VILLONGCO V.

YABUT CORP: Determination of Quorum

174
G.R. No. L-42091 November 2, 1935 BUTTE, J.: Matt
Petitioners: Respondents:
GONZALO CHUA GUAN, SAMAHANG MAGSASAKA, INC., and SIMPLICIO
OCAMPO, ADRIANO G. SOTTO, and EMILIO
VERGARA, as president, secretary and treasurer
respectively of the same
Recit Ready Summary

Samahang Magsasaka, Inc., is a corporation duly organized under the laws of the Philippine Islands with
principal office in Cabanatuan, Nueva Ecija, and that the individual defendants are the president,
secretary and treasurer respectively of the corporation.

On June 18, 1931, Gonzalo H. Co Toco was the owner of 5,894 shares of the capital stock of the said
corporation represented by nine certificates having a par value of P5 per share; that on said date Gonzalo
H. Co Toco, a resident of Manila, mortgaged said 5,894 shares to Chua Chiu to guarantee the payment of
a debt of P20,000 due on or before June 19, 1932.

Debtor, Gonzalo H. Co Toco, having defaulted in the payment of said debt at maturity, the plaintiff
foreclosed said mortgage and delivered the certificates of stock and copies of the mortgage and
assignment to the sheriff of the City of Manila in order to sell the said shares at public auction. Chua
Guan bought the shares in the auction.

Plaintiff tendered the certificates of stock standing in the name of Gonzalo H. Co to the proper officers of
the corporation for cancellation and demanded that they issue new certificates in the name of the plaintiff.
The said officers (the individual defendants) refused and still refuse to issue said new shares in the name
of the plaintiff

The issue is W/N the registration of said chattel mortgage in the registry of chattel mortgages in the office
of the register of deeds of Manila, under date of July 23, 1931, give constructive notice to the said
attaching creditors?

Section 4 of Act No. 1508 provides two ways for executing a valid chattel mortgage which shall be
effective against third persons. First, the possession of the property mortgaged must be delivered to and
retained by the mortgagee; and, second, without such delivery the mortgage must be recorded in the
proper office or offices of the register or registers of deeds. If a chattel mortgage of shares of stock of a
corporation may validly be made without the delivery of possession of the property to the mortgagee and
the mere registration of the mortgage is sufficient to give constructive notice to third parties, we are
confronted with the question as to the proper place of registration of such a mortgage. Section 4 provides
that in such a case the mortgage shall be registered in the province in which the mortgagor resides at the
time of making the same or, if he is a non-resident, in the province in which the property is situated; and it
also provides that if the property is situated in a different province from that in which the mortgagor
resides the mortgage shall be recorded both in the province of the mortgagor's residence
and in the province where the property is situated.

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 7owner 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.

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Section 35 of the Corporation Law (Act No. 1459) 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
creditor

Facts
1. Samahang Magsasaka, Inc., is a corporation duly organized under the laws of the Philippine
Islands with principal office in Cabanatuan, Nueva Ecija, and that the individual defendants are the
president, secretary and treasurer respectively of the same
2. June 18, 1931, Gonzalo H. Co Toco was the owner of 5,894 shares of the capital stock of the said
corporation represented by nine certificates having a par value of P5 per share; that on said date
Gonzalo H. Co Toco, a resident of Manila, mortgaged said 5,894 shares to Chua Chiu to guarantee
the payment of a debt of P20,000 due on or before June 19, 1932. The said certificates of stock
were delivered with the mortgage to the mortgagee, Chua Chiu. The said mortgage was duly
registered in the office of the register of deeds of Manila on June 23, 1931, and in the office of the
said corporation on September 30, 1931.
3. Debtor, Gonzalo H. Co Toco, having defaulted in the payment of said debt at maturity, the plaintiff
foreclosed said mortgage and delivered the certificates of stock and copies of the mortgage and
assignment to the sheriff of the City of Manila in order to sell the said shares at public auction. The
sheriff auctioned said 5,894 shares of stock on December 22, 1932, and the plaintiff having been
the highest bidder for the sum of P14,390, the sheriff executed in his favor a certificate of sale of
said shares.
4. Plaintiff tendered the certificates of stock standing in the name of Gonzalo H. Co to the proper
officers of the corporation for cancellation and demanded that they issue new certificates in the
name of the plaintiff. The said officers (the individual defendants) refused and still refuse to issue
said new shares in the name of the plaintiff.
5. Prayer is that a writ of mandamus be issued requiring the defendants to transfer the said 5,894
shares of stock to the plaintiff by cancelling the old certificates and issuing new ones in their stead.
6. Special defenses set up in the answer are as follows, that the defendants refuse to cancel said
certificates standing in the name of Gonzalo H. Co Toco on the books of the corporation and to
issue new ones in the name of the plaintiff because prior to the date when the plaintiff made his
demand, to wit, February 4, 1933, nine attachments had been issued and served and noted on the
books of the corporation against the shares of Gonzalo H. Co Toco and the plaintiff objected to
having these attachments noted on the new certificates which he demanded.
Issues Ruling
1. W/N the registration of said chattel mortgage in the registry of 1. NO,
chattel mortgages in the office of the register of deeds of Manila,
under date of July 23, 1931, give constructive notice to the said
attaching creditors?

Rationale
1. The registration of the said chattel mortgage in the office of the corporation was not necessary
and had no legal effect. The log mooted question as to whether or not shares of a corporation
could be hypothecated by placing a chattel mortgage on the certificate representing such
shares
2. Practical application of the Chattel Mortgage Law to shares of stock of a corporation presents
considerable difficulty and we have obtained little aid from the decisions of other jurisdictions
because that form of mortgage is ill suited to the hypothecation 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.
3. Section 4 of Act No. 1508 provides two ways for executing a valid chattel mortgage
which shall be effective against third persons. First , the possession of the property
mortgaged must be delivered to and retained by the mortgagee; and, second , without

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 such delivery the mortgage must be recorded in the proper office or offices of the
register or registers of deeds. If a chattel mortgage of shares of stock of a corporation
may validly be made without the delivery of possession of the property to the
mortgagee and the mere registration of the mortgage is sufficient to give constructive
notice to third parties, we are confronted with the question as to the proper place of
registration of such a mortgage. Section 4 provides that in such a case the mortgage
shall be registered in the province in which the mortgagor resides at the time of making
the same or, if he is a non-resident, in the province in which the property is situated;
and it also provides that if the property is situated in a different province from that in
which the mortgagor resides the mortgage shall be recorded both in the province of the
mortgagor's residence and in the province where the property is situated.
4. If with respect to a chattel mortgage of shares of stock of a corporation, registration in the
province of the owner's domicile should be sufficient, those who lend on such security would
be confronted with the practical difficulty of being compelled not only to search the records of
every province in which the mortgagor might have been domiciled but also every province in
which a chattel mortgage by any former owner of such shares might be registered.
5. We cannot think that it was the intention of the legislature to put this almost prohibitive
impediment upon the hypothecation of shares of stock in view of the great volume of business
that is done on the faith of the pledge of shares of stock as collateral.
6. The situs of shares of stock for some purposes may be at the domicile of the owner and for
others at the domicile of the corporation; and even elsewhere. It is a general rule that for
purposes of execution, attachment and garnishment, it is not the domicile of the owner of a
certificate but the domicile of the corporation which is decisive.
7. 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.
8. It is to be noted, however, that section 35 of the Corporation Law ( Act No. 1459) 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
9. This unsatisfactory state of our law is well known to the bench and bar. Loans upon stock
securities should be facilitated in order to foster economic development. 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.
10. The present case has 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.

Disposition
Petition denied