4. Chua Guan vs Samahang Magsasaka

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[No.42091.November2,1935]

GONZALO CHUA GUAN, plaintiff and appellant, vs.SAMAHANG MAGSASAKA, INC., and SIMPLICIOOCAMPO,ADRIANOG.SOTTO,andEMILIOVERGARA,as president, secretary and treasurer respectively of thesame,defendantsandappellees.

CORPORATIONS; MORTGAGE OF SHARES OFSTOCK.—The registration of the chattel mortgage in theofficeofthecorporationwasnotnecessaryandhadnolegaleffect.(Monserratvs.Ceron,58Phil.,469.)Thelongmootedquestionastowhetherornotsharesofacorporationcouldbe hypothecated by placing a chattel mortgage on thecertificate representing such shares we now regard assettledbythecaseabovecitedofMonserratvs.Ceron.

ID.; ID.; SITUS OF SHARES.—It is a common but notaccurategeneralizationthatthesitusofsharesofstockisatthedomicileoftheowner.Thetermsitusisnotoneoffixedorinvariablemeaningorusage.Thesitusofsharesofstockforsomepurposesmaybeatthedomicileoftheownerandfor others at the domicile of the corporation; and evenelsewhere.(Cf.Vidalvs.SouthAmericanSecuritiesCo.,276Fed.,855;BlackEagleMin.Co.vs.Conroy,94Okla., 199;221Pac., 425;Norrievs.KansasCitySouthernRy.Co., 7Fed.[2d],158.)

ID. ; ID. ; ID. ;DOMICILE.—It is a general rule that forpurposes of execution, attachment and garnishment, it isnotthedomicileoftheownerofacertificatebutthedomicileofthecorporationwhichisdecisive.(Fletcher,CyclopediaoftheLaw ofPrivateCorporations, vol. 11, paragraph 5106;Cf.sections430and450,CodeofCivilProcedure.)

ID.; ID.; ID.; ACT No. 1508, SECTION 4,CONSTRUED.—By analogy with the foregoing andconsidering the ownership of shares in a corporation aspropertydistinct fromthecertificateswhicharemerely the

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evidenceof suchownership, it isa reasonable constructionofsection4ofActNo.1508toholdthatthepropertyintheshares may be deemed to be situated in the province inwhich the corporation has its principal office or place ofbusiness.Ifthisprovinceisalsotheprovinceoftheowner'sdomicile,asingleregistrationissufficient.Ifnot,thechattelmortgageshouldberegisteredbothat theowner'sdomicileandintheprovincewherethecorporationhasits

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Chua Guan vs. Samahang Magsasaka, Inc.

principal office or place of business. In these sense theproperty mortgaged is not the certificate but theparticipation and share of the owner in the assets of thecorporation.

ID.; ID.; ASSIGNMENT AND DELIVERY OFCERTIFICATE.—The only safe way to accomplish thehypothecationofsharesofstockofaPhilippinecorporationisforthecreditortoinsistontheassignmentanddeliveryofthecertificateandtoobtainthetransferofthelegaltitletohim on the books of the corporation by the cancellation ofthecertificateandtheissuanceofanewonetohim.

ID.; ID.; ACT No. 1459, SECTION 35,CONSTRUED.—Section35oftheCorporationLaw(ActNo.1459) enacts that shares of stock "may be transferred bydelivery of the certificate endorsed by the owner or hisattorney in factorotherperson legallyauthorizedtomakethe transfer." The use of the verb "may" does not excludethe possibility that a transfermay bemade in a differentmanner, thus leaving the creditor in an insecure positioneven though he has the certificate in his possession. Thesharesstillstandinginthenameofthedebtoronthebooksofthecorporationwillbeliabletoseizurebyattachmentorlevyonexecutionattheinstanceofothercreditors.(Cf.UyPiaocovs.McMicking,10Phil.,286,andUsonvs.Diosomito,61 Phil., 535.) This unsatisfactory state of our law is wellknown to the bench and bar. (Cf. Fisher, The PhilippineLawofStockCorporations,pages163168.)

APPEALfromajudgmentoftheCourtofFirstInstanceofNuevaEcija.Platon,J.

Thefactsarestatedintheopinionofthecourt.Buenaventura C. Lopezforappellant.Domingo L. Vergaraforappellees.

BUTTE,J,:

This is an appeal from a judgment of the Court of FirstInstance of Nueva Ecija in an action for a writ ofmandamus.Thecaseisremarkableforthefollowingreason:that the parties entered into a stipulation in which thedefendantsadmittedalloftheallegationsofthecomplaintandtheplaintiffadmittedallofthespecialdefensesinthe473

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answer of the defendants, and on this stipulation theysubmittedthecasefordecision.

The complaint alleges that the defendant SamahangMagsasaka,Inc.,isacorporationdulyorganizedunderthelaws of the Philippine Islands with principal office inCabanatuan, Nueva Ecija, and that the individualdefendants are the president, secretary and treasurerrespectivelyofthesame;thatonJune18,1931,GonzaloH.CoTocowastheownerof5,894sharesofthecapitalstockofthesaidcorporationrepresentedbyninecertificateshavingaparvalueofP5pershare;thatonsaiddateGonzaloH.CoToco,aresidentofManila,mortgagedsaid5,894sharestoChuaChiutoguaranteethepaymentofadebtofP20,000dueonorbeforeJune19,1932.Thesaidcertificatesofstockweredeliveredwith themortgage to themortgagee,ChuaChiu.ThesaidmortgagewasdulyregisteredintheofficeoftheregisterofdeedsofManilaonJune23,1931,andintheofficeofthesaidcorporationonSeptember30,1931.

OnNovember28,1931,ChuaChiuassignedallhisrightand interest in said mortgage to the plaintiff and theassignment was registered in the office of the register ofdeeds intheCityofManilaonDecember28,1931,andintheofficeofthesaidcorporationonJanuary4,1932.

Thedebtor,GonzaloH.CoToco,havingdefaultedinthe

payment of said debt at maturity, the plaintiff foreclosedsaid mortgage and delivered the certificates of stock andcopiesofthemortgageandassignmenttothesheriffoftheCity of Manila in order to sell the said shares at publicauction.Thesheriffauctionedsaid5,894sharesofstock011December 22, 1932. and the plaintiff having been thehighestbidderforthesumofP14,390,thesheriffexecutedinhisfavoracertificateofsaleofsaidshares.

Theplaintiff tendered the certificates of stock standing'inthenameofGonzaloH.CoTocototheproperofficersofthe corporation for cancellation and demanded that theyissuenewcertificatesinthenameoftheplaintiff.Thesaid

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officers (the individualdefendants)refusedandstill refusetoissuesaidnewsharesinthenameoftheplaintiff.

The prayer is that a writ of mandamus be issuedrequiringthedefendantstotransferthesaid5,894sharesofstock to the plaintiff by cancelling the old certificates andissuingnewonesintheirstead.

Thespecialdefensessetupintheanswerareasfollows.that the defendants refuse to cancel the said certificatesstandinginthenameofGonzaloH.CoTocoonthebooksofthe corporation and to issuenew ones in thename of theplaintiffbecausepriortothedatewhentheplaintiffmadehisdemand,towit,February4,1933,nineattachmentshadbeen issued and served and noted on the books of thecorporationagainst the shares ofGonzaloH.CoTocoandtheplaintiffobjectedtohavingtheseattachmentsnotedonthenewcertificateswhichhedemanded.TheseattachmentsnotedonthebooksofthecorporationagainstthesharesofGonzaloH.CoTocoareasfollows:

"(1)Confechaagosto26,1931,serecibióporelSecretariode la entidad demandada la notificación de embargoexpedida por el Juzgado de Primera Instancia de NuevaÉcijaenlacausacivilNo.6043,siendopartesLucíaMatíascontra Gonzalo H. Co Toco y otros, siendo la cantidadreclamadaP23,582.55.

"(2)Confechaagosto27,1931,serecibióporelSecretariode la entidad demandada la notificación de embargoexpedida por el Juzgado de Paz de Cabanatúan, Nueva

Écija.en lacausacivilNo.2322,siendopartesSamahangMagsasaka,Inc.contraGonzaloH.CoToco,abarcandolasacciones o títulos Nos. 280 al 2,279 o 2,000 acciones porvalordeP10,000.

"(3) Con fecha 27 de agosto, 1931, se recibió por elSecretario de la entidad demandada la notificación deembargo expedidapor el JuzgadodePazdeCabanatúan,Nueva Écija, en la causa civil No. 2323, siendo partesSamahang Magsasaka, Inc. contra Gonzalo H. Co Toco,abarcandolasaccio

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nesotítulosNos.280al2,279o2,000accionesporvalordeP10,000.

"(4) Con fecha 28 de agosto, 1931, se recibió por elSecretario de la entidad demandada la notificación deembargoexpedidaporelJuzgadodePrimeraInstanciadeNueva Écija en la causa civil No. 6049, siendo partesHermenegildaGarcíacontraGonzaloH.CoToco,siendolacantidadreclamadaP3,064.72.

"(5) Con fecha 29 de agosto, 1931, se recibió por elSecretario de la entidad demandada la notificación deembargoexpedidaporelJuzgadodePrimeraInstanciadeNuevaÉcijaenlacausacivilNo.6052,siendopartesLicerioSoto contra Gonzalo H. Co Toco, y abarcando todas lasaccionesotítuloanombredelSr.GonzaloH.CoToco.

"(6)Con fecha septiembre 1, 1931, se recibió por el SecretariodelaentidaddemandadalanotificacióndeembargoexpedidaporelJuzgadodePrimeraInstanciadeManilaenlacausacivilNo.40211,siendopartesAsiaticPetroleumCo.(P.I.),Ltd.contraGonzaloH.CoTocoyabarcandotodaslasaccionesotítulosanombredelSr.GonzaloH.CoToco.

"(7) Con fecha septiembre 1, 1931, se recibió por elSecretario de la entidad demandada la notificación deembargoexpedidaporelJuzgadodePrimeraInstanciadeNuevaEcijaenlacausacivilNo.6053,siendopartesRufinaPachecocontraGonzaloH.CoToco,yabarcandotodaslasaccionesotítulosanombredelSr.GonzaloH.CoToco.

" (8) Con fecha septiembre 2, 1931, se recibió por elSecretario de la entidad demandada la notificación deembargoexpedidaporelJuzgadodePrimeraInstanciade

Manila en la causa civilNo. 40294, siendopartesManuelBorja contra Gonzalo H. Co Toco y abarcando todas lasaccionesotítulosanombredelSr.GonzaloH.CoToco.

"(9)Queelenero15,1932,serecibióporelSecretariodelaentidaddemandadalanotificacióndeembargoexpedidaporelJuzgadodePrimeraInstanciadeManilaenlacausacivilNo.40244,siendopartesThePhilippineGuarantyCo.,Inc.contraGonzaloH.CoTocoyotrosyabar

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candotodaslasaccionesotítulosanombredelSr.GonzaloH.CoToco."

Itwill be noted that the first eight of the saidwrits ofattachmentwereservedonthecorporationandnotedonitsrecords before the corporation received notice from themortgageeChuaChiuofthemortgageofsaidsharesdatedJune18,1931.Noquestionisraisedastothevalidityofsaidmortgage or of said writs of attachment and the solequestion presented for decision is whether the saidmortgagetakespriorityoverthesaidwritsofattachment.

It is not alleged that the said attaching creditors hadactual notice of the said mortgage and the questionthereforenarrowsitselfdowntothis:Didtheregistrationofsaidchattelmortgageintheregistryofchattelmortgagesinthe office of the register of deeds ofManila,underdate ofJuly23,1931,giveconstructivenoticetothesaidattachingcreditors?

Inpassing,letitbenotedthattheregistrationofthesaidchattel mortgage in the office of the corporation was notnecessaryandhadnolegaleffect.(Monserratvs.Ceron,58Phil.,469.)ThelongmootedquestionastowhetherornotsharesofacorporationcouldbehypothecatedbyplacingachattelmortgageonthecertificaterepresentingsuchshareswenowregardassettledbythecaseofMonserratvs.Ceron,supra.Butthatcasedidnotdealwithanyquestionrelatingtotheregistrationofsuchamortgageortheeffectofsuchregistration.Nothingappearsintherecordofthatcaseeventending to show that the chattelmortgage there involvedwas ever registered anywhere except in the office of thecorporation,andtherewasnoquestioninvolvedthereastotherightofpriorityamongconflictingclaimsofcreditorsof

theowneroftheshares.TheChattelMortgageLaw,ActNo.1508,asamendedby

ActNo.2496,containsthefollowingprovision:

"SEC.4.Achattelmortgageshallnotbevalidagainstanypersonexcept the mortgagor, his executors or administrators, unless thepossession of the property is delivered to and retained by themortgageeorunlessthemortgageis

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recorded in the office of the register of deeds of the province inwhichthemortgagorresidesatthetimeofmakingthesame,or, ifheresideswithoutthePhilippineIslands, intheprovinceinwhichtheproperty issituated:Provided, however,That if theproperty issituated in a different province from that inwhich themortgagorresides,themortgageshallberecordedintheofficeoftheregisterofdeeds.ofboththeprovinceinwhichthemortgagorresidesandthatinwhich theproperty is situated, and for thepurposes of thisActtheCityofManilashallbedeemedtobeaprovince."

ThepracticalapplicationoftheChattelMortgageLawtosharesof stock of a corporation presents considerable difficulty and wehave obtained little aid from the decisions of other jurisdictionsbecause that formofmortgage is ill suited to thehypothecationofsharesofstockandhasbeenrarelyusedelsewhere.In fact, ithasbeendoubtedwhethersharesofstock inacorporationarechattelsinthesenseinwhichthatwordisusedinchattelmortgagestatutes.Thisdoubt is reflected inourowndecision in thecaseofFuaCunvs. Summers and China Banking Corporation (44 Phil., 705), inwhichwesaid:

"* * * an equity in shares of stock is of such an intangiblecharacterthatitissomewhatdifficulttoseehowitcanbetreatedasachattelandmortgagedinsuchamannerthattherecordingofthemortgagewillfurnishconstructivenoticetothirdparties.***"Andweheldthatthechattelmortgagethereinvolved:"atleastoperatedasaconditionalequitableassignment."Inthatcasewequotedthefollowing from Spalding vs. Paine's Adm'r. (81 Ky., 416), withregardtoachattelmortgageofsharesofstock:

"'Thesecertificatesofstockareinthepocketsoftheowner,andgowithhimwherehemayhappentolocate,aschosesinaction,orevidenceofhisright,withoutanymeansonthepartofthosewithwhom he proposes to deal on the faith of such a security of

ascertainingwhetherornotthisstockis inpledgeormortgagedtoothers.Hefindsthenameoftheowneronthebooksofthecompanyasasub

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scriber of paidup stock, amounting to 180 shares, with thecertificates in his possession, pays for these certificates their fullvalue, and has the transfer to him made on the books of thecompany,therebyobtainingaperfecttitle.Whatotherinquiryishetomake,soastomakehisinvestmentcertainandsecure?Whereishetolook,inordertoascertainwhetherornotthisstockhasbeenmortgaged? The chief office of the company may be at one placetoday and at another tomorrow.The ownermayhaveno fixed orpermanent abode, and with his notes in one pocket and hiscertificates of stock in the other—the one evidencing the extent ofhis interest in the stock of the corporation, the other his right tomoney owing him by his debtor, we are asked to say that themortgageiseffectualastotheoneandinoperativeastotheother.'"

ButthecaseofFuaCunvs.SummersandChinaBankingCorporation, supra, did not decide the question herepresented and gave no light as to the registration of achattelmortgage of shares of stock of a corporationunderthe provisions of section 4 of the Chattel Mortgage Law,supra.

Section4ofActNo.1508providestwowaysforexecutinga valid chattel mortgage which shall be effective againstthird persons. First, the possession of the propertymortgaged must be delivered to and retained by themortgagee;and,second,withoutsuchdeliverythemortgagemustberecordedintheproperofficeorofficesoftheregisterorregistersofdeeds.Ifachattelmortgageofsharesofstockofacorporationmayvalidlybemadewithoutthedeliveryofpossession of the property to themortgagee and themereregistrationofthemortgageissufficienttogiveconstructivenoticetothirdparties,weareconfrontedwiththequestionas to the proper place of registration of such amortgage.Section4providesthatinsuchacasethemortgageshallberegisteredintheprovinceinwhichthemortgagorresidesatthetimeofmakingthesameor, ifhe isanonresident, intheprovince inwhich theproperty is situated;and italso

provides that if the property is situated in a differentprovincefromthatinwhichthemortgagor

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residesthemortgageshallberecordedbothintheprovinceofthemortgagorsresidenceandintheprovincewherethepropertyissituated.

Ifwithrespecttoachattelmortgageofsharesofstockofa corporation, registration in the province of the owner'sdomicile should be sufficient, those who lend on suchsecuritywouldbeconfrontedwiththepracticaldifficultyofbeing compelled not only to search the records of everyprovinceinwhichthemortgagormighthavebeendomiciledbutalsoeveryprovinceinwhichachattelmortgagebyanyformerownerofsuchsharesmightberegistered.Wecannotthinkthatitwastheintentionofthelegislaturetoputthisalmost prohibitive impediment upon the hypothecation ofsharesofstockinviewofthegreatvolumeofbusinessthatis done on the faith of the pledge of shares of stock ascollateral.

Itisacommonbutnotaccurategeneralizationthatthesitusofsharesofstockisatthedomicileoftheowner.Theterm situs is not one of fixed or invariable meaning orusage.Nor shouldwe lose sight of the difference betweenthe situs of the shares and the situs of the certificates ofshares.Thesitusofsharesofstockforsomepurpose?maybeatthedomicileoftheownerandforothersatthedomicileofthe corporation; and even elsewhere. (Cf. Vidal vs. SouthAmerican SecuritiesCo., 276Fed., 855; BlackEagleMin.Co. vs. Conroy, 94 Okla., 199; 221 Pac., 425; Norrie vs.Kansas City Southern Ry. Co., 7 Fed. [2d]. 158.) It is ageneralrulethatforpurposesofexecution,attachmentandgarnishment, it is not the domicile of the owner of acertificate but the domicile of the corporation which isdecisive. (Fletcher, Cyclopedia of the Law of PrivateCorporations,vol.11,paragraph5106.Cf.sections430and450,CodeofCivilProcedure.)

By analogy with the foregoing and considering theownership of shares in a corporation as property distinctfromthecertificateswhicharemerelytheevidenceofsuchownership, it seems to us a reasonable construction of

section4 ofActNo. 1508 tohold that theproperty in theshares may be deemed to be situated in the province inwhichthecor

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porationhasitsprincipalofficeorplaceofbusiness.Ifthisprovinceisalsotheprovinceoftheowner'sdomicile,asingleregistrationissufficient.Ifnot,thechattelmortgageshouldbe registered both at the owner's domicile and in theprovince where the corporation has its principal office orplace of business. In this sense the propertymortgaged isnot the certificate but the participation and share of theownerintheassetsofthecorporation.

Apart from the cumbersome and unusual method ofhypothecating shares of stock by chattel mortgage, itappears that in thepresentstateofour law, theonlysafewaytoaccomplishthehypothecationofshareofstockofaPhilippine corporation is for the creditor to insist on theassignmentanddeliveryofthecertificateandtoobtainthetransfer of the legal title to him on the books of thecorporation by the cancellation of the certificate and theissuance of anewone tohim.From the standpoint of thedebtor this may be unsatisfactory because it leaves thecreditorastheostensibleownerofthesharesandthedebtoris forced to rely upon the honesty and solvency of thecreditor.Ofcourse,themerepossessionandretentionofthedebtor'scertificatebythecreditorgivessomesecuritytothecreditor against an attempted voluntary transfer by thedebtor, provided the bylaws of the corporation expresslyenactthattransfersmaybemadeonlyuponthesurrenderofthecertificate.Itistobenoted,however,thatsection35oftheCorporationLaw (ActNo. 1459) enacts that shares ofstock "may be transferred by delivery of the certificateendorsedbytheownerorhisattorneyinfactorotherpersonlegallyauthorizedtomakethetransfer."Theuseoftheverb"may"doesnotexcludethepossibilitythatatransfermaybemadeinadifferentmanner,thusleavingthecreditorinan insecurepositioneven thoughhehas the certificate inhis possession. Moreover, the shares still standing in thenameof thedebtoronthebooksof thecorporationwillbeliabletoseizurebyattachmentorlevyonexecutionatthe

instanceofothercreditors.(Cf.UyPiaoco

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Sambrano vs. Reyes and Northern Luzon Trans. Co.

vs. McMicking, 10 Phil., 286, and Uson vs, Diosomito, 61Phil., 535.) This unsatisfactory state of our law is wellknown to the bench and bar. (Cf. Fisher, The PhilippineLaw of Stock Corporations, pages 163168.) Loans uponstock securities should be facilitated in order to fostereconomic development. The transfer by endorsement anddeliveryofacertificatewithintentiontopledgethesharescovered thereby should be sufficient to give legal effect tothat intentionand to consummate the juristic actwithoutnecessityforregistration.

WearefullyconsciousofthefactthatourdecisionsinthecaseofMonserratvs.Ceron,supra,andinthepresentcasehavedonelittleperhapstoamelioratethepresentuncertainandunsatisfactorystateofourlawapplicabletopledgesandchattel mortgages of shares of stock of Philippinecorporations.Theremedylieswiththelegislature.

In view of the premises, the attaching creditors areentitledtopriorityoverthedefectivelyregisteredmortgageof theappellantand the judgmentappealed frommustbeaffirmedwithoutspecialpronouncementastocosts inthisinstance.

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Malcolm, VillaReal, Imperial, and Goddard, JJ.,concur.

Judgment affirmed.

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4. Chua Guan vs Samahang Magsasaka