Title
China Banking Corp. vs. Court of Appeals
Case
G.R. No. 117604
Decision Date
Mar 26, 1997
A stockholder pledged shares to CBC as loan security. VGCCI sold the shares despite CBC's prior claim. SC ruled CBC had prior rights, nullifying VGCCI's sale.

Case Summary (G.R. No. 212136)

Applicable Law and Constitutional Basis

Constitutional basis: the 1987 Philippine Constitution applies (decision post‑1990). Statutory and doctrinal authorities relied upon in the decision include P.D. No. 902‑A (granting regulatory and adjudicative powers to the SEC, notably Sections 3 and 5), provisions of the Civil Code (notably Article 2087), relevant portions of the Corporation Code (including Section 63), and established jurisprudence interpreting SEC jurisdiction and corporate by‑laws (cases cited in the record such as Viray, Abejo v. De la Cruz, Fleischer v. Botica Nolasco and others).

Procedural History

CBC pursued extrajudicial foreclosure of Calapatia’s pledged share and acquired a certificate of sale after a 17 September 1985 auction. VGCCI later published and held its own auction on 10 December 1986, selling the same share and terminating Calapatia’s membership. CBC sought recognition of its ownership and registration of the share in its name through the RTC of Makati, which dismissed the action for lack of jurisdiction (characterizing it as intra‑corporate). CBC then filed with the SEC; the hearing officer dismissed CBC’s complaint, but the SEC en banc reversed and ordered nullification of VGCCI’s 1986 sale and issuance of a new certificate to CBC. The CA set aside the SEC orders for lack of jurisdiction; the Supreme Court reviewed both the jurisdictional question and the merits.

Issues Presented

  1. Whether the Court of Appeals gravely erred in nullifying and setting aside the SEC en banc’s orders for lack of jurisdiction and in dismissing CBC’s complaint.
  2. Whether the SEC en banc decision correctly concluded that CBC is the lawful owner of Membership Certificate No. 1219 and therefore entitled to registration of the share in its name.

Jurisdictional Analysis and Test Applied

P.D. No. 902‑A vests the SEC with original and exclusive jurisdiction over controversies arising out of intra‑corporate relations (Section 5[b]) and grants broad supervisory authority over corporations (Section 3). The Court applied the established analytic approach: jurisdiction is determined not solely by the formal status of the parties but by the nature of the controversy — in particular, whether the dispute concerns intra‑corporate relations requiring interpretation of corporate by‑laws and corporate law principles. The Court invoked precedents that emphasize administrative expertise and primary jurisdiction where the resolution requires specialized knowledge and uniformity of rulings (e.g., Abejo v. De la Cruz and Viray). The Supreme Court held that the SEC properly took cognizance of the dispute because the core issue required interpretation and application of VGCCI’s by‑laws and related corporate law provisions.

Court’s Findings on Jurisdiction

The Supreme Court found that CBC, by acquiring the share at public auction and receiving a certificate of sale, became a bona fide stockholder/member of VGCCI. The dispute therefore exemplified an intra‑corporate controversy under Section 5(b) of P.D. No. 902‑A because it involved the relationship between a corporation and its stockholder/member and required interpretation of VGCCI’s by‑laws. The Court rejected the CA’s narrow construction of SEC jurisdiction and its conclusion that the controversy was outside the SEC’s competence. The Court also rejected VGCCI’s estoppel argument that CBC had previously filed in an improper forum or had been estopped from invoking SEC jurisdiction; the Court noted that filing in a court lacking jurisdiction does not prevent later recourse to the competent tribunal, and that VGCCI itself had taken the position before the RTC that the controversy was intra‑corporate.

Merits — Validity and Scope of the Pledge Agreement

The Court examined the pledge agreement and concluded it validly secured present and future obligations up to P20,000. The agreement expressly provided that the pledged share would secure "all loans ... which have heretofore been contracted, or which may hereafter be contracted" up to the specified amount. The promissory note dated 3 August 1983 was a renewal within the scope of this pledge; consequently, VGCCI’s contention that the pledge lacked consideration because the loan post‑dated the pledge was unavailing.

Merits — Effect of VGCCI’s Subsequent Sale and Notice to CBC

The Court found that VGCCI sold the subject share in its 10 December 1986 auction despite having earlier acknowledged the pledge in its books and without notifying CBC. VGCCI had sent delinquency notices to Calapatia after receiving notice from CBC of the foreclosure proceedings, and it failed to inform CBC of the club’s later auction. The Court concluded that these acts disregarded CBC’s rights as pledgee and suggested bad faith on VGCCI’s part. Under the law and persuasive authorities, the pledgee is entitled to protection and to resort to the pledged property for satisfaction of the secured debt; cancellation of a pledged certificate and issuance of a new certificate to a third party without regard to the pledge defeats the pledgee’s rights.

By‑laws, Notice, and the Third‑Party Rule

The Court reiterated the general rule that corporate by‑laws are internal rules and do not bind third parties unless those third parties had actual or constructive knowledge of the by‑laws at the time the relevant transaction was entered into. Citing Fleischer and the SEC en banc analysis, the Court held that to bind a pledgee, knowledge of the by‑laws must exist when the pledge agreement was executed; knowledge at a later time, including at foreclosure, is insufficient. Since VGCCI had recognized the pledge in its corporate books when CBC asserted the pledge, and CBC had no notice of the alleged delinquency at the time of the pledge, VGCCI could not invoke its by‑laws to defeat CB

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