Case Summary (G.R. No. 42091)
Factual Background
The owner of the shares was Gonzalo H. Co Toco, who held 5,894 shares represented by nine certificates with a par value of P5 per share. On June 18, 1931, Co Toco mortgaged those shares to Chua Chiu as security for a debt of P20,000 due June 19, 1932, and delivered the certificates to the mortgagee. The chattel mortgage was recorded in the register of deeds of the City of Manila on June 23, 1931 and was later entered in the corporation’s records on September 30, 1931. On November 28, 1931, Chua Chiu assigned his rights under the mortgage to the petitioner; the assignment was registered in the register of deeds on December 28, 1931 and in the books of the corporation on January 4, 1932. After the debtor defaulted at maturity, the petitioner foreclosed, caused the shares to be levied and sold at public auction, and became the highest bidder at the sheriff’s sale on December 22, 1932 for P14,390. The petitioner then tendered the original certificates and demanded that the corporation cancel them and issue new certificates in his name, which demand the corporate officers refused.
Trial Court Proceedings and Stipulation
The action below sought a writ of mandamus to compel the corporate officers to cancel the old certificates and issue new ones in the petitioner’s name. The defendants pleaded special defenses asserting the existence of nine writs of attachment noted on the books of the corporation against the shares of Gonzalo H. Co Toco. The parties entered a stipulation in which the defendants admitted the allegations of the complaint and the petitioner admitted the defendants’ special defenses, submitting the case for decision on that record. The trial court rendered judgment adverse to the petitioner, prompting this appeal to the Supreme Court.
Defendants’ Special Defenses and Attachments
The defendants pleaded that nine writs of attachment had been issued and served and were noted on the corporation’s records prior to the petitioner’s demand for transfer and prior to the corporation’s receipt of notice from the original mortgagee. Those writs, dated between August 26, 1931 and January 15, 1932, were issued in various civil causes and in several instances purported to attach all of the shares standing in the name of Gonzalo H. Co Toco. It was not disputed that these writs of attachment were valid and that the first eight were noted on the corporation’s books before any notice to the corporation of the mortgage from Chua Chiu.
Principal Legal Question
The crucial question was whether the recording of the chattel mortgage in the office of the register of deeds of Manila on June 23, 1931 gave constructive notice to the attaching creditors and thus entitled the mortgage, and consequently the petitioner as assignee, to priority over the attachments noted on the corporation’s books in Nueva Ecija. The parties did not contest the validity of the mortgage itself or of the attachments; the dispute concerned the mortgage’s effectiveness against third parties under Sec. 4, Act No. 1508, as amended by Act No. 2496.
Statutory Framework and Precedents
Section 4 of Act No. 1508 provides two methods by which a chattel mortgage becomes valid against third persons: by delivery of possession of the mortgaged property to and retention by the mortgagee, or by recording the mortgage in the proper register of deeds — namely, the register of the province in which the mortgagor resided when the mortgage was made, or, if the mortgagor resided outside the Philippine Islands, in the province where the property is situated; and, where the property is situated in a different province from the mortgagor’s residence, by recording in both provinces, with the City of Manila deemed a province for this purpose. The Court observed that the recording of the chattel mortgage in the corporation’s office had no legal effect, citing Monserrat v. Ceron, 58 Phil. 469.
Character of Shares and Practical Difficulties
The Court reviewed existing difficulties in applying chattel mortgage law to shares of stock, noting prior observations in Fua Cun v. Summers and China Banking Corporation, 44 Phil. 705, that equitable interests in shares are intangible and that a chattel mortgage of shares may, at least, operate as a conditional equitable assignment. The Court recognized that the practical effect of treating shares as chattels raises inquiry problems for third persons who deal with certificates and books of the corporation. The Court acknowledged authorities that, for purposes of execution, attachment and garnishment, the situs of the corporate shares for many purposes is the domicile of the corporation rather than that of the certificate holder (citing authorities such as Vidal v. South American Securities Co., Fletcher, and relevant Code of Civil Procedure sections).
Construction of Sec. 4 Applied to Corporate Shares
Interpreting Sec. 4, Act No. 1508, the Court held that, for purposes of constructive notice by registration, the property mortgaged when the thing hypothecated is shares of stock may be deemed situated in the province where the corporation has its principal office or place of business. Accordingly, if the mortgagor’s domicile differs from the province where the corporation has its principal office, the chattel mortgage should be recorded both in the register of the mortgagor’s domicile and in the register of the province of the corporation’s principal office so as to be effective against third parties. The Court explained that such a construction avoids the impracticable necessity of searching the records of every province in which successive domiciles or prior owners might have been situated.
Practical Recommendation and Limitations of Chattel Mortgage of Shares
The Court observed that, given statutory and practical limitations, the safest method to secure loans by shares of stock under existing law is by assignment and delivery of certificates coupled with obtaining a tran
...continue readingCase Syllabus (G.R. No. 42091)
Parties and Procedural Posture
- GONZALO CHUA GUAN, Plaintiff and Appellant, appealed from a judgment of the Court of First Instance of Nueva Ecija in an action for a writ of mandamus.
- SAMAHANG MAGSASAKA, INC., and SIMPLICIO OCAMPO, ADRIANO G. SOTTO, and EMILIO VERGARA, Defendants and Appellees, were sued in their capacities as president, secretary and treasurer respectively of the corporation.
- The parties submitted the case for decision on a stipulation in which the defendants admitted the allegations of the complaint and the plaintiff admitted the special defenses of the defendants.
- The question before the Court was narrowed by the pleadings to conflict of priorities between a chattel mortgage and attachments noted on the corporate books.
Key Factual Allegations
- Gonzalo H. Co Toco was alleged to be the owner of 5,894 shares of the capital stock of Samahang Magsasaka, Inc., represented by nine certificates of P5 par value per share.
- On June 18, 1931, Gonzalo H. Co Toco executed a chattel mortgage of those shares to Chua Chiu to secure a debt of P20,000 due on or before June 19, 1932, and delivered the certificates with the mortgage to Chua Chiu.
- The chattel mortgage was registered in the office of the Register of Deeds of Manila on June 23, 1931 and was later registered in the books of the corporation on September 30, 1931.
- Chua Chiu assigned all his rights under the mortgage to GONZALO CHUA GUAN on November 28, 1931, and the assignment was registered in the Register of Deeds of Manila on December 28, 1931 and in the corporate office on January 4, 1932.
- After default by Gonzalo H. Co Toco, the plaintiff foreclosed, caused a sheriff's sale on December 22, 1932, became highest bidder for P14,390, and received a certificate of sale.
- The plaintiff tendered the certificates of stock to the corporate officers for cancellation and demanded issuance of new certificates in his name, which the corporate officers refused.
- The defendants alleged nine writs of attachment had been received and noted on the corporate books against Gonzalo H. Co Toco, with the first eight attachments served and noted before the corporation received notice of the mortgage from Chua Chiu.
Pleadings and Stipulation
- The defendants admitted all material allegations of the complaint pursuant to the parties' stipulation.
- The plaintiff admitted all allegations of the defendants' special defenses pursuant to the same stipulation.
- The parties thereby submitted the factual and legal controversies to the Court for decision without contested testimonial proof.
Issues Presented
- The principal issue was whether the chattel mortgage of the shares took priority over the attachments noted on the books of the corporation.
- The legal question ultimately presented was whether registration of the chattel mortgage in the Register of Deeds of Manila under date of June 23, 1931, gave constructive notice to the attaching creditors whose writs