G.R. No. 37078 - Monserrat vs. Erma, Inc.

Enrique Monserrat, the plaintiff and appellee, served as the president and manager of the Manila Yellow Taxicab Co., Inc. and was the owner of 1,200 common shares of the corporation.
On March 25, 1930, in recognition of the financial aid and interest shown by Carlos G. Ceron in the corporation’s organization, Monserrat executed a deed (Exhibit A) transferring to Ceron the usufruct of half of his common shares.
The transfer was limited in nature: it granted Ceron the right to enjoy the profits during his lifetime but expressly reserved for Monserrat and his heirs the right to vote and recover the ownership of the shares upon termination of the usufruct.
Stock certificate No. 7, evidencing the 600 common shares subject to the transfer, was recorded in the name of Carlos G. Ceron with an annotation on page 22 of the corporation’s Stock and Transfer Book.

On February 20, 1931, Eduardo R. Matute (president of Erma, Inc.) and Carlos G. Ceron visited the office of the Manila Yellow Taxicab Co., Inc. to examine its Stock and Transfer Book.

During that visit, Ceron, acting as secretary, presented the book to Matute, who observed that the record for the shares in question showed Ceron’s name without any reference to the restrictive deed (Exhibit A).

On February 26, 1931, Carlos G. Ceron mortgaged the shares, including the 600 common shares evidenced by certificate No. 7, to Eduardo R. Matute for the sum of P30,000.

At the time of mortgaging, Ceron did not disclose the existence of the restrictive deed (Exhibit A) that limited the rights pertaining to the shares.
The mortgage transaction was evidenced by the delivery of certificate No. 7, which remained in the possession of Erma, Inc.

The restrictive deed (Exhibit A) was not entered in the corporation’s stock book until May 5, 1931—coinciding with the scheduled public auction of the shares due to Ceron’s default—raising issues regarding its timely notation.

The appellants, Erma, Inc. and the Sheriff of Manila, appealed from a judgment of the Court of First Instance which had favored Monserrat by:

Declaring the preliminary injunction permanent.
Recognizing Monserrat’s ownership of the 600 shares.
Declaring the mortgage on the ownership of the shares null and void, while upholding the mortgage on the usufruct.

The entry and notation in the stock book are required for a transfer of shares to have force as against third persons.
A chattel mortgage, as executed by Ceron, does not amount to an absolute transfer since it is conditional and reverts upon the fulfillment of the debtor’s obligation.

Erma, Inc. acted in good faith as a conditional purchaser of the shares, having no actual knowledge of the restrictive deed (Exhibit A) due to its absence in the stock book at the time of their transaction.

Whether the entry and notation in the corporation’s Stock and Transfer Book are required for a mortgage on common shares to be valid and effective against third persons.
Whether Erma, Inc. had knowledge of the restrictive deed (Exhibit A) under which Carlos G. Ceron had received only the usufruct of the shares, thereby affecting the validity of their title as holders of the shares.