C. N. HODGES AND RICARDO GURREA, PETITIONER, VS. JOSE MANUEL LEZAMA, BENJAMIN LUIS BORJA AND THE COURTS OF APPEALS, RESPONDENTS.

Hodges versus Lezama

The Case

C. N. Hodges and Ricardo Gurrea against Jose Manuel Lezama, Benjamin Luis Borja, and the Court of Appeals. This is an appeal by certiorari from a decision of the Court of Appeals reversing the Court of First Instance of Iloilo. The petitioners sought a writ of prohibition with preliminary injunction to restrain the president and secretary of a corporation from allowing Borja to vote shares of stock in a stockholders meeting. The case matters because it settles the rule on the transfer of shares of stock: a transfer is not complete, and does not bind the corporation, until the certificate is surrendered and cancelled and the transfer is entered in the corporate books. It also teaches that a court will not sacrifice the substance of justice to its form by requiring a separate action when all the parties and facts are already before it.

Procedural History

Hodges and Gurrea filed a petition for a writ of prohibition with preliminary injunction before the Court of First Instance of Iloilo, to restrain the corporation's president and secretary from allowing Borja to vote the shares in question at the stockholders meeting scheduled on August 6, 1959. A preliminary injunction was issued upon the filing of a bond. After trial, the Court of First Instance rendered judgment making the injunction permanent and declaring Hodges entitled to vote the shares. On appeal by the respondents, the Court of Appeals reversed the trial court and dismissed the petition, holding that Borja had become owner of the shares upon the sale to him in 1954, and that the provision in the stock certificate was merely an internal corporate procedure which the corporation could waive. Hence, this appeal by certiorari to the Supreme Court.

Facts

On July 12, 1954, Hodges acquired at public auction 2,230 shares of stock in the La Paz Ice Plant and Cold Storage Company. The stock certificates covering the shares were endorsed to him, surrendered, and cancelled, and stock certificate No. 17 was issued in his favor. Pending actual delivery of that certificate, Hodges sold the shares to Borja, and to secure payment Borja executed a chattel mortgage on the shares in favor of Hodges on November 1, 1954.

Without stock certificate No. 17 being endorsed by Hodges to Borja and surrendered to the corporation for cancellation, Borja caused stock certificate No. 18 to be issued in his name by Jose Manuel Lezama, his brother-in-law and president of the corporation, and Paquita B. Lezama, his sister and secretary. The certificate was entered in Borja's name in the corporate books. Hodges refused to surrender his certificate No. 17 for cancellation, believing it was his until fully paid.

Upon Borja's failure to pay certain installments, Hodges foreclosed the chattel mortgage and on September 17, 1958 reacquired the shares at public auction. Hodges did not cause this acquisition to be entered in the corporate books, as he still held certificate No. 17. On September 18, 1958, he again sold the shares on installment to Gurrea, but kept the certificate without endorsing it, believing the shares were his until fully paid. Hodges has remained in possession of certificate No. 17, unendorsed and uncancelled, a fact known to the respondents.

Issues

• Whether or not Borja became the owner of the shares of stock upon the sale to him in 1954 and the execution of the chattel mortgage in favor of Hodges, despite the provision in stock certificate No. 17 that the shares are transferable only on the books of the corporation upon surrender of the certificate properly endorsed.
• Whether or not the provision in the stock certificate is merely an internal corporate procedure for the protection of the corporation which the latter could validly waive.
• Whether or not Hodges is entitled to vote the shares in question, and whether the Court may order the surrender and cancellation of stock certificate No. 18 and the issuance of a new certificate in his favor without requiring a separate action.

Applicable Provisions

The decision quotes the provision printed on stock certificate No. 17, which governs the transfer of the shares:

He is the owner of Two Thousand Two Hundred Thirty Shares of the Capital Stock of La Paz Ice Plant and Cold Storage Co., Inc., transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this certificate properly endorsed.

This provision is the heart of the case: it fixes the manner by which title to the shares passes as against the corporation, and it is the standard against which Borja's act of causing a new certificate to be issued in his name is measured.

Ruling

On the first issue, the Court held that Borja did not become owner of the shares as against the corporation. The Court found that Hodges retained certificate No. 17 with Borja's consent, and that it was evidently part of their agreement that Hodges would keep the certificate and thus remain in the records of the corporation as owner of the shares, despite the sale and the chattel mortgage. In other words, the parties intended Hodges to continue, for all intents and purposes, as owner of the shares until Borja shall have fully paid the stipulated price. The Court further reasoned that if title had passed to Borja upon the sale in 1954, then by the same token such title reverted to Hodges when he bought the shares at public auction in the foreclosure proceedings on September 17, 1958, especially since Hodges then held the instrument evidencing the shares.

On the second issue, the Court rejected the appellate court's view that the provision was a mere internal procedure the corporation could waive. The Court found itself unable to share that view, noting that Borja had never assailed the right of Hodges to withhold certificate No. 17, and that neither Borja nor the president and secretary questioned the validity of the auction sale in favor of Hodges.

On the third issue, the Court held that since all persons concerned are parties in the case and the requisite allegations and essential facts are before it, it would be sacrificing the substance of justice to its form to dismiss the case and require the petitioners to bring another action to compel the surrender and cancellation of certificate No. 18. Instead, the Court itself ordered such surrender and cancellation and the issuance of a new certificate in favor of Hodges.

Doctrine

A transfer of shares of stock is not complete, and does not bind the corporation, until the certificate is surrendered and cancelled and the transfer is entered in the corporate books, as the certificate itself provides. The provision making shares transferable only on the books of the corporation upon surrender of the certificate properly endorsed is not a mere internal procedure that the corporation may waive at will; it protects the corporation and its stockholders and must be observed. Where the parties intended the transferor to remain owner of the shares until full payment, and the transferor retained the certificate with the transferee's consent, the transferee acquires no title as against the corporation. And where all the parties and essential facts are before the court, the court may grant complete relief and order the surrender and cancellation of a wrongfully issued certificate and the issuance of a new one, rather than remanding the parties to a separate action, for it would be sacrificing the substance of justice to its form.

Disposition

The Court reversed the decision of the Court of Appeals and sentenced Borja to surrender stock certificate No. 18 within thirty days from entry of judgment to the corporation's president and secretary for immediate cancellation, and the issuance of a new certificate in favor of Hodges, affirming the trial court in all other respects, with costs against the respondents.

Remember This

Memorize this line: shares of stock are transferable only on the books of the corporation upon surrender of the certificate properly endorsed, and that provision is not a mere internal procedure the corporation may waive. Examiners like to use this case in corporation law questions on the transfer of shares, the effect of non-registration in the corporate books, and the power of the court to grant complete relief when all parties are before it.