Facts:
1. Gonzalo Toco, the owner of the 5,894 shares of capital stock mortgaged these shares to Chua Chiu to guarantee the payment of debt of 20,000. -These shares were represented by 9 certificates; having a par value of P5 per share -The said shares were delivered by the mortgagor to the mortgagee, Chua Chiu -The mortgage was duly registered in the office of the registered of deeds of Manila and in the office of the corporation2. Toco defaulted in the payment of said debt at maturity thus, Chua Guan foreclosed said mortgage. - He delivered the certificates of stock and copies of the mortgage and assignment to the sheriff of the City of Manila to sell the shares at a public auction.3. Plaintiff tendered the certificates of stock standing in the name of Co Toco to the proper officers of the corporation for cancellation and demanded that they issue new certificates in the name of Chua Guan but the company refused.
Held:
1. Registration of chattel mortgage in the office of corporation not necessary and had no legal effect.2. Difficulty on the practical application of the Chattel Mortgage law to shares of stock of a corporation - Equity in shares of stock is of such an intangible character. -This form of mortgage is ill suited to the pledging of shares of stock and has been rarely used elsewhere. -In fact, it has been doubted whether shares of stock in a corporation are chattels in the sense in which that word is used in chattel mortgage statutes (see Fua Cun vs.
Summers and China Banking Corporation).3. To execute a valid chattel mortgage effective against third persons: a. First, the possession of the property mortgaged must be delivered to and retained by the mortgagee b. Second, without such delivery the mortgage must be recorded in the proper office or offices of the register or registers of deeds.4.
Domicile of corporation decisive for purposes of execution, attachment and garnishment of shares of stock6. Court’s construction of Section 4, Act 1508, as to ownership of shares in a corporation-Considering the ownership of shares in a corporation as property distinct from the certificates which are merely the evidence of such ownership, it seems to be a reasonable construction of section 4 of Act 1508 to hold that the property in the shares may be deemed to be situated in the province in which the corporation has its principal office or place of business. If this province is also the province of the owner’s domicile, a single registration is sufficient. If not, the chattel mortgage should be registered both at the owner’s domicile and in the province where the corporation has its principal office or place of business.
In this sense the property mortgaged is not the certificate but the participation and share of the owner in the assets of the corporation.7. Method of hypothecating shares of stock by chattel mortgage cumbersome and unusual in the present state of law; Risks of debtor and/or creditor; Remedy is with legislature Apart from the cumbersome and unusual method of hypothecating shares of stock by chattel mortgage, it appears that in the present state of our law, the only safe way to accomplish the hypothecation of share of stock of a Philippine corporation is for the creditor to insist on the assignment and delivery of the certificate and to obtain the transfer of the legal title to him on the books of the corporation by the cancellation of the certificate and the issuance of a new one to him.From the standpoint of the debtor this may be unsatisfactory because it leaves the creditor as the ostensible owner of the shares and the debtor is forced to rely upon the honesty and solvency of the creditor.
Of course, the mere possession and retention of the debtor’s certificate by the creditor gives some security to the creditor against an attempted voluntary transfer by the debtor, provided by- laws of the corporation expressly enact that transfers may be made only upon the surrender of the certificate. It is to be noted, however, that section 35 of the Corporation Law enacts that shares of stock “may be transferred by delivery of the certificate endorsed by the owner or his attorney in fact or other person legally authorized to make the transfer.”The use of the verb “may” does not exclude the possibility that a transfer may be made in a different manner, thus leaving the creditor in an insecure position even though he has the certificate in his possession. Moreover, the shares still standing in the name of the debtor on the books of the corporation will be liable to seizure by attachment or levy on execution at the instance of other creditors. Decisions in the case of Monserrat vs. Ceron and in the present case have done little perhaps to ameliorate the present uncertain and unsatisfactory state of our law applicable to pledges and chattel mortgages of shares of stock of Philippine corporations.
The remedy lies with the legislature.8. Transfer by endorsement and delivery of certificate with intention to pledge sufficient to give legal effect The transfer by endorsement and delivery of a certificate with intention to pledge the shares covered thereby should be sufficient to give legal effect to that intention and to consummate the juristic act without necessity for registration.
