Monserrat v. Ceron
REITERATIONFacts
The Antecedents: Plaintiff Enrique Monserrat, president and manager of Manila Yellow Taxicab Co., Inc., assigned the usufruct of 600 common shares of stock to defendant Carlos G. Ceron. The assignment, evidenced by Exhibit A, stipulated that Ceron could enjoy the profits during his lifetime but could not sell, mortgage, or alienate the shares, with Monserrat reserving the right to vote and recover ownership upon termination of the usufruct. Certificate No. 7 was issued in Ceron's name, with Exhibit A noted on page 22 of the Stock and Transfer Book. Procedural History: Defendant Carlos G. Ceron mortgaged the 600 shares of stock to Eduardo R. Matute, president of defendant Erma, Inc., for P30,000. Ceron endorsed the stock certificate to Matute, who took possession without knowledge of Exhibit A. Ceron did not inform Matute of the usufruct agreement, fearing the loan would not be granted. The notation of Exhibit A in the stock book was allegedly made by Ceron on May 5, 1931, the day the shares were to be auctioned for his debt to Matute. The trial court issued a preliminary injunction, which was made permanent, declaring Monserrat the owner of the shares, the mortgage null and void, but the mortgage on the usufruct valid. The Petition: Erma, Inc., and the Sheriff of Manila appealed the trial court's decision.
Issue(s)
Whether a mortgage constituted on common shares of stock must be entered in the corporation's books to be valid against third persons. Whether the defendant entity, Erma, Inc., had knowledge of the deed (Exhibit A) restricting the alienation of the shares.
Ruling
The judgment appealed from is reversed. The defendants are absolved from the complaint, and the complaint is dismissed with costs against the appellee.
Ratio Decidendi
On the necessity of entering a mortgage on shares in the corporation's books: The Court held that Section 35 of the Corporation Law requires entry in the corporate books only for "transfers" of shares to be valid against third persons. The Court, construing "transfer" in its ordinary signification, defined it as an act by which property of one person is vested in another, implying an absolute and unconditional conveyance of title and ownership. A chattel mortgage, as defined by Act No. 1508, as amended by Act No. 2496, is a conditional sale for security purposes, not an absolute alienation of ownership. Therefore, a chattel mortgage on shares of stock does not fall under the definition of "transfer" requiring notation in the corporate books for validity against third persons. The validity of such a mortgage is governed by the Chattel Mortgage Law. On Erma, Inc.'s knowledge of the usufruct agreement: The Court found that Erma, Inc., through its president Eduardo R. Matute, had no knowledge of the usufruct agreement (Exhibit A) when it accepted the mortgage on the shares. Matute examined the stock book and found the shares registered in Ceron's name, free from liens or encumbrances, with no reference to Exhibit A. Ceron himself admitted he did not inform Matute of Exhibit A for fear of jeopardizing the loan. The notation of Exhibit A was made only on the day of the scheduled auction. Consequently, Erma, Inc., as a conditional purchaser of the shares in good faith, is entitled to the protection of the law, having acquired Ceron's rights and title without notice of the prior usufruct agreement.
Main Doctrine
A chattel mortgage constituted on shares of stock, even if accompanied by delivery of the certificate, is not a "transfer" within the meaning of Section 35 of the Corporation Law, which requires entry in the corporate books for validity against third persons. Such a mortgage is a conditional sale for security purposes and its validity against third persons does not depend on its notation in the corporate books, but on compliance with the Chattel Mortgage Law.