Title
Guan vs. Samahang Magsasaka, Inc.
Case
G.R. No. 42091
Decision Date
Nov 2, 1935
Plaintiff’s chattel mortgage on corporate shares, defectively registered, loses priority over earlier creditor attachments, affirmed by court.

Case Summary (G.R. No. 133113)

Petitioner’s Claim and Relief Sought

Plaintiff asserts he holds by assignment a chattel mortgage covering 5,894 shares (nine certificates, P5 par each) originally owned by Gonzalo H. Co Toco and mortgaged to Chua Chiu to secure P20,000. Following the mortgagor’s default, the mortgage was foreclosed, the shares sold at sheriff’s auction, and the plaintiff became highest bidder. Plaintiff tendered the surrendered certificates for cancellation and demanded issuance of new certificates in his name; defendants refused. Plaintiff seeks a writ of mandamus compelling the corporation and its officers to cancel the old certificates and issue new ones to him.

Defendants’ Special Defenses and Factual Background

Defendants’ sole defense is that nine writs of attachment had been issued, served, and noted on the corporation’s books against the shares of Gonzalo H. Co Toco prior to the plaintiff’s demand (and prior to the corporation’s receipt of notice from the mortgagee). Those attachments, issued by various courts in Nueva Ecija and Manila, had been entered on the corporation’s records and covered varying amounts and in some instances purported to attach “all actions or titles” in the name of Co Toco. The record shows the certificates were delivered with the mortgage to Chua Chiu; the mortgage was registered in the register of deeds in Manila and recorded in the corporation’s office, but the timing of these entries relative to the attachments is critical.

Controlling Legal Issue

Whether the chattel mortgage held by the plaintiff takes priority over the attaching creditors — specifically, whether registration of the mortgage in the register of deeds (and the recording in the corporation’s office) gave constructive notice to the attaching creditors so as to defeat their attachments.

Applicable Legal Provisions and Precedents

  • Chattel Mortgage Law (Act No. 1508), as amended by Act No. 2496, Section 4: a chattel mortgage is not valid against third persons unless either (1) possession of the property is delivered to and retained by the mortgagee, or (2) the mortgage is recorded in the register of deeds of the province in which the mortgagor resides, or, if the mortgagor resides outside the Philippines, in the province where the property is situated; if the mortgagor’s domicile and the property’s situs are in different provinces, registration must be in both provinces. The City of Manila is deemed a province for purposes of the Act.
  • Corporation Law (Act No. 1459), Section 35: shares “may be transferred by delivery of the certificate endorsed by the owner…” (language noted in the decision).
  • Precedents discussed: Monserrat v. Ceron (58 Phil. 469) (registration in corporation office held legally ineffective for purposes of third-party notice); Fua Cun v. Summers and China Banking Corp. (44 Phil. 705) (recognition of intangible character of share ownership; chattel mortgage of shares operates at least as a conditional equitable assignment).

The decision was rendered under the constitutional and statutory regime applicable in 1935 (the 1935 Constitution era).

Court’s Analysis on Nature of Shares and Registration Difficulties

The Court recognized practical and conceptual difficulties in treating shares as chattels subject to chattel mortgages. Shares represent intangible participatory rights in corporate assets; the physical certificate is evidence of that right but not necessarily the situs of the property for all purposes. The Court observed that chattel mortgage statutes create two alternative means of protecting the mortgagee against third parties (possession or registry), but applying the registry route to shares raises complex questions about the proper place(s) for registration and the reasonable expectation of notice by third parties.

Court’s Reasoning on Situs and Proper Registration

Interpreting Section 4 in light of practical commerce and the nature of shares, the Court concluded it is reasonable to deem the “property” in the shares to be situated in the province where the corporation has its principal office or place of business for purposes of registry and constructive notice. Consequently:

  • If the mortgagor’s domicile coincides with the corporation’s principal place of business, a single registration at that province’s register of deeds suffices.
  • If the mortgagor’s domicile and the corporation’s principal office are in different provinces, the mortgage should be registered both at the mortgagor’s domicile and in the province of the corporation’s principal office to furnish constructive notice to third parties in either jurisdiction.
    The Court emphasized that registration solely in the corporation’s office is legally ineffective to create constructive notice under the Chattel Mortgage Law (citing Monserrat v. Ceron).

Application of Law to the Facts and Priority Result

Applying the above rule, the Court found the mortgage had been defectively

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