complaint. The complaint alleges only that the
defendants were subscribers and stockholders. That they were not subscribers
and liable as such is plain. As to their being liable as stockholders, there is no
allegation in the complaint other than that they were such. If it be the law that
the owner of stock issued as fully paid, but in reality for a consideration known
to the directors of the company to be less in value than the par value of the stock,
is not liable for the difference in value merely because of his ownership of the
stock, but only when there are further circumstances existing in the case, as, for
example, that he knowingly participated in the transaction whereby the stock
was issued, then there is in the present complaint no allegation of such
circumstances, and it appearing that the allegation that the defendants were
subscribers is not true, the complaint does not state a cause of action.
It is also to be noted that there is no finding that either Knapp or the defendants
knew or believed that the value of the claim transferred was less than the par
value of the stock issued in return for them. The only finding is that the directors
of the company so knew and believed, and there is no finding that either Knapp
or any of the defendants were directors. There is very serious question as to
whether stock issued as fully paid in return for property conveyed to the
corporation can be considered as not fully paid, except where it is found that
both parties to the transaction, the transferor of the property as well as the
company through its directors, knew or believed that the property was not equal
in value to the par value of the stock. If the transferor genuinely believes that his
property is fully worth the par value of the stock which he is receiving in return
for it, it is difficult to see any reason why the transaction should not stand as it is
as to him, no matter what the directors may believe, or why he should be
compelled at the suit of creditors of the corporation or otherwise to pay more on
account of his stock than he agreed to pay. Because of this lack alone in the
findings, it is exceedingly doubtful, therefore, if they are sufficient to sustain the
judgment. We need not, however, decide the case upon this point.
Finally, in this connection it is to be noted that if the finding that Knapp
transferred the claims and received the stock in consideration therefor as trustee
for certain stockholders of the former company, among whom were the
defendants, is to be taken as a finding that the defendants participated in the
transaction, the finding is contrary to the evidence. There is no real dispute as to
the facts and no doubt whatever as to what they really are. Knapp had been
interested in the former company, and it can fairly be inferred that he was largely
responsible for it. He had at one time managed its operations, and had then
ceased to do so, undoubtedly because the company was not prospering. A new
management succeeded him, and this management finally abandoned
operations and something over a year later permitted its claims to lapse by failure
to do the necessary assessment work. After this had occurred, Knapp relocated
the claims, and, together with one Earl Stuart Rhode, who subsequently married
the plaintiff, organized the present company for the purpose of working the
property, and transferred the claims to it in consideration for the issue to Knapp
of the stock mentioned. Under these circumstances, Knapp directed that the
certificates for certain of these shares be made out in the names of certain
stockholders of the former company and sent to them. This was done, and with
the certificates went a letter from Knapp to each of the recipients of the
certificates, reading as follows:
"Dear Sir:
"When I surrendered control of the affairs of the Hayden Hill Gold Company in
October, 1912, to the management which at that time succeeded me, it was with
the distinct understanding that the new management would use every effort in
their power to put the affairs of the Company on a sound business basis and that
at least an attempt would be made to raise money from the sale of the Treasury
Stock to the end that something definite might be acomplished in the way of
actual development work at the mine.
"However, no work of a beneficial character was ever even attempted by the new
management and after wasting nearly a year in costly and useless delays, the
Board of Directors finally met on August 22nd last and practically decided to
abandon the property without making any effort to preserve the interests of the
stockholders. Abandonment was finally consummated despite the protests of
Messrs. Rhode and Lemon, contituting a minority of the Board of Directors and
notwithstanding my own repeated appeals that something be done to protect
the interests of the stockholders.
"No assessment work was done on the claims held by the Company during the
year 1913 as required by law and the property lapsed to the government January
1st, 1914. It was at this juncture that I personally assumed the task of protecting
my own interests and that of the stockholders who were unable to protect
themselves, with full knowledge that the smaller stockholders of the Hayden Hill
Gold Company were not even given an opportunity to protect their investment,
and actuated by a sense of justice and fair play I have succeeded in making terms
with the Lord Stuart Gold Company which enables me to reimburse you for the
loss of your holdings in the Hayden Hill Gold Company by having an equal number
of shares of the stock of the Lord Stuart Gold Company issued to you without any
cost to you whatever. Herewith enclosed you will find certificates covering same.
Kindly acknowledge receipt.
"I will say in conclusion that the property now held by the Lord Stuart Gold
Company is in my opinion very valuable and under capable management if
backed by sufficient funds could be made to pay well. The many delays in
the development of the properties have not shaken my faith in their value and if
the new management meets with the support from the stockholders that it
deserves good results will follow, but it must be borne in mind that it will take
money to prosecute the work of development to the point where the concern
can be placed on a self sustaining basis, and the funds to begin this work must
come from the stockholders. It therefore behooves the stockholders to protect
their holdings and contribute to the success of the enterprise by the purchase of
the Treasury Stock now for sale to the end that the affairs of the Company may
be placed on a sound financial basis. Assuring you that I will put forth every effort
within my power to co-operate with the new management to to the end that the
enterprise may be made a success, I am,
"Very sincerely yours,"
Now, whether the motive actuating Knapp in so distributing the stock was that
stated in the next to the last paragraph of his letter, namely, that he desired to
protect the investments of certain stockholders in the former company, or
whether it was that which might be inferred from the last paragraph, namely,
that he desired to interest them so that they would purchase treasury stock and
give the company some money of which it very much stood in need, or whether,
as may well have been the case, it was a mixture of the two, we need not stop to
inquire. In any case, his action in distributing the stock instead of keeping it all
himself, was not due to any legal obligation which he owed the distributees, or
to any legal relation existing between him and them. It was a purely voluntary
thing done by him for motives of his own, without consultation with the
distributees and without knowledge on their part that he had any intention of
doing it. He calls himself a trustee for them, to be sure, but it is perfectly evident
that he was a wholly self-constituted trustee, so that his actions in relocating the
claims, participating in, if not inspiring, the organization of a new company to
take them over, transferring the claims to that company in return for its stock,
and then distributing the stock, were purely his own and were not done by him
in any representative capacity. There is one circumstance which destroys at once
any claim of real trusteeship. If he were in any real sense a trustee for
stockholders of the former company, he was certainly a trustee for all of them.
Unless his relationship or character in that respect was a purely voluntary thing
on his part, no reason appears why he should be trustee for some and not for
others. But he recognized no relationship to the old stockholders as a class. It is
only certain ones whom he selects, who are the recipients of his doubtful bounty
in the way of stock. This is wholly inconsistent with any thought except that he
was acting entirely on his own responsibility without any obligation or reason
except such as he himself was willing to recognize. The final fact, in other words,
appearing unmistakably from the evidence, is that the defendants did not
participate in the transaction by which the stock was issued, either directly, or
indirectly by way of representation through Knapp, but acquired and held their
stock merely as transferees of Knapp.
It is also to be noted that while perhaps there is evidence which would justify a
finding that the defendants, when they received and accepted their stock, knew
that it was issued for a consideration less in value than its par value, there is no
such finding, and the evidence is by no means conclusive, so that the fact must
be considered as undetermined.
The facts of the case, then, upon the pleadings, findings, and evidence are: (1)
That the defendants were not subscribers; (2) that they did not directly or
indirectly participate in the transaction whereby their stock was issued for a
consideration less than its par value; (3) that it does not appear that the
defendants knew when they accepted their stock that it had been so issued; and
(4) that the defendants acquired their stock merely as the transferees of one of
the parties to the original transaction by which it was issued. Upon these facts, if
the defendants are to be held liable, it must be because it is the law that one
owning stock issued as fully paid but in fact for a consideration less than its par
value and known to be so issued by those participating in its issuance, is liable for
the difference between what the corporation did receive and what it should have
received, merely because of the ownership of the stock, regardless of anything
further, and, in particular, regardless of the facts that the stock was acquired by
transfer, that its present owner did not participate in the transaction by which it
was issued, and did not know that it had been issued for a consideration fictitious
in part. Whether such be in truth the law is the prime question presented on this
appeal, and the answer to it is determinative as to whether the judgment against
the defendants shall be affirmed or reversed. To its consideration we pass.
It is to be noted at the outset that there is a marked difference between the case
of one acquiring and accepting stock which is only partially paid and does not
purport to be otherwise, and the case of one acquiring and accepting stock which
purports to be fully paid, but is not in fact, which is, in other words, what is
commonly known as watered stock. The difference between the two kinds of
stock is apparent and is thoroughly well recognized, and the liability of the owner
in the one case to make good upon call his share of the unpaid balance of the
capital of the company and his liability to do so in the other case depend upon
entirely different principles. And yet the two cases are much confused, and it is
not infrequently sought to apply to one class of cases the principles applicable to
the other.
It is apparent that when one accepts partially paid stock, which does not purport
to be anything else, he does so, or must be taken to do so, upon the
understanding that it is answerable upon call for the unpaid balance upon it, and
that he as its owner must respond to such a call. When he enters into relationship
with the corporation as one of its stockholders owning stock of that character,
he assumes as an incident of the relationship the obligation to respond to calls
upon him for further contributions to the capital of the company until such
capital is fully paid in. (See 3 Clark Marshall on Private Corporations, sec. 564a,
and authorities there cited; Perkins v. Cowles, 157 Cal. 625, [137 Am. St. Rep.
158, 30 L.R.A. (N.S.) 283, 108 P. 711]; Union Savings Bank v. Leiter, 145 Cal. 696,
703, [ 79 P. 441]; Geary etc. Co. v. Bradbury etc. Co., 179 Cal. 46, [ 175 P. 457].)
But where a person accepts the ownership of stock which purports to be fully
paid, a very different situation is presented. It cannot be said of him for a moment
that he accepts the stock and enters upon the relation of stockholder to the
corporation upon any understanding that his stock is liable for further calls on
capital account, or that he, as an incident of his ownership and consequent
relationship, assumes any such obligation. On the contrary, it is evident that he
accepts the ownership of the stock and enters upon the relationship of
stockholder with just the contrary understanding. What, then, is the principle
upon which the holder of watered stock is, under any circumstances, held
obligated to supply substance instead of water, to make good what it is
pretended the corporation received but did not? The answer to this question is
not in doubt. [5] The stockholder is held upon the principle that one giving credit
to a corporation is entitled to rely upon its ostensible capitalization as the basis
for the credit given, and that when the corporation issues watered stock and
thereby assumes an ostensible capitalization in excess of its real assets, the
transaction necessarily involves the misleading of subsequent creditors, and,
whether done with that purpose actually in mind or not, is at least a constructive
fraud upon such creditors. In other words, the essence of the right of the creditor
to brush aside the issuance of the stock as fully paid and to show that it was not
such and to compel the payment of the balance upon it, is that its issuance as
fully paid was as to him a fraud. This is now the view generally accepted in this
country. (2 Clark Marshall on Private Corporations, sec. 401a, and authorities
there cited.)
Such, likewise, is the view which obtains in this state. It is true that some of our
earlier decisions put the right of recovery in such a case upon the so-called trust
fund doctrine. (See Vermont etc. Co. v. Declez etc. Co., 135 Cal. 579, 583, [87 Am.
St. Rep. 143, 56 L.R.A. 728, 67 P. 1057].) It is doubtful if by this doctrine is meant
anything other than that the capital of a corporation constitutes a fund upon
which its creditors have a right to rely for the payment of their claims, and that if
the corporation, by knowingly issuing stock as fully paid when it is not, represents
its capital to be greater than it really is, its action is a fraud upon its creditors. If
the trust fund doctrine means this, the gravamen of the creditors' right of action
to compel the making good of the representation as to the corporation's capital
is still fraud, and the trust fund doctrine is but another way of expressing the
same underlying idea. Whether this be or be not the true interpretation of the
trust fund doctrine, the later decisions of this court place the right of recovery
against the owner of watered stock squarely on the ground of fraud, and in one
instance at least are wholly inconsistent with any other view. Thus it is said
in Harrison v. Armour, 169 Cal. 787, 790, [ 147 P. 1166]: "In such cases the rule
is that where the corporation and stockholder have agreed upon a given
valuation for the property transferred, such valuation is binding and conclusive
unless it is fraudulent in purpose or effect. But if the parties have put upon the
property a valuation in excess of what they knew or believed to be its true value,
this is constructive fraud upon the creditors, and the stock will be deemed paid
only to the extent of the actual value of the property received in exchange for it."
(See, also, Herron etc. Co. v. Shaw, 165 Cal. 668, 672, [Ann. Cas. 1915A, 1265, 133
P. 488].) In Sherman v. Harley,178 Cal. 584, [7 A. L. R. 950, 174 P. 901], following
an intimation in Herron etc. Co. v. Shaw, just cited, a recovery was refused a
creditor where it appeared that at the time he gave the corporation credit he
knew that part of its ostensible capitalization was water. Such a holding is
inconsistent with any view other than that essentially the creditor's right of
action is based on fraud, and that therefore where he has not been misled by the
fictitious capitalization he has no cause of action. In fact, the court makes the
following quotation from 4 Thompson on Corporations (second edition), section
3983, as stating the reason of the decision: "On principle and authority, a creditor
who deals with the corporation with full knowledge of the manner in which its
shares have been paid for, is not defrauded by the taking of overvalued property
as payment of stock, and is estopped to raise that question."
It must be taken, then, that the right of a creditor of a corporation, which
knowingly issues shares as fully paid when they are not, to compel payment on
them in full, proceeds upon the ground of fraud. This ground is entirely different
from the ground upon which proceeds his right in the case of shares only partially
paid up and issued as such, and it follows that a recovery may be had in the latter
case when it cannot be in the former. In the case of partially paid shares issued
as such, the stockholder, when he accepts his shares and enters upon the relation
of stockholder, does so, as we have said, upon the condition that his shares are
subject to call for the unpaid balance upon them, and that he, as their owner, will
respond to such call. This obligation is an asset of the corporation which it may
enforce, and which, if it does not itself do so, its unpaid creditors
may themselves enforce if it be necessary for the full discharge of their debts. It
makes no difference, therefore, in such a case, whether any particular
stockholder against whom a recovery is sought was a party to the original
transaction whereby the stock was issued or is only a transferee of some such
party. He is liable simply as the owner of the stock and because of the relationship
with the corporation which he voluntarily assumed when he accepted such
ownership.
Such, however, is not the situation of the stockholder owning shares ostensibly
fully paid but not so in fact. He owes the corporation no duty to make good the
difference, and there is no obligation on his part which is an asset of the
corporation or which the corporation may enforce. ( Garretson v. Pacific Crude
Oil Co., 146 Cal. 184, 188, [ 79 P. 838], and authorities there cited.) He is liable
only because of the original transaction whereby the stock was issued for a
fictitious consideration, and then only to those who were defrauded thereby. His
liability, in other words, is not based upon his relationship to the corporation as
a stockholder but upon a fraudulent transaction. Upon the plainest principles,
therefore, he cannot be held liable unless he was either a party to the transaction
in the first instance or has in effect in some manner made himself a party since.
It is not sufficient to justify a recovery against him that it be pleaded, proven, and
found only that he be a stockholder owning watered stock. Upon those facts
alone the full elements necessary to make a cause of action against him do not
appear.
The result is, that one who is only a transferee of watered stock, and did not
participate in the transaction whereby it was originally issued and who took his
stock unaware of the character of that transaction, cannot be compelled to make
good the false representation as to the capital of the company which he had no
part in making and the responsibility for which he has done nothing to assume.
This is now the well-nigh universal rule in this country (3 Clark Marshall on Private
Corporations, sec. 564f), and it is a necessary result of the underlying principle
upon which a recovery is permitted in the case of watered stock. Nor has any
different rule been laid down in this state. While perhaps the distinction between
the liability of the owner of partially paid shares and that of the owner of watered
shares has not always been clearly made in our decisions, it will be found upon
examination that in every case where a recovery has been permitted against one
acquiring stock by transfer simply because of his ownership of the stock without
anything further, the defendant has been the owner of but partially paid stock,
that is, stock which did not purport to be fully paid. The most notable instance
wherein such a recovery was permitted is that of Perkins v. Cowles, 157 Cal. 625,
[137 Am. St. Rep. 158, 30 L.R.A. (N.S.) 283, 108 P. 711]. This case is in fact strongly
urged upon us as decisive of the present case in favor of the plaintiff. There the
defendants were transferees of the stock of a corporation, and were held liable
to make up the balance unpaid upon their shares at the suit of the corporation's
trustee in bankruptcy. But, as plainly stated in the opinion, the stock appeared
on the books of the corporation as but partially paid. The defense of the
defendants was that the parties from whom they bought had represented to
them that the stock was fully paid, and that the corporation had itself so
represented to them by issuing them certificates which contained no notation
that the shares evidenced by them were not fully paid. As to this defense, it was
held (and this holding was the real point of the case) that the representation by
someone else than the corporation that its shares were fully paid was not binding
on the corporation or its creditors, and that the issuance of certificates without
any notation as to whether the shares were fully paid or not was not a
representation by the corporation that they were fully paid. Upon this latter
point the decision differs apparently from the rule generally followed elsewhere
(3 Clark Marshall on Private Corporations, sec. 564f), but its correctness in this
respect is not material here, nor is it of particular importance now because of the
subsequent amendment to section 323 of the Civil Code requiring all certificates
representing partially paid shares to indicate that fact. For the purposes of our
present discussion, the point in connection with Perkins v. Cowles is that the case
was one where a fictitious credit by way of payment upon the stock was not
given, and where it was held that the defendants must be considered as having
acquired their stock upon the basis that it was but partially paid stock. It is also
worthy of note that in the case of Herron v. Shaw, 165 Cal. 668, [Ann. Cas. 1915A,
1265, 133 P. 488], involving the liability of the owner of watered stock, and
decided very shortly after Perkins v. Cowles, the question as to the liability of
such an owner who acquires his stock by transfer is expressly reserved. There
was no necessity for such reservation if it had been the intention of the court to
decide the question in Perkins v. Cowles. We are free, then, to follow the rule
that the transferee of watered stock who takes it in ignorance of its real character
is not required, even at the suit of a creditor of the company, to pay in anything
more upon it, and we have no hesitation in following it, both as the rule almost
universally adopted elsewhere, and as the only one consistent with the principle
upon which a recovery is permitted in any case against the owner of stock issued
by the corporation as fully paid.
It may be added that any other rule would have the effect of possibly subjecting
the innocent purchaser of corporate stock to obligations in large amounts of
which he had no conception when he acquired his stock. The injustice of this and
the serious hindrance it would be to the free sale and disposal of corporate stocks
are strong reasons in addition for the adoption of the rule stated. [7] The
conclusion so reached necessitates a reversal of the judgment against the
defendants, in the present case, since, so far as appears, they were but innocent
transferees of the watered stock because of which it is sought to charge them.
It may perhaps be said that the burden was on the defendants to allege and prove
as a defense that they did not acquire their stock under such circumstances as
would make them liable. The answer to this is that it was an element of any cause
of action against them that they be connected in some manner with the
fraudulent transaction by reason of which alone they can be charged, and that
by the most elementary rules of pleading and proof, the burden rested upon the
plaintiff to allege and prove that such element existed. (See,
also, Finletter v. Appleton, 195 Pa. St. 349, [45 A. 1063]; Davies v. Hall, 64 Wn.
292, 296, [Ann. Cas. 1914B, 750, 116 P. 833].)
It may also be said that it clearly appears from the evidence that the defendants
gave nothing for their shares and were not purchasers for value. But this is not a
case where the doctrine of bona fide purchasers for value has any application.
That doctrine is always one applied to protect one who has acquired certain
property from some equitable charge against the property. (2 Pomeroy's Equity
Jurisprudence, secs. 737-743.) The present action is not one to enforce some
equitable charge upon the defendants' shares. It is essentially one to compel the
defendants to make good a false representation in defraud of the plaintiff; a suit
to enforce an alleged personal liability, not a suit to enforce a lien or claim against with him, is entirely different from the question as to the necessity of making
the stock in the hands of the defendants. As an element of such a cause of action other stockholders parties defendant. But the question, while possibly suggested
against the defendants, they must be shown either to have participated in the by the parties, is not argued by them, and as a matter of first impression would
making of the representation or in some manner to have assumed responsibility not seem to be free from doubt. (See Baines v. West Coast Lumber Co., 104 Cal.
for it. The mere fact that they received their stock as a gratuity does not show 1, [37 P. 767]; Seymour v. McAvoy, 121 Cal. 438, [41 L.R.A. 544, 53 P.
either. The fact may still be that they knew nothing about the representation and 946]; Winchester v. Mabury, 122 Cal. 522, [55 P. 393]; Daggett v. Southwest
had no part in it, and cannot justly be held responsible for it in any way. etc. Co., 155 Cal. 762, [ 103 P. 204]; In re La Jolla etc. Co., 243 Fed. 1004.) Under
In view of the necessity for a new trial, there are three further points which these circumstances, we have no opinion to express concerning it, and make
should be determined for the guidance of the court and parties. The first of these mention of it only that it may not be confused with the question we do decide as
is as to what is necessary in order to show that the defendants, acquiring, as they to parties defendant.
did, their stock by way of transfer from Knapp, assumed responsibility for the The third point on which it is advisable that we express an opinion for the
fraudulent representation involved in the issuance of the shares as fully paid; is purposes of a new trial is presented by the refusal of the trial court to receive in
it enough to show that they acquired their stock with notice or knowledge that it evidence a written report on the mining claims transferred by Knapp, made by
was issued for a consideration fictitious in part, or must something more be one claiming to be a mining engineer and painting the prospects of those claims
shown? As to this, we think it sufficient that it appear that when the defendants in sunset colors of a vivid hue. As direct evidence of the value of the claims, the
accepted their stock they had notice or knowledge of its real character. We can report was, of course, pure hearsay, and inadmissible. If, however, it appeared,
see no reason why one who accepts stock with notice or knowledge that it is but or there was sufficient to justify the inference, that it was before the minds of
partially paid, although issued as fully paid, should not be held to assume the the directors of the company, or the mind of Knapp when the claims were
same responsibility which he would assume if the stock were issued for what it transferred in return for the stock, it was competent evidence as to the belief of
really is, partially paid stock. He knows, or should know, its real character, and the directors or Knapp as to the value of the claims. It was open to both sides to
should be charged as if its ostensible character were what it really is. This is also, show whatever the directors and Knapp had in mind which would affect their
we believe, the practically universal rule of the decisions in other jurisdictions. (3 judgment in that respect. How far it can reasonably be considered that the
Clark Marshall on Private Corporations, sec. 564f.) particular report could really affect the judgment of any rational man of any
The second point which should be decided for the purposes of a new trial is raised experience whatever, is a question as to its weight.
by the fact that it appears that there are other stockholders who stand in exactly Judgment reversed, with directions that the parties be granted leave to amend
the same position as the defendants, and who are liable if the defendants are
liable, and yet they have not been made parties to the action. The contention of
the defendants is that they should have been made parties defendant with them.
But the question presented was carefully considered in Baines v. Babcock, 95 Cal.
581, [29 Am. St. Rep. 158, 27 P. 674, 30 P. 776], and there decided contrary to
the defendants' contention, and that decision has been since approved and
followed. (See, for example, Blood v. La Serena etc. Co., 150 Cal. 764, [ 89 P.
1090].) It would require the strongest reasons to justify us in now overruling it,
even if we had serious doubts as to its correctness, which we have not. It is
attempted to distinguish Baines v. Babcock from the present case on the ground
that the former was one to compel the payment of unpaid balances on stock
subscriptions, while the latter is to compel the payment of unpaid balances on
watered stock. But so far as the point under immediate conÏIGsideration is
concerned, the distinction is one without a difference.
It should, perhaps, be said that the question of whether a creditor can recover in
such a case as the present for the benefit of himself alone, or whether he can
recover only by a creditors' bill for the benefit of all creditors who choose to join
G.R. No. L-16236 June 30, 1965 In Civil Case G.R. No. L-16238 (CFI No. 13340), Baltazar and Rose filed
their complaint against Bernardo Acena alone.
IRINEO S. BALTAZAR, plaintiff-appellee,
vs. The Lingayen Gulf Electric Power Co., Inc., hereinafter referred to as
LINGAYEN GULF ELECTRIC POWER, CO., INC., DOMINADOR C. Corporation, was doing business in the Philippines, with principal offices
UNGSON, BRIGIDO G. ESTRADA, MANUEL L. FERNANDEZ, at Lingayen, Pangasinan, and with an authorized capital stock of
BENEDICTO C. YUSON and BERNARDO ACENA, defendants- P300.000.00 divided into 3,000 shares of voting stock at P100.00 par
appellants. 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
G.R. No. L-16237 June 30, 1965 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
MARVIN O. ROSE, plaintiff-appellee,
issued to him several fully paid up and non-assessable certificates of
vs.
stock, corresponding to the 535 shares. After having made transfers to
LINGAYEN GULF ELECTRIC CO., INC., DOMINADOR, C. UNGSON,
third persons and acquired new ones, Baltazar had to his credit, on the
BRIGIDO G. ESTRADA, MANTEL L. FERNANDEZ, BENEDICTO C.
filing of the complaint 341 shares fully paid and non-assessable. He had
YUSON and BERNARDO C. ACENA, defendants-appellants.
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.
G.R. No. L-16238 June 30, 1965.
The respondents Ungson, Estrada, Fernandez and Yuson were small
IRINEO S. BALTAZAR and MARVIN O. ROSE, plaintiffs-appellees, stockholders of the Corporation, all holding a total number of fully paid-up
vs. shares of stock, of not more than 100 shares, with a par value of
BERNARDO ACENA, defendant-appellant. P10,000.00 and the defendant Acena, was likewise an incorporator and
stockholder, holding 600 shares of stock, for which certificate of stock
Primicias and Del Castillo for plaintiffs-appellees. were issued to him and as such, was the largest individual stockholder
Manuel L. Fernandez and Brigido G. Estrada for and in their own behalf thereof. Defendants Ungson, Estrada, Fernandez and Yuzon, constituted
as defendants-appellants. the majority of the holdover seven-member Board of Directors of the
Corporation, in 1955, two (2) of said defendants having been elected as
PAREDES, J.: 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
In Civil Case G.R. No. L-16236 (CFI No. 13211), Irineo S. Baltazar, filed (2) were elected mainly on the vote of the plaintiffs and their group of
the complaint against Lingayen Gulf Electric Power Co., Inc., Dominador stockholders. Let the first group be called the Ungson groupand the
C. Ungson, Brigido G. Estrada, Manuel L. Fernandez, Benedicto C. second, the Baltazar group.
Yuson and Bernardo Acena.
The date of the annual stockholders' meeting of the Corporation had
In Civil Case G.R. No. L-16237 (CFI No. 13212), Marvin O. Rose filed the been fixed, under its by-laws, on the first Tuesday of February of every
complaint against the same defendants. 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 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 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;
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 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:
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 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 thepar 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 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).
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.
Barrera and Bengzon, J.P., JJ., took no part.
G.R. No. 96674 June 26, 1992
RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA
TRIAS and FRANCISCO TRIAS, petitioners,
vs.
COURT OF APPEALS*, SECURITIES AND EXCHANGE
COMMISSION, MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA
G. ROSALES, FRANCISCO M. GUERRERO, JR., and FRANCISCO
GUERRERO , SR., respondents.
PARAS, J.:
The basic controversy in this case is whether or not the respondent court
erred in sustaining the Securities and Exchange Commission when it
compelled by Mandamus the Rural Bank of Salinas to register in its stock
and transfer book the transfer of 473 shares of stock to private
respondents. Petitioners maintain that the Petition for Mandamus should
have been denied upon the following grounds.
(1) Mandamus cannot be a remedy cognizable by the Securities and
Exchange Commission when the purpose is to register certificates of
stock in the names of claimants who are not yet stockholders of a
corporation:
(2) There exist valid reasons for refusing to register the transfer of the
subject of stock, namely:
(a) a pending controversy over the ownership of the
certificates of stock with the Regional Trial Court;
(b) claims that the Deeds of Assignment covering the
subject certificates of stock were fictitious and antedated;
and
(c) claims on a resultant possible deprivation of
inheritance share in relation with a conflicting claim over
the subject certificates of stock.
The facts are not disputed.
On June 10, 1979, Clemente G. Guerrero, President of the Rural Bank of
Salinas, Inc., executed a Special Power of Attorney in favor of his wife,
private respondent Melania Guerrero, giving and granting the latter full
power and authority to sell or otherwise dispose of and/or mortgage 473
shares of stock of the Bank registered in his name (represented by the
Bank's stock certificates nos. 26, 49 and 65), to execute the proper
documents therefor, and to receive and sign receipts for the dispositions.
On February 27, 1980, and pursuant to said Special Power of Attorney,
private respondent Melania Guerrero, as Attorney-in-Fact, executed
a Deed of Assignment for 472 shares out of the 473 shares, in favor of
private respondents Luz Andico (457 shares), Wilhelmina Rosales (10
shares) and Francisco Guerrero, Jr. (5 shares).
Almost four months later, or two (2) days before the death of Clemente
Guerrero on June 24, 1980, private respondent Melania Guerrero,
pursuant to the same Special Power of Attorney, executed a Deed of
Assignment for the remaining one (1) share of stock in favor of private
respondent Francisco Guerrero, Sr.
Subsequently, private respondent Melania Guerrero presented to
petitioner Rural Bank of Salinas the two (2) Deeds of Assignment for
registration with a request for the transfer in the Bank's stock and transfer
book of the 473 shares of stock so assigned, the cancellation of stock
certificates in the name of Clemente G. Guerrero, and the issuance of
new stock certificates covering the transferred shares of stocks in the
name of the new owners thereof. However, petitioner Bank denied the
request of respondent Melania Guerrero.
On December 5, 1980, private respondent Melania Guerrero filed with
the Securities and Exchange Commission" (SEC) an action
for mandamus against petitioners Rural Bank of Salinas, its President
and Corporate Secretary. The case was docketed as SEC Case No.
1979.
Petitioners filed their Answer with counterclaim on December 19, 1980
alleging the upon the death of Clemente G. Guerrero, his 473 shares of
stock became the property of his estate, and his property and that of his
widow should first be settled and liquidated in accordance with law before
any distribution can be effected so that petitioners may not be a party to
any scheme to evade payment of estate or inheritance tax and in order to
avoid liability to any third persons or creditors of the late Clemente G.
Guerrero.
On January 29, 1981, a motion for intervention was filed by Maripol
Guerrero, a legally adopted daughter of the late Clemente G. Guerrero
and private respondent Melania Guerrero, who stated therein that on
November 26, 1980 (almost two weeks before the filing of the petition
for Mandamus) a Petition for the administration of the estate of the late
Clemente G. Guerrero had been filed with the Regional Trial Court,
Pasig, Branch XI, docketed as Special Proceedings No. 9400. Maripol
Guerrero further claimed that the Deeds of Assignment for the subject
shares of stock are fictitious and antedated; that said conveyances are
donations since the considerations therefor are below the book value of
the shares, the assignees/private respondents being close relatives of
private respondent Melania Guerrero; and that the transfer of the shares
in question to assignees/private respondents, other than private
respondent Melania Guerrero, would deprive her (Maripol Guerrero) of
her rightful share in the inheritance. The SEC hearing officer denied the
Motion for Intervention for lack of merit. On appeal, the SEC En
Banc affirmed the decision of the hearing officer.
Intervenor Guerrero filed a complaint before the then Court of First
Instance of Rizal, Quezon City Branch, against private respondents for
the annulment of the Deeds of Assignment, docketed as Civil Case No.
Q-32050. Petitioners, on the other hand, filed a Motion to Dismiss and/or
to Suspend Hearing of SEC Case No. 1979 until after the question of
whether the subject Deeds of Assignment are fictitious, void or simulated
is resolved in Civil Case No. Q-32050. The SEC Hearing Officer denied
said motion.
On December 10, 1984, the SEC Hearing Officer rendered a Decision
granting the writ of Mandamus prayed for by the private respondents and
directing petitioners to cancel stock certificates nos. 26, 49 and 65 of the
Bank, all in the name of Clemente G. Guerrero, and to issue new
certificates in the names of private respondents, except Melania
Guerrero. The dispositive, portion of the decision reads:
WHEREFORE, judgment is hereby rendered in favor of
the petitioners and against the respondents, directing the
latter, particularly the corporate secretary of respondent
Rural Bank of Salinas, Inc., to register in the latter's Stock
and Transfer Book the transfer of 473 shares of stock of
respondent Bank and to cancel Stock Certificates Nos.
26, 45 and 65 and issue new Stock Certificates covering
the transferred shares in favor of petitioners, as follows:
1. Luz Andico 457 shares
2. Wilhelmina Rosales 10 shares
3. Francisco Guerrero, Jr. 5 shares
4. Francisco Guerrero, Sr. 1 share
and to pay to the above-named petitioners, the dividends
for said shares corresponding to the years 1981, 1982,
1983 and 1984 without interest.
No pronouncement as to costs.
SO ORDERED. (p. 88, Rollo)
On appeal, the SEC En Banc affirmed the decision of the Hearing Officer.
Petitioner filed a petition for review with the Court of Appeals but said
Court likewise affirmed the decision of the SEC.
We rule in favor of the respondents.
Section 5 (b) of P.D. No. 902-A grants to the SEC the original and
exclusive jurisdiction to hear and decide cases involving intracorporate
controversies. An intracorporate controversy has been defined as one
which arises between a stockholder and the corporation. There is no
distinction, qualification, nor any exception whatsoever (Rivera vs.
Florendo, 144 SCRA 643 [1986]). The case at bar involves shares of
stock, their registration, cancellation and issuances thereof by petitioner
Rural Bank of Salinas. It is therefore within the power of respondent SEC
to adjudicate.
Respondent SEC correctly ruled in favor of the registering of the shares
of stock in question in private respondent's names. Such ruling finds
support under Section 63 of the Corporation Code, to wit:
Sec. 63. . . . 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 . . .
In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court
interpreted Sec. 63 in his wise:
Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the
Corporation Code]) contemplates no restriction as to
whom the stocks may be transferred. It does not suggest
that any discrimination may be created by the corporation
in favor of, or against a certain purchaser. The owner of
shares, as owner of personal property, is at liberty, under
said section to dispose them in favor of whomever he
pleases, without limitation in this respect, than the general
provisions of law. . . .
The only limitation imposed by Section 63 of the Corporation
Code is when the corporation holds any unpaid claim against the
shares intended to be transferred, which is absent here.
A corporation, either by its board, its by-laws, or the act of its officers,
cannot create restrictions in stock transfers, because:
. . . Restrictions in the traffic of stock must have their
source in legislative enactment, as the corporation itself
cannot create such impediment. By-laws are intended
merely for the protection of the corporation, and prescribe
regulation, not restriction; they are always subject to the
 charter of the corporation. The corporation, in the
absence of such power, cannot ordinarily inquire into or
pass upon the legality of the transactions by which its
stock passes from one person to another, nor can it
question the consideration upon which a sale is based. . .
. (Tomson on Corporation Sec. 4137, cited in Fleisher vs.
Nolasco, Supra).
The right of a transferee/assignee to have stocks transferred to his name
is an inherent right flowing from his ownership of the stocks. Thus:
Whenever a corporation refuses to transfer and register
stock in cases like the present, mandamus will lie to
compel the officers of the corporation to transfer said
stock in the books of the corporation" (26, Cyc. 347, Hyer
vs. Bryan, 19 Phil. 138; Fleisher vs. Botica Nolasco, 47
Phil. 583, 594).
The corporation's obligation to register is ministerial.
In transferring stock, the secretary of a corporation acts in
purely ministerial capacity, and does not try to decide the
question of ownership. (Fletcher, Sec. 5528, page 434).
The duty of the corporation to transfer is a ministerial one
and if it refuses to make such transaction without good
cause, it may be compelled to do so by mandamus. (See.
5518, 12 Fletcher 394)
For the petitioner Rural Bank of Salinas to refuse registration of the
transferred shares in its stock and transfer book, which duty is ministerial
on its part, is to render nugatory and ineffectual the spirit and intent of
Section 63 of the Corporation Code. Thus, respondent Court of Appeals
did not err in upholding the Decision of respondent SEC affirming the
Decision of its Hearing Officer directing the registration of the 473 shares
in the stock and transfer book in the names of private respondents. At all
events, the registration is without prejudice to the proceedings in court to
determine the validity of the Deeds of Assignment of the shares of stock
in question.
WHEREFORE, the petition is DISMISSED for lack of merit.
SO ORDERED.
Narvasa, C.J., Padilla and Regalado, JJ., concur.
Nocon, J., is on leave.
G.R. No. L-4818 February 28, 1955
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.
Jose P. Laurel, Adolfo A. Scheerer, Antonio Quirino, and J. C. Orendain,
for appellees.
Harold I. Baynton, Stanley Gilbert, Juan T. Santos, and Lino M. Patajo,
and Perkins, Ponce Enrile & Associates, for appellant.
Office of the Solicitor General Pompeyo Diaz and Solicitor Pacifico P. de
Castro for intervenor-appellant.
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, 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 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 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 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 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 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.
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; .
(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.
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.
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. . . .
xxx xxx xxx
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 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 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.
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.
Paras, C. J., Pablo, Padilla, Montemayor, Reyes, A., Jugo and Labrador,
JJ., concur.
 [G.R. No. 145855. November 24, 2004] individual computation of the overtime claim of each of the workers
concerned.[4]
In its position paper, the PCDP maintained that there were only five
PEPSI-COLA PRODUCTS PHILIPPINES, INC., petitioner, vs. THE (5) legal Muslim holidays under the Muslim Code. It asserted that under
COURT OF APPEALS, and PEPSI-COLA PRODUCTS the law, the cities of Cagayan de Oro and Dipolog were not included in the
PHILIPPINES, INC. EMPLOYEES & WORKERS UNION (UOEF areas that officially observed the Muslim holidays, and that the said
No. 70) represented by its incumbent president, ISIDRO holidays were only applicable to Muslims. It also argued that even
REALISTA, respondents. assuming that the employees were entitled to such overtime pay, only the
rank-and-file employees and not the managerial employees should be
given such benefit.
DECISION
On May 26, 1987, the Executive Labor Arbiter (ELA)[5] rendered a
CALLEJO, SR., J.: Decision in favor of PCEWU, ordering PCDP to pay the claims of its
workers. The decretal portion of the decision reads:
Before us is a petition for review on certiorari of the Decision[1] of the
Court of Appeals (CA) in CA-G.R SP No. 50690, setting aside the decision WHEREFORE, finding merit in complainants claim, the respondent is hereby
of the National Labor Relations Commission (NLRC) in NLRC RABX Case ordered to pay the complaining workers their claims for overtime services
No. RO-7-0234-86 and the reinstatement of the decision of the Executive rendered in calendar year 1985 on duly-designated Muslim holidays
Labor Arbiter in the said case. corresponding to the following dates: May 20, 1985; June 17, 1985; June 19,
The facts, as culled from the records of the case, are as follows: 1985; August 26, 1985; September 4, 1985; September 24, 1985; November 25,
1985 and December 19, 1985, for workers involved with places of assignments
Pepsi-Cola Products Philippines, Inc. Employees and Workers Union at Iligan City and Tubod, Lanao del Norte and June 17, 1985; June 19, 1985;
(PCEWU) is a duly- registered labor union of the employees of the Pepsi- August 26, 1985; September 24, 1985 and November 25, 1985, for workers
Cola Distributors of the Philippines (PCDP).[2] On July 14, 1986, PCEWU, involved in the instant case whose place of assignment is at Dipolog City. Thus:
through its local union president, Arisedes T. Bombeo, filed a Complaint
against PCDP with the Regional Arbitration Branch No. X of the Ponciano Waslo P 649.20
Department of Labor and Employment (DOLE), Cagayan de Oro City, for Valentin Estao P 1,003.68
payment of overtime services rendered by fifty-three (53) of its members, Sergio Estrosas P 711.52
who were employed as salesmen, warehousemen, truck helpers, route Exequiel Caeda P 1,091.68
salesmen, route sales workers, distributors, conductors and forklift Guindelino Labial P 649.20
operators, on the eight (8) days duly- designated as Muslim holidays for Domingo Moreno P 728.56
calendar year 1985, in their respective places of assignment, namely: Eufemio Amora P 1,001.44
Iligan City, Tubod, Lanao del Norte and Dipolog City.[3] The complaint was Salvador Nisnisan P 1,028.40
docketed as NLRC RABX Case No. RO-7-0234-86. Leonides Lesonada P 711.52
The PCEWU alleged, inter alia, that in previous years, they had been Zosimo Clemen P 711.52
paid overtime pay for services rendered during the eight (8) Muslim David Gotengco P 1,017.52
holidays in their places of assignment, including Dipolog City. To support Toriano Cabelbel P 504.24
its claims, the PCEWU appended to its position paper the following: a Arsenio Calumpang P 711.52
photocopy of the applicable provisions of Presidential Decree (P.D.) No. Jose Sales, Jr. P 711.52
1083; a certification dated March 26, 1986 from the Regional Autonomous Prudencio Labra P 1,584.00
Government of Region 12-A, Marawi City, attesting to the eight (8) Muslim Romulo Dalagan P 498.00
holidays observed in the said region in calendar year 1985; and the Rodrigo dela Cerna P 498.00
Apolinario Oreniano P 649.20
Pablo Cabanos P 504.24
 Felicisimo Dadofalsa P 497.20 12 had passed legislation providing for three (3) more Muslim holidays per
Simplecio Torres P 1,071.52 the Manifestation of the employees, the latter failed to prove that a similar
Hadji Nur Usman P 1,065.04 legislation had been approved by the Regional Legislative Assembly for
Lumna Salic P 697.20 Region 9. The ELA concluded that those employees assigned in Region
Cornelio Llanos P 1,078.80 12 were entitled to overtime pay for eight (8) Muslim holidays, but those
Godofredo Anana P 504.24 assigned in Region 9 were not so entitled.
Conrado Salon P 504.24
Evaristo Tuante P 1,164.83 The respondent appealed the decision to the NLRC where it reiterated
Roque Clomas P 711.45 its contention that, P.D. No. 1083 (Code of Muslim Personal Laws of the
Tomas Fillo P 711.45 Philippines,) enumerates only five (5) legal Muslim holidays. It assailed the
Bernaflor Macayan P 1,091.68 finding of the ELA that there were three (3) additional Muslim legal holidays
Gregorio Moreno P 711.52 in Region 12 based on the certification made by the Chief of the
Cornelio Iway P 1,091.68 Administrative Division of the Office of Muslim Affairs, considering that the
Salvador Anggot P 504.24 actual existence of any proclamation issued in relation thereto was not
Felix Lagat P 711.52 even verified. It argued that only Muslims were covered by the legal Muslim
Rogelio Mangubat P 504.24 holidays benefits, and not all persons found in the places enumerated in
Avelino Jabonillo P 504.52 P.D. No. 1083. The respondent averred that since the employees failed to
Alberto Ordona P 801.28 specify whether they were Muslims or non-Muslims, they were not entitled
Dominador Ponce P 1,028.88 to the overtime pay awarded by the ELA. It further claimed that Dipolog
Robinson Berhay P 635.95 City is a distinct political subdivision from the province of Zamboanga del
Juanito Cabale P 405.75 Norte, and is not one of those areas enumerated under P.D. No. 1083.[7]
Reynaldo Fulgarinas P 444.70 On March 21, 1991, the NLRC rendered judgment[8] affirming the
Emelito Pineda P 435.75 decision of the ELA with modification:
Antonio Andante P 315.15
Dionesio Coyoca P 315.15 WHEREFORE, the decision appealed from is Modified consistent with the
Alberto Macapanas P 315.15 foregoing resolution. For purposes of recomputing the money claims of
Nestor Murro P 315.15 complainants, the Labor Arbiter is directed to conduct further proceedings
Alfredo Nisnisan P 315.15 affording both parties reasonable opportunity to be heard. The monetary award,
Joseph Putian P 315.15 as decreed in the decision of May 31, 1987, is hereby Vacated. No findings as to
Manuel Quirante P 627.30 costs.
Antonio Torres P 315.15
Arturo Pelare P 649.00
SO ORDERED.[9]
Further respondent is hereby ordered to pay Complainant an amount equivalent
The NLRC ruled that, since the respondent had been giving overtime
to ten (10) percent of the aggregate award as attorneys fee.
pay during Muslim holidays to its employees, such proclamation had
ripened into a company policy; hence, the respondent is estopped from
SO ORDERED.[6] denying the claims for overtime services rendered by its rank-and-file
employees during the said Muslim holidays.[10] The NLRC also declared
The ELA ruled that, although P.D. No. 1083 does not specifically that the other three (3) holidays considered by the ELA, aside from the five
mention Dipolog City as one of the places where Muslim holidays are (5) Muslim holidays provided under P.D. No. 1083, were not customarily
observed, it is nevertheless a part of Zamboanga del Norte and the observed by Filipino Muslims. As such, these should not be included in the
autonomous region in Mindanao where such Muslim holidays are computation of overtime pay. It also ruled that since the complainants
observed. He also ruled that while there were only five (5) Muslim holidays failed to present their daily time records, there can be no basis for the
under P.D. No. 1083, and the Regional Legislative Assembly for Region computation and determination for the claims of overtime pay. There was
thus a need to present appropriate company records to determine the
proper computation of the claims for overtime pay during the post
arbitration stage.[11]
The NLRC also held that the managerial employees were not entitled
to receive overtime pay because they were paid on a monthly basis.
Furthermore, such overtime pay did not appear to be included in their
monthly salaries, and that they were allowed day-off privileges or to offset
any absences they may have incurred in case they had already exhausted
their respective vacation or sick leave credits. The NLRC also declared
that the matter of whether the complainants were managerial employees
or not should be threshed out during the post arbitration proceedings.[12]
The PCDP filed its motion for partial reconsideration of the NLRC
decision. The employees also filed a motion for reconsideration of the
decision on April 17, 1991. Pending resolution of the said motions,
ownership of various Pepsi-Cola bottling plants was transferred to
petitioner Pepsi-Cola Products Philippines, Inc. (PCPPI). The NLRC
directed the parties to file their respective pleadings concerning the
respondents existence as a corporate entity. The PCDP alleged that it had
ceased to exist as a corporation on July 24, 1989 and that it has winded
up its corporate affairs in accordance with law. It also averred that it was
now owned by PCPPI.[13]
On February 11, 1992, the NLRC issued a Resolution[14] dismissing
the complaint of the PCEWU for the reason that, with the cessation and
dissolution of the corporate existence of the PCDP, rendering any
judgment against it is incapable of execution and satisfaction:
WHEREFORE, premises considered, judgment is hereby rendered dismissing
the above-entitled case on account of a lawful supervening event, that is the
dissolution and cessation of the corporate and juridical personality of respondent
company thereby rendering any judgment against it incapable of execution and
satisfaction. This is without prejudice to the rights of complainants from
pursuing their money claims with the proper forum. This order supersedes the
previous orders of this Commission in so far as the enforcement of the money
claims of complainants are concerned with this labor tribunal. No findings as to
costs.
SO ORDERED.[15]
The NLRC ruled that it was not competent for it to proceed against the
PCDP because it had ceased to exist as a juridical entity. Thus, it no longer
resolved the respondents motion for partial reconsideration, as well as the
motion for reconsideration of the employees.
The PCEWU filed a motion for reconsideration of the February 11,
1992 Resolution of the NLRC, but the latter issued a Resolution on June
4, 1992[16] denying the said motion for lack of merit.
The petitioner filed a petition for the nullification of the February 11,
1992 Resolution of the NLRC. In a Resolution dated November 23, 1998,
the Court referred the case to the Court of Appeals (CA) for proper
disposition.[17] In its petition, the petitioner raised the following issues:
1. WHETHER OR NOT PEPSI-COLA PRODUCTS PHILIPPINES, INC., AS
SUCCESSOR-IN-INTEREST OF THE DISSOLVED PEPSI-COLA
DISTRIBUTORS OF THE PHILIPPINES, [IS] LIABLE OVER [THE]
UNPAID OBLIGATION OF THE DISSOLVED CORPORATION TOWARDS
ITS EMPLOYEES;
2. WHETHER OR NOT A DISSOLVED CORPORATION IS EXEMPT FROM
THE PAYMENT OF ITS OBLIGATION;
3. WHETHER OR NOT THE NLRC HAS JURISDICTION OVER PEPSI-
COLA DISTRIBUTORS OF THE PHILIPPINES.[18]
For its part, the respondent averred that notwithstanding the
dissolution of the PCDP while the complaint was pending resolution by the
NLRC, the latter continued existing as a corporation for a period of three
years from the time when it would have been dissolved, conformably to
Section 122 of the Corporation Code. It prayed that judgment be rendered
in its favor, thus:
WHEREFORE, premises considered, petitioner prays that this Honorable Court
issue judgment:
1. Declaring the National Labor Relations Commission to have committed grave
abuse of discretion in rendering the assailed resolutions.
2. Reversing the decision of the NLRC in the above-entitled case.
3. Reinstating the decision of the executive labor arbiter on May 4, 1987,
ordering respondent to pay the complaining workers their claims for overtime
services.
4. Granting petitioner such other reliefs and remedies equitable under the
circumstances.[19]
 In its comment on the petition, the Office of the Solicitor General
(OSG) recommended that the petition be granted and that the NLRC be
ordered to resolve the motions for reconsideration of the petitioner and
respondent therein as follows:
Indeed, respondent NLRC acted without lawful justification when it dismissed
the complaint of petitioner union.
PRAYER
WHEREFORE, it is respectfully prayed of this Honorable Court that respondent
NLRCs Resolution dated February 11, 1992, dismissing the complaint of
petitioner union, and Resolution dated June 4, 1992, denying petitioner unions
motion for reconsideration, be annulled and set aside; and that respondent NLRC
be ordered to decide on the merits [of] petitioner unions motion for
reconsideration of April 17, 1991 only insofar as the actual number of Muslim
holidays in 1985 is concerned.
It is further respectfully prayed that, in as much as the instant Comment is
adverse to respondent NLRC, the latter be given an opportunity to submit its
own Comment, if it so desires.[20]
The CA found the petition meritorious, and on April 28, 1998, rendered
judgment annulling the February 11, 1992 Resolution of the NLRC. It ruled
that the NLRC committed grave abuse of its discretion when it dismissed
the complaint, citing the ruling of this Court in Pepsi-Cola Bottling Co., et
al. vs. NLRC.[21] The CA declared that the PCDP was still in existence
when the complaint was filed, and that the supervening dissolution of the
corporation did not warrant the dismissal of the complaint against
it.[22] After all, the appellate court ratiocinated, every corporation is given
three (3) years to wind up its affairs. Hence, in case any litigation is filed
by or against the corporation within the three (3)-year period which could
not be terminated within the expiration of the same, such period must
necessarily be prolonged until the final determination of the case, for if the
rule were otherwise, corporations in liquidation would lose what should
justly belong to them or would be exempt from the payment of just
obligations through mere technicality, something that courts should not
countenance.[23] However, instead of remanding the case to the NLRC for
the resolution of the respondents motion for partial reconsideration and the
petitioners motion for reconsideration of the decision of the NLRC, the CA
set aside the decision of the NLRC and reinstated the decision of the ELA,
thus:
WHEREFORE, premises considered, the instant petition is GIVEN DUE
COURSE and GRANTED. The questioned resolutions of the NLRC in the
above-entitled case are REVERSED and SET ASIDE. The decision of the
Executive Labor Arbiter on May 4, 1987, ordering the respondent Pepsi Cola
Distributors Philippines and its successor-in-interest Pepsi Cola Products
Philippines, Inc., to pay the complaining workers their claims for overtime
services, is hereby REINSTATED.[24]
The petitioners motion for reconsideration of the CA decision was
denied by the appellate court on September 15, 2000.[25]
Petitioner PCPPI, as the successor-in-interest of PCDP, filed the
instant petition for review on certiorari with this Court, assailing the decision
and resolution of the CA on the following issues:
I WHETHER OR NOT THE DECISION OF THE COURT OF
APPEALS IS NULL AND VOID INSOFAR AS IT
REINSTATED THE DECISION OF THE LABOR ARBITER IN
FULL WITHOUT EXPRESSING THEREIN THE FACTS AND
LAW ON WHICH IT IS BASED.
II. WHETHER OR NOT NON-MUSLIMS LIVING AND WORKING
IN PRIVATE COMPANIES LOCATED IN MUSLIM AREAS
ARE ENTITLED TO THE MUSLIM HOLIDAY PROVISIONS
OF P.D. 1083.
III. WHAT IS THE SPIRIT BEHIND THE DECLARATION AND
CELEBRATION OF MUSLIM HOLIDAYS? IS IT TO ENABLE
MUSLIMS TO OBSERVE, ENJOY, AND CELEBRATE THEIR
RELIGION, OR IS IT TO ALLOW MUSLIM AND NON-
MUSLIM ALIKE TO ENJOY ADDITIONAL HOLIDAYS OVER
AND ABOVE THE REGULAR AND NATIONWIDE SPECIAL
DAYS ALREADY OBSERVED IN THE COUNTRY.
IV. WHETHER OR NOT ALLOWING EVEN NON-MUSLIMS
WORKING IN PRIVATE COMPANIES LOCATED IN MUSLIM
AREAS, TO BE ENTITLED TO MUSLIM HOLIDAY PAY, IF
THEY RENDER WORK DURING MUSLIM HOLIDAYS, WILL
PROVE TO BE TOO ONEROUS AND UNFAIR TO THE
EMPLOYER IN VIOLATION OF THE LATTERS RIGHT TO
EQUAL PROTECTION OF THE LAW.
V. WHETHER OR NOT THE MUSLIM HOLIDAY PROVISIONS
OF P.D. 1083 COVER THE CITY OF DIPOLOG.
VI. WHETHER OR NOT MANAGERIAL EMPLOYEES ARE
ENTITLED TO OVERTIME PAY.
 VII. WHETHER THERE ARE FIVE (5) OR EIGHT (8) MUSLIM
HOLIDAYS TO BE OBSERVED IN THE AREAS AT ISSUE.[26]
The petitioner avers that the decision of the CA, setting aside the
decision of the NLRC and reinstating the decision of the ELA, is null and
void because it failed to delve into the factual and legal issues on the
merits, such as the number of Muslim legal holidays, and whether non-
Muslims, who were assigned in the Muslim areas, were entitled to overtime
pay. Despite such failure, it set aside the decision of the NLRC and
reinstated that of the ELA. The petitioner avers that this violated Section
14, Article VIII of the Constitution, which reads:
Sec. 14. No decision shall be rendered by any court without expressing therein
clearly and distinctly the facts and the law on which it is based.
No petition for review or motion for reconsideration of a decision of the court
shall be refused due course or denied without stating the legal basis therefor.
For its part, the respondent avers that the decision of the CA is in
accord with law and the facts. The OSG opted not to file any comment on
the petition.
We agree with the ruling of the CA that the NLRC committed a grave
abuse of its discretion amounting to lack of jurisdiction in dismissing the
case. The NLRC clearly erred in perceiving that, upon the petitioners
acquisition of the PCDP, the latter lost its corporate personality. The
appellate court delved into and resolved the issue with sufficient fullness,
and supported the same with statutory provisions and applicable case law.
Under Section 122 of the Corporation Code, a corporation whose
corporate existence is terminated in any manner continues to be a body
corporate for three (3) years after its dissolution for purposes of
prosecuting and defending suits by and against it and to enable it to settle
and close its affairs, culminating in the disposition and distribution of its
remaining assets. It may, during the three-year term, appoint a trustee or
a receiver who may act beyond that period. The provision which reads in
full:
SEC. 122. Corporate Liquidation. Every corporation whose charter expires by
its own limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall nevertheless
be continued as a body corporate for three (3) years after the time when it would
have been so dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to dispose of and convey
its property and to distribute its assets, but not for the purpose of continuing the
business for which it was established.
At any time during the said three (3) years, the corporation is authorized and
empowered to convey all of its properties to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and after
any such conveyance by the corporation of its properties in trust for the benefit
of its stockholders, members, creditors and others in interest, all interest which
the corporation had in the properties terminates the legal interest vests in the
trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member, who is unknown or cannot be found, shall be
escheated to the city or municipality where such assets are located.
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 termination of the life of a corporate entity does not by itself cause
the extinction or diminution of the rights and liabilities of such entity.[27] If
the three-year extended life has expired without a trustee or receiver
having been expressly designated by the corporation, within that period,
the board of directors (or trustees) itself, may be permitted to so continue
as "trustees" by legal implication to complete the corporate liquidation.[28]
However, we agree with the petitioners contention that the decision of
the CA setting aside the decision of the NLRC and reinstating the decision
of the ELA is null and void for lack of jurisdiction.
It bears stressing that the Court of Appeals had no appellate
jurisdiction over the issue of whether the decision of the NLRC is correct
or not. This is so because the only issue in the CA was whether or not the
NLRC committed a grave abuse of its discretion in dismissing the
complaint simply and merely because PCDP was acquired by herein
petitioner while the complaint of the respondent was pending.
The issue of the correctness of the NLRC decision was not raised in
the Court of Appeals by the petitioner therein (now the respondent). And
the reason for this is obvious: the petitioner and the respondent therein
which are the complainant-appellee and respondent-appellee in the NLRC
had filed their respective motions for reconsideration of the decision of the
NLRC, and the latter had yet to resolve such motions when it dismissed
the case; thus, rendering moot and academic any resolutions on said
motions. By dismissing the case, the NLRC thereby set aside, not only the
decision of the ELA, but also its own. The only relief the petitioner in the
Court of Appeals was entitled to was the nullification of the assailed
Resolution of the NLRC and the reinstatement of the case before it. The
petitioner was not entitled to a reversal of the decision of the NLRC on the
merits of the appeal and the reinstatement of the decision of the ELA
appealed from.
In sum, then, the decision of the CA setting aside the decision of the
NLRC and reinstating the decision of the ELA is null and void. As we ruled
in People v. Court of Appeals:[29]
If a court is authorized by statute to entertain jurisdiction in a particular case
only, and undertakes to exercise the jurisdiction conferred in a case to which the
statute has no application, the judgment rendered is void. The lack of statutory
authority to make a particular judgment is akin to lack of subject-matter
jurisdiction. In this case, the CA is authorized to entertain and resolve only errors
of jurisdiction and not errors of judgment.
A void judgment has no legal and binding effect, force or efficacy for any
purpose. In contemplation of law, it is non-existent.
It behooved the CA, after nullifying the February 11, 1992 Resolution
of the NLRC, to order the latter to reinstate the case, inclusive of its
decision, and resolve, with reasonable dispatch, the pending motions for
reconsideration of the parties. After the NLRC shall have resolved the
pending motions, the aggrieved party may then file a petition on certiorari
under Rule 65 of the Rules of Court from the decision of the NLRC and its
resolution of the said motions.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY
GRANTED. The assailed Decision of the Court of Appeals, nullifying the
February 11, 1992 Decision of the NLRC, is AFFIRMED WITH
MODIFICATION. The NLRC is DIRECTED to resolve, with reasonable
dispatch, the motions for reconsideration of the parties of its decision. No
costs.
SO ORDERED.
McLaran vs. Crescent Planning Mill Co.
117 Mo. App. 40, 93 S.W. 819 (1906)
Statement - the appellant, a business corporation organized under the
laws of the state of Missouri, with the capital stock of $50,000, divided
into 500 shares of the par value of $100 each, maintained its offices
and conducted a manufacturing business in the city of St. louis.
Respondent’s testator, Robert j, Humber, was in his lifetime proprietor
of fifty-seven fully paid shares of said corporate stock of the par value
aforesaid, and was a director and for many years’ president of the
board of directors of said corporation. The corporation being solvent
and possessing ample surplus funds, at regular meeting of its board of
directors, held on February 7, 1903, unanimously adopted the
following resolution: “Moved and seconded the company declare a
dividend of six per cent. divided into four payments of one and one-
half per cent each, payable February 15, April 1, July 1 and October 1 ,
1903 .” No further resolution was passed nor were there additional
stets taken in my manner to set apart a fund out of which to pay the
dividend, although the company was solvent and then had on hand,
according to the showing made that day, something near $10,000
undivided profits and $29,000 surplus, Notwithstanding the fact that
no separate resolution was adopted setting aside a fund out of which
said dividend should be paid, the officers of the company proceeded
to and did actually pay the plaintiff and other stockholders the first
installment of the said dividend, the one and one-half per cent
installment falling due February 15,1903 the one in one-half per cent
installment falling due April 1st, was not paid and at a meeting of the
board of directors held April 11th,it was shown that an error had been
discovered in the previous showing of the financial condition of the
company and that its assets were actually $6,000 less than had been
understood, which reduced its surplus from $29,000 to $23,000, for
this in other business reasons, which are unnecessary to enumerate
here, but which appeared sufficient to the board of directors, The said
board on that day adopted the following resolution: “Moved by Mr.
Herman and seconded by Mr. Thomas sparks that one the
recommendation of the president’s report rescinding and recalling of
dividends payable April 1st, July 1st and October 1st be adopted; that
payment of said dividends be indefinitely deferred and the said
dividends rescinded and recalled.” Whereby it sought to revoke and
rescind the former declaration of dividends, The company was
perfectly solvent and had ample funds on hand at the time to pay the
dividend and retain a comfortable surplus of $20,000.
Plaintiff requested the payment of his installment of the dividend
falling due April 1st, which amounted to $235,50 and it was refused on
the ground that is declaration and allowance had been superseded and
set aside by resolution of April 11th, supra; whereupon he instituted
this suit, an action of law, against appellant seeking to recover the
amount of the installment due April 1st, $235.50 and six percent
interest thereon from April 1, 1903
There is no controversy on the facts. The defenses interposed that
there was no declaration of a dividend for the reason the board of
directors failed at the time, or at any time prior to institution of the
suit, to set apart funds for the payment of the same. And second, that
by resolution on April 11th, it set aside its former action and thereby
rescinded and recalled and dividend.
On the trial before Judge Sale without a jury, the court refused a
peremptory instruction to find for the defendant and also the following
instruction requested by defendant:
“ The court declares the law to be that if it believes and finds from the
evidence that no funds were set apart for the payment of said dividend
at the same time of or after the same had been declared by the board
of directors and that nothing was done in respect to the installment to
be paid April 1,1903, except to adopted a resolution rescinding and
recalling said dividend, then plaintiff cannot recover, “ and found the
issues for the plaintiff. The defendant corporation appeals.
Since the judgment in the court below in his favor and since the
lodgment of the appeal in this court, plaintiff has departed this life,
leaving a will, and his counsel, Robert L. McLaran has been appointed
his administrator with the will annexed. The death of the plaintiff
having been suggested in this court and an order of revival heretofore
made, the case now stands revived in the same of his administrator.
NORTONI, J (After stating the facts---)1. As will appear by reference to
the statement of facts, we have to deal with the declaration of a cash
dividend by a solvent corporation possessed of ample undivided profits
and surplus, under circumstances that made its declaration entirely
competent and proper. And here it may not be out of place to say that
the court is grateful to learned counsel representing either party for
most carefully prepared and thoughtful briefs. Indeed, there is but one
question presented for decision, and it seems not difficult of solution.
It is of more or less importance, however, in the world of commerce in
this age when such an exceedingly large per cent of capital is invested
in corporate stock rather than individual of partnership undertakings,
and we have therefore given thoughtful in the briefs which we have
found to be highly instructive.
The precise questions arising on the record calling for the opinion of
the court are:
1. Whether the mere declaration of a dividend by a solvent
corporation under such circumstances as indicated, creates a
debt in favor of the stockholder and against such corporation
for the amount of such dividend in the absence of further
express action on the part of the board of directors, setting
aside a fund out of which to pay such dividend?
2. Is it competent for such corporation, after having declared the
dividend, to pay one installment thereon and to rescind and
recall the installments thereof yet unpaid?
Counsel for appellant presents the following definitions of the word
“dividend” from the authorities cited:
“A dividend is defined as follows: A profit set a side, declared
by the board of directors, of a corporation and ordered by them
to be distributed among the holders of its stock.’ (9 Amer. And
Eng. Ency. Law (2d ed.), 680.) ‘A dividend is a corporate profit,
set aside, and ordered by the directors to be paid to the
stockholders on a fixed date. [2 cook on corp. (4th ed.,), sec.
 534.] ‘A dividend is a fund which corporation set apart from its
profits to be dividend is that portion of the profits and surplus
funds of the corporation which has been actually set apart by a
valid resolution of the board of directors, or by the
shareholders according to their respective interests, in such a
sense as to become segregated from the property of the
shareholders, distributively.’ [2 Thompson on Corporations,
sec. 2126.]”
Upon the words “set aside,” “set apart,” and “actually set apart,”
employed in the definitions above stated, the learned counsel
predicates the argument that a resolution declaring a dividend is not
sufficient to create a dividend, or, in the other words, to create a debt
from the corporation to the stockholders therefore, in the absence of
further action on the part of the corporation setting a part a fund out
of which the dividend is to be paid. It is insisted that such resolution
declaring a dividend, as in the case, is but an expression of intension in
that behalf, which, to constitute it effectual for that purpose, must be
followed or accompanied with competent action as well, setting aside
a fund out of which the dividend id to be paid when due, and until such
fund is set aside for that purpose, no dividend has been declared and
no right thereto is vested in the stockholders, and therefore it is
competent for the sane authority to rescind or recall the former action
in that behalf. In short, it is argued that a declaration of a dividend and
fixing for a time for its payment does not create a dividend in the
absence of the setting apart a fund out of which it is to be paid. With
this thought in mind, we have carefully examined the many authorities
and find the fundamental idea running through every case (save one)
to be that if the declaration of the dividend is fairly and properly made,
out of profits existing at the time it is declared, the relation debtor and
creditor is thereby established between the corporation and the
stockholders and a debt is thereby created against the corporation and
in favor of the stockholder for the amount of the dividend due on the
stock held by him. There can be no doubt that this idea pervades the
entire adjudicated law on the subject.
And upon the principle that the declaration of the dividends operating
as a severance thereof from the stock in the general mass of the
corporate property, and raises from such declaration an implied
promise on the part of the corporation to pay the stockholder the
amount of the dividend, it has been adjudicated that when moneys for
the payment thereof, but are permitted to remain still in the corpus of
such of such corporate estate after the declaration, the stockholder
stands as the general creditor of the concern in bankruptcy who can
come in only notably with such creditors, looking to the general estate
for liquidation of his dividend debt. [Lowne v. Amer, Fire Ins. Co., 6
Paige’s Ch. 482: Hunt v. O’Shea, 69 N.H. 600] While on the other hand,
the converse of this principle has been stated and applied in cases
where the dividend has been declared and a fund set apart out of
which to pay the same. Under such circumstances, it is held that such
action on the part of the corporation in setting aside the fund for the
specific purpose constitutes such moneys a trust fund in the hands of
the corporation for the use of the stockholders and in the event of the
bankruptcy of the corporation, the stockholders are not required to go
in pro rata with the general creditors for such unpaid dividends, but
may proceed as against a trustee on account of such trust fund and
recover the whole of their pro rata thereof….
Wherefore, it appears that the principle obtains that the mere
declaration of the dividend, without more, by competent
authority under proper circumstances, creates a debt against
the corporation in favor of the stockholders the same as any
other general creditor of the concern: whereas, the setting
apart of a fund after or concurrent with the declaration, out of
which the debt thus created is to be paid, passes one step
further toward securing the payment of the identical fund to
the shareholder in as much as the law treats the setting apart
such fund as payment to the corporation as trustee for the use
of the stockholder, on which fund the stockholder has a lien,
and to which fund he has rights superior to the general creditor.
 From these considerations we are persuaded that the mere
declaration of the dividend itself, without the setting aside the
fund, creates a debt, and that when the learned text-writers
supra employed the terms “set aside,” “set apart” and “actually
set apart”. As above pointed out, they proceed upon the theory
and principle supra, that the act of declaring a dividend from
the stock and corpus of the corporate property and estate, is
ipso facto, in and itself, the setting part, setting aside and
segregating such dividends in the sense that it creates an
immediate right of the stockholder to demand and recover the
same when due, in as much as seems quiet clear by noting the
manner in which the authorities have employed the
expressions and applied the pertinent principles in the
adjudicated cases. The doctrine is that by the mere declaration,
the dividend becomes immediately fixed and absolute in the
stockholder is changed by the act of declaration from that of
partner and part owner of the corporate property to a status
absolutely, adverse to every other stockholder and to the
corporation itself, in so far as his pro rata proportion of the
dividend is concerned.
and recalled their action declaring the same. The court held, laying
stress upon the facts that none of the stockholders knew of the original
vote by which dividend was declared, and that no fund had been
distinctly set apart for its payment, “the passage of the vote did note
constitute an actual contract of the corporation with the stockholders,
but was merely a mode of dividing its profits, and it is therefore
competent under the circumstances, to rescind the dividend.” The
decision of that case can only be sustained upon stockholders, for if a
debt was thereby created, it is preposterous to say that such debt can
be cancelled by the action of the debtor without the consent of the
creditor.
The court is therefore of the opinion that the learned trial judge
properly refused the instruction requested. The judgement will
therefore be affirmed. It so ordered.

2. It follows, of course, that a cash dividends, properly and fairly

declared, cannot be revoked by the subsequent action of the
corporation, for it, by the declaration of the dividend, the corporation
becomes the debtor of the stockholder, it goes without saying that the
debtor cannot revoke, recall or rescind the debt or otherwise absolve
itself from its payment by any action on its part against or without the
consent of the creditor, and therefore, the resolution of April 11th,
attempting to do so, was no force.

Ford v. East Hampton Rubber Thread Co., 158 Mass 84, is cited
and relied upon by appellant as authority for the action of the board of
directors in rescinding the dividend. In that case it appears that the
board of directors made and declared a dividend, but before notifying
any of the stockholders except the directors themselves who were
present, and without having set apart a fund for its payment, rescinded