G.R. No. 19441. March 27, 1923

It appears from the evidence that on August 26, 1920, one Chua Soco
subscribed for five hundred shares of stock of the defendant Banking Corporation
at a par value of P100 per share, paying the sum of P25,000, one-half of the
subscription price, in cash, for which a receipt was issued in the following
terms:

“This is to certify, That Chua Soco, a subscriber for five hundred shares of
the capital stock of the China Banking Corporation at its par value of
P100 per share, has paid into the Treasury of the Corporation, on account of
said subscription and in accordance with its terms, the sum of twenty-five
thousand pesos (P25,000), Philippine currency.

“Upon receipt of the balance of said subscription in accordance with the
terms of the calls of the Board of Directors, and surrender of this certificate,
duly executed certificates for said five hundred shares of stock will be issued
to the order of the subscriber.

“It is expressly understood that the total number of shares specified in this
receipt is subject to sale by the China Banking Corporation for the
payment of any unpaid subscriptions, should the subscriber fail to pay the whole
or any part of the balance of his subscription upon 30 days’ notice issued
therefor by the Board of Directors.

“Witness our official signatures at Manila, P. I., this 25th day of August,
1920.

	(Sgd.) “MERWIN WEBSTER
		“Cashier
	(Sgd.) “DEE C. CHUAN
		“President“

On May 18, 1921, Chua Soco executed a promissory note in favor of the
plaintiff Fua Cun for the sum of P25,000 payable in ninety days and drawing
interest at the rate of 1 per cent per month, securing the note with a chattel
mortgage on the shares of stock subscribed for by Chua Soco, who also endorsed
the receipt above mentioned and delivered it to the mortgagee. The plaintiff
thereupon took the receipt to the manager of the defendant Bank and informed him
of the transaction with Chua Soco, but was told to await action upon the matter
by the Board of Directors.

In the meantime Chua Soco appears to have become indebted to the China
Banking Corporation in the sum of P37,731.68 for dishonored acceptances of
commercial paper and in an action brought against him to recover this amount,
Chua Soco’s interest in the five hundred shares subscribed for was attached and
the receipt seized by the sheriff. The attachment was levied after the defendant
bank had received notice of the fact that the receipt had been endorsed over to
the plaintiff.

Fua Cun thereupon brought the present action maintaining that by virtue of
the payment of the one-half of the subscription price of five hundred shares
Chua Soco in effect became the owner of two hundred and fifty shares and praying
that his, the plaintiff’s, lien on said shares, by virtue of the chattel
mortgage, be declared to hold priority over the claim of the defendant Banking
Corporation; that the defendants be ordered to deliver the receipt in question
to him; and that he be awarded the sum of P5,000 in damages for wrongful
attachment.

The trial court rendered judgment in favor of the plaintiff declaring that
Chua Soco, through the payment of the P25,000, acquired the right to two hundred
and fifty shares fully paid up, upon which shares the plaintiff holds a lien
superior to that of the defendant Banking Corporation and ordering that the
receipt be returned to said plaintiff. From this judgment the defendants
appeal.

Though the court below erred in holding that Chua Soco, by paying one-half of
the subscription price of five hundred shares, in effect became the owner of two
hundred and fifty shares, the judgment appealed from is in the main correct.

The claim of the defendant Banking Corporation upon which it brought the
action in which the writ of attachment was issued, was for the non-payment of
drafts accepted by Chua Soco and had no direct connection with the shares of
stock in question. At common law a corporation has no lien upon the shares of
stockholders for any indebtedness to the corporation (Jones on Liens, 3d ed.,
sec. 375) and our attention has not been called to any statute creating such
lien here. On the contrary, section 120 of the Corporation Act provides that “no
bank organized under this Act shall make any loan or discount on the security of
the shares of its own capital stock, nor be the purchaser or holder of any such
shares, unless such security or purchase shall be necessary to prevent loss upon
a debt previously contracted in good faith, and stock so purchased or acquired
shall, within six months from the time of its purchase, be sold or disposed of
at public or private sale, or, in default thereof, a receiver may be appointed
to close up the business of the bank in accordance with law.”

Section 35 of the United States National Banking Act of 1864 contains a
similar provision and it has been held in various decisions of the United States
Supreme Court that a bank organized under that Act can have no lien on its own
stock for the indebtedness of the stockholders even when the by-laws provide
that the shares shall be transferable only on the books of the corporation and
that no such transfer shall be made if the holder of the shares is indebted to
the corporation. (Jones on Liens, 3d ed., sec. 384; First National Bank of South
Bend vs. Lanier and Handy, 11 Wall., 369; Bullard vs. National
Eagle Bank, 18 Wall., 589; First National Bank of Xenia vs. Stewart and
McMillan, 107 U. S., 676.) The reasons for this doctrine are obvious; if banking
corporations were given a lien on their own stock for the indebtedness of the
stockholders, the prohibition against granting loans or discounts upon the
security of the stock would become largely ineffective.

Turning now to the rights of the plaintiff in the stock in question, it is
argued that the interest held by Chua Soco was merely an equity which could not
be made the subject of a chattel mortgage. Though the courts have uniformly held
that chattel mortgages on shares of stock and other choses in action are valid
as between the parties, there is still much to be said in favor of the
defendants’ contention that the chattel mortgage here in question would not
prevail over liens of third parties without notice; an equity in shares of stock
is of such an intangible character that it is somewhat difficult to see how it
can be treated as a chattel and mortgaged in such a manner that the recording of
the mortgage will furnish constructive notice to third parties. As said by the
court in the case of Spalding vs. Paine’s Adm’r. (81 Ky., 416), in regard
to a chattel mortgage of shares of stock:

“These certificates of stock are in the pockets of the owner, and go with him
where he may happen to locate, as choses in action, or evidence of his right,
without any means on the part of those with whom he proposes to deal on the
faith of such a security of ascertaining whether or not this stock is in pledge
or mortgaged to others. He finds the name of the owner on the books of the
company as a subscriber of paid-up stock, amounting to 180 shares, with the
certificates in his possession, pays for these certificates their full value,
and has the transfer to him made on the books of the company, thereby obtaining
a perfect title. What other inquiry is he to make, so as to make his investment
certain and secure? Where is he to look, in order to ascertain whether or not
this stock has been mortgaged? The chief office of the company may be at one
place to-day and at another tomorrow. The owner may have no fixed or permanent
abode, and with his notes in one pocket and his certificates of stock in the
other—the one evidencing the extent of his interest in the stock of the
corporation, the other his right to money owing him by his debtor, we are asked
to say that the mortgage is effectual as to the one and inoperative as to the
other.”

But a determination of this question is not essential in the present case.
There can be no doubt that an equity in shares of stock may be assigned and that
the assignment is valid as between the parties and as to persons to whom notice
is brought home. Such an assignment exists here, though it was made for the
purpose of securing a debt. The endorsement to the plaintiff of the receipt
above mentioned reads:

“For value received, I assign all my rights in these shares in favor of Mr.
Tua Cun.

“Manila, P. I., May 18, 1921.

(Sgd.) “CHUA SOCO”

This endorsement was accompanied by the delivery of the receipt to the
plaintiff and further strengthened by the execution of the chattel mortgage,
which mortgage, at least, operated as a conditional equitable assignment.

As against the rights of the plaintiff the defendant bank had, as we have
seen, no lien unless by virtue of the attachment. But the attachment was levied
after the bank had received notice of the assignment of Chua Soco’s interests to
the plaintiff and was therefore subject to the rights of the latter. It follows
that as against these rights the defendant bank holds no lien whatever.

As we have already stated, the court erred in holding the plaintiff as the
owner of two hundred and fifty shares of stock; “the plaintiff’s rights consist
in an equity in five hundred shares and upon payment of the unpaid portion of
the subscription price he becomes entitled to the issuance of certificate for
said five hundred shares in his favor.”

The judgment appealed from is modified accordingly, and in all other respects
it is affirmed, with the costs against the appellant Banking Corporation. So
ordered.

Araullo, C.J., Street, Malcolm, Avanceña, Villamor, Johns,
and Romualdez, JJ., concur.