De los Santos vs. McGrath

A plaintiff claiming title to stock must prove the alleged purchase by preponderance of evidence; even if a purchase is shown, an unrecorded transfer of non-negotiable stock certificates does not bind the registered owner or the beneficial owner absent estoppel by negligence.

Apolinario G. de los Santos and Isabelo Astraquillo sought title to 1,600,000 shares of Lepanto Consolidated Mining Co., Inc. registered in the name of Vicente Madrigal. The defendant Attorney General acted as successor to the Philippine Alien Property Administration, which had vested the shares as enemy property under the Trading with the Enemy Act. The Republic of the Philippines intervened pursuant to the Philippine Property Act, under which property vested in the United States and located in the Philippines was to be transferred to the Republic. The Mitsui Bussan Kaisha, a Japanese corporation with a Manila branch, was alleged to be the beneficial owner of the shares.

The action concerned title to 1,600,000 shares of stock of Lepanto Consolidated Mining Co., Inc. The certificates were issued in the name of Vicente Madrigal, who was registered in Lepanto’s books as owner and whose blank indorsement appeared on the back. Plaintiffs Apolinario G. de los Santos and Isabelo Astraquillo initially claimed one-half each; during the pendency of the case, Astraquillo allegedly conveyed and assigned his interest in his half to De los Santos. Except for certificate No. 2279 covering 55,000 shares, marked Exhibit 2, the certificates were in plaintiffs’ possession. Exhibit 2 was also with them until sometime in 1945 or 1946, when possession was lost under the conditions later set forth.

Plaintiffs claimed De los Santos bought Lepanto shares from Juan Campos and Carl Hess in Manila in December 1942. According to De los Santos, on or about December 8, 1942, he purchased 500,000 shares from Juan Campos for P30,000, or about P0.06 per share, paid in cash and exchanged for the corresponding stock certificates. Several days later, he bought 300,000 shares from Carl Hess at the same rate. While visiting Astraquillo in Baguio, De los Santos mentioned his purchases; Astraquillo expressed a wish to buy 800,000 shares at the same price and delivered the amount the next day. Upon returning to Manila, De los Santos purchased the 800,000 shares from Hess and delivered the certificates to Astraquillo in Baguio around Christmas time. In January 1946, De los Santos went to Lepanto’s offices to ask whether it accepted certificates for registration and received a negative answer. In February 1946, he learned that the shares in Madrigal’s name were blocked. He engaged Atty. A. Scheerer, obtained an order of release from the Freezing Control Office of the United States Treasury Department, and in May 1946 was told that no transfer could be effected without the authority of Clyde DeWitt, Lepanto’s president. Plaintiffs then filed a claim with the Property Custodian.

Astraquillo corroborated the testimony concerning the purchase of 800,000 shares for his account. He testified that, needing money, he came to Manila in November or December 1945 and delivered certificate No. 2279, Exhibit 2, for 55,000 shares to stock broker Leonardo Recio to sell at P0.13 to P0.15 per share, suggesting DeWitt as a possible buyer. Recio allegedly left Exhibit 2 with Atty. Orlina and received a receipt, which was later lost when Recio’s house burned in December 1945. Primitivo Javier corroborated delivery of Exhibit 2 to Recio. Recio testified that he gave Exhibit 2 to Orlina, received a receipt, later met DeWitt, who said the shares were questioned, and left the certificate with DeWitt. Recio’s receipt was destroyed when his house burned.

The defendant and intervenor contended that the shares had been bought by Vicente Madrigal in trust for Mitsui Bussan Kaisha, a Japanese corporation with a branch office in the Philippines, as the true owner. Before the outbreak of the war, Madrigal delivered the corresponding stock certificates, with his blank indorsement, to the Mitsuis, who kept them in their Manila office until liberation in 1945. The Mitsuis never sold or otherwise disposed of the shares, and the certificates must have been stolen or looted during the liberation. The defense presented Vicente Madrigal, Matsune Kitajima, Kingy Miwa, Miguel Simon, E. A. Perkins, and Victor E. Lednicky. Madrigal testified that he purchased the shares for the Mitsuis at their request, paid with his own funds later reimbursed by the Mitsuis, held the certificates in his name with the understanding that he would transfer them to the Mitsuis upon demand, and delivered them to the Mitsuis shortly before the war. Kitajima testified that in June 1941 he received certificates for about 1,900,000 Lepanto shares from Kobayashi, kept them in a steel safe in the Mitsui office, returned them to Madrigal in July 1941 to buy more shares, and late in 1941 received certificates for 2,100,000 shares back. He possessed them until April 1943, when he delivered them to Kingy Miwa. Miwa corroborated the delivery and testified that the Mitsuis never sold or disposed of the shares; in late September 1944 he ordered the transfer of important documents to their Taft Avenue residence, and in January 1945 he told his assistant Shinoda to burn important papers before leaving Manila. Simon testified that Hess did not possess any Lepanto certificates in Madrigal’s name during the occupation and made no mining-share transactions except selling Benguet shares. Perkins testified that on October 27, 1945, Recio brought Exhibit 2 to DeWitt and offered it for sale at P0.13 per share; DeWitt checked it with the Property Custodian, told Recio it was looted, telephoned Erickson, and Recio left without Exhibit 2. Lednicky testified that in February 1945 he went to the Mitsui offices and saw scattered documents, including two Lepanto certificates, one in Madrigal’s name endorsed in blank, but left upon hearing voices.

The Court of First Instance found the defense evidence inherently improbable and seemingly concluded that plaintiffs’ version should be accepted, rendering judgment for plaintiffs. On appeal, the Supreme Court reviewed the record and found plaintiffs’ evidence highly improbable and inherently weak, noting among other things the deaths of Campos and Hess, the loss of Recio’s receipt, the conditions in December 1942, the risk and prohibited nature of dealing in enemy stock, Astraquillo’s relationship to De los Santos, the value of the shares, plaintiffs’ resources, the lack of bargaining, Simon’s testimony that Hess never had the certificates, and Kitajima and Miwa’s continuous custody of the certificates. The Supreme Court also found Lednicky’s testimony not inherently improbable and took judicial notice that looting occurred during the liberation of Manila.

• Mitsui Ownership and Trust: Defendant-appellant and intervenor-appellant contended that the shares were bought by Vicente Madrigal in trust for, and for the benefit of, Mitsui Bussan Kaisha, a Japanese corporation, which was the true owner.
• No Sale by Mitsuis: Appellants argued that the Mitsuis never sold, conveyed, or otherwise disposed of the shares and that Madrigal had delivered the certificates with blank indorsement to the Mitsuis before the war.
• Looting or Theft: Appellants maintained that the stock certificates must have been stolen or looted during the liberation of Manila in 1945, and therefore plaintiffs could not have acquired them from Campos and Hess in December 1942.
• Failure of Plaintiffs’ Claim: Appellants contended that plaintiffs had not purchased the shares and that the burden of proof was on plaintiffs to establish their claim by preponderance of evidence.

• Purchase from Campos and Hess: Plaintiffs-appellees maintained that De los Santos purchased shares from Juan Campos and Carl Hess in Manila in December 1942, including 800,000 shares for the account and benefit of Astraquillo.
• Lawful Ownership: Plaintiffs argued that they were the lawful owners of the shares and that the transfer to the Alien Property Custodian was null and void.
• Mitsuis’ Lack of Standing: Plaintiffs maintained that, not being the registered owners of the shares, the Mitsuis could not assert a better right than plaintiffs.
• Unauthorized Disposition by Mitsui Officers: Plaintiffs argued that Kitajima might have, or must have, assigned the certificates on or before December 1942, and that plaintiffs acquired the shares for value and in good faith.

• Preponderance of Evidence: Whether plaintiffs established by a preponderance of evidence that they purchased the 1,600,000 shares of stock from Juan Campos and Carl Hess.
• Validity of Transfer: Whether, assuming a sale, the transfer of stock certificates endorsed in blank but not entered on the corporate books validly transferred title as against Madrigal and the Mitsuis.
• Negotiability of Stock Certificates: Whether stock certificates endorsed in blank are negotiable such that a bona fide purchaser for value acquires title against the true owner.
• Beneficial Ownership: Whether the Mitsuis, as beneficial owners, may assert the rights of the registered owner, Vicente Madrigal.
• Vesting Order: Whether the vesting order issued by the Property Custodian in favor of the Alien Property Custodian was valid.

• Preponderance of Evidence: No. Plaintiffs failed to establish by a preponderance of evidence that they purchased the shares; their evidence was highly improbable and inherently weak.
• Validity of Transfer: No. Even assuming a sale, the transfer was not valid except between the parties until entered and noted on the corporate books, and it did not bind Madrigal or the Mitsuis.
• Negotiability of Stock Certificates: No. Stock certificates are non-negotiable; a transferee under a forged or unauthorized transfer acquires no title against the true owner unless the owner is estopped by negligence.
• Beneficial Ownership: Yes. The Mitsuis, as the undisputed principal or beneficiary of the registered owner Madrigal, could invoke such rights as Madrigal had as registered stockholder.
• Vesting Order: Yes. When the Property Custodian issued the vesting order, the shares belonged to the Mitsuis, an enemy corporation, so the vesting order was in conformity with law and should be upheld.

• Preponderance of Evidence: The burden of proof was upon plaintiffs, and a decision in their favor was not in order unless a preponderance of the evidence supported their claim. The alleged improbabilities in the defense testimony would not justify a judgment against the defense if plaintiffs’ evidence was more improbable than, or at least as improbable as, that of the defense. The trial court’s findings of fact were generally entitled to respect, but here the trial judge was guided not by the conduct of the witnesses but by what he regarded as the inherent weakness of the defense evidence, so the appellate court could review the record. Plaintiffs’ case rested mainly on the uncorroborated testimony of De los Santos, since Juan Campos and Carl Hess, the alleged vendors, were dead. The Court found plaintiffs’ testimony highly improbable and inherently weak for several reasons: the Lepanto was under Japanese control in December 1942 and its stock had doubtful or no market value; the transactions were prohibited by the Japanese and dangerous; Astraquillo, a former employee of De los Santos, allegedly risked transporting certificates through Japanese checkpoints without gain; plaintiffs allegedly paid P48,000 each in December 1942 for dubious stock; their evidence of sufficient resources was uncorroborated and general; De los Santos did not bargain despite knowing the sellers needed money; Hess never had the certificates in his possession during the occupation according to Simon; and Kitajima and Miwa testified that the certificates were continuously in Mitsui custody from December 1941 to April 1943. The Court also found Lednicky’s testimony not inherently improbable, took judicial notice that looting occurred during the liberation of Manila, and found no sufficient reason to discredit Perkins or to treat Miwa’s hesitation about his signature as lack of veracity. Plaintiffs therefore did not establish their pretense by a preponderance of the evidence.

• Validity of Transfer: Section 35 of the Corporation Law provides that shares of stock may be transferred by delivery of the certificate endorsed by the owner or his attorney in fact, but that no transfer shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation. No such entry was made in plaintiffs’ names. Consequently, the transfer allegedly effected by Juan Campos and Carl Hess in plaintiffs’ favor was not valid except as between themselves and did not bind Madrigal or the Mitsuis, who were not parties to the alleged transaction. The transfer was, as to Madrigal and the Mitsuis, absolutely void and as good as non-existent. Although a stock certificate is sometimes regarded as quasi-negotiable in the sense that it may be transferred by endorsement coupled with delivery, it is non-negotiable because the holder takes it subject to such rights or defenses as the registered owner or creditor may have under the law, except insofar as those rights or defenses are subject to the limitations imposed by estoppel. A transferee under a forged assignment acquires no title against the true owner unless the owner’s negligence created an estoppel. If the owner endorsed the certificate in blank and it was stolen from him, no title is acquired by an innocent purchaser for value. Neither Madrigal nor the Mitsuis alienated the shares or, through negligence, gave occasion for an improper or irregular disposition of the certificates. Plaintiffs were also aware of sufficient facts to put them on notice of the need to inquire into the regularity of the transactions and the title of the supposed vendors: the certificates were in Madrigal’s name, Campos and Hess were not registered owners, plaintiffs were presumed to know Section 35 of Act No. 1459, and the sales were hostile to the Japanese and prohibited. Plaintiffs therefore could not validly claim the status of purchasers in good faith.

• Negotiability of Stock Certificates: The Court held that stock certificates are not negotiable instruments. The status of quasi-negotiability generally accorded to stock certificates under Philippine law recognized that they are non-negotiable. Section 5 of the Uniform Stock Transfer Act, which gives full negotiability to certificates of stock, was not in force in the Philippines and had not been incorporated into Philippine law. The Court declined to apply it and instead applied Section 35 of the Corporation Law. Thus, even assuming an unauthorized disposition by Mitsui officers, the title of their assignees and successors in interest would still be subject to the rights of the registered owner, Madrigal, and consequently of the Mitsuis as the party for whose benefit and account Madrigal held the shares.

• Beneficial Ownership: Madrigal, the registered owner, had always acknowledged that he held the shares merely as an agent of, or trustee for, the Mitsuis, and this was not denied. The Mitsuis were therefore entitled to invoke such rights as Madrigal had as registered stockholder. The alleged sale by Campos and Hess to plaintiffs was contested and not established by preponderance of evidence. As the undisputed principal or beneficiary of the registered owner, the Mitsuis could claim Madrigal’s rights, which plaintiffs could not exercise because their alleged title was not derived from Madrigal or the Mitsuis and was in derogation of their rights. Madrigal and the Mitsuis were not privies to the alleged sales by Campos and Hess to plaintiffs.

• Vesting Order: When the Property Custodian issued the vesting order complained of, the shares of stock in question belonged to the Mitsuis, admittedly an enemy corporation. The vesting order was therefore in conformity with law and should be upheld.

• Burden of Proof and Preponderance of Evidence — In civil cases, the burden of proof is on the plaintiff, and a judgment in the plaintiff’s favor is not proper unless a preponderance of the evidence supports the claim. Alleged improbabilities in the defendant’s evidence do not justify a judgment for the plaintiff if the plaintiff’s evidence is more improbable than, or at least as improbable as, the defendant’s evidence. The Court applied this doctrine to hold that plaintiffs failed to prove the alleged purchase of the shares.

• Non-Negotiability of Stock Certificates — Stock certificates are not negotiable instruments. They are sometimes regarded as quasi-negotiable because they may be transferred by endorsement coupled with delivery, but the holder takes the certificate subject to such rights or defenses as the registered owner or creditor may have under the law, except insofar as those rights or defenses are subject to estoppel. A transferee under a forged assignment acquires no title against the true owner unless the owner’s negligence created an estoppel. If the owner endorsed the certificate in blank and it was stolen, no title is acquired by an innocent purchaser for value. The Court applied this doctrine to hold that plaintiffs could not defeat the rights of Madrigal and the Mitsuis.

• Recording of Stock Transfers under Section 35 of the Corporation Law — Under Section 35 of the Corporation Law, shares of stock may be transferred by delivery of the certificate endorsed by the owner or his attorney in fact, but no transfer is valid, except as between the parties, until it is entered and noted upon the books of the corporation. The Court applied this provision to hold that the alleged transfer to plaintiffs, not having been recorded, did not bind Madrigal or the Mitsuis.

• Estoppel by Negligence of the True Owner — A true owner of a stock certificate may be estopped from asserting title against a bona fide purchaser only if the owner’s negligence was the proximate cause of the purchase or advancement of money and was in or immediately connected with the transfer itself. The owner is not guilty of negligence merely in entrusting another with possession of the certificate or in endorsing it in blank if the loss or theft was not due to the owner’s negligence. The Court found no negligence on the part of Madrigal or the Mitsuis.

• Beneficial Ownership of Registered Stock — A registered stockholder may hold shares merely as an agent or trustee for a beneficial owner. The beneficial owner may invoke the rights of the registered stockholder. The Court applied this doctrine to allow the Mitsuis, as the undisputed principal or beneficiary of Madrigal, to assert Madrigal’s rights as registered owner against plaintiffs.

• "To put it differently, the alleged improbabilities in the testimony of the witnesses for the defense will not justify a judgment against the latter, if the evidence for the plaintiffs is more improbable than, or, at least, as improbable as, that of the defense." — This passage states the controlling burden-of-proof principle that defeated plaintiffs’ claim: even if the defense evidence had weaknesses, plaintiffs still had to establish their own case by preponderance of evidence.

• "Pursuant to this provision, a share of stock may be transferred by endorsement of the corresponding stock certificate, coupled with its delivery. However, the transfer shall \"not be valid, except as between the parties,\" until it is \"entered and noted upon the books of the corporation.\"" — This passage construes Section 35 of the Corporation Law and supplies the basis for holding that the unrecorded transfer did not bind Madrigal or the Mitsuis.

• "Certificates of stock are not negotiable instruments (post, Par. 102), consequently, a transferee under a forged assignment acquires no title which can be asserted against the true owner, unless his own negligence has been such as to create an estoppel against him (Clarke on Corporations, Sec. Ed. p. 415)." — This passage is the Court’s canonical statement of the non-negotiability of stock certificates and the true owner’s protection absent estoppel.

• "If the owner of the certificate has endorsed it in blank, and it is stolen from him, no title is acquired by an innocent purchaser for value" — This passage states the specific rule that even a bona fide purchaser for value acquires no title where the owner endorsed the certificate in blank and it was stolen, unless estoppel applies.

• Uson vs. Diosomito, 61 Phil. 535 — Cited in the majority as approving the rule that an unrecorded transfer is “absolutely void” and as good as non-existent insofar as the registered owner and the beneficial owner are concerned.
• East Birmingham Land Co. vs. Dennis, 85 Ala. 565, 2 L.R.A. 836 — Cited for the rule that if the owner of a certificate has endorsed it in blank and it is stolen from him, no title is acquired by an innocent purchaser for value.
• Western Union Telegraph Co. vs. Davenfort, 97 U.S. 369; 24 L. Ed. 1047 — Cited for the principle that neither the absence of blame on the part of corporate officers nor the good faith of the purchaser of stolen property will answer the true owner’s demand, and that stolen property wrongfully transferred should be restored to its rightful owner.
• Knox vs. Eden Muscee American Co., 42 N. E. 988 — Cited for the rule that stock certificates are not fully negotiable and that the true owner of a lost or stolen certificate may reclaim it from a bona fide purchaser.
• Sherwood vs. mining co., 50 Calif. 412 — Cited together with East Birmingham Land Co. vs. Dennis for the rule that a stolen blank-endorsed certificate does not transfer title to an innocent purchaser for value.
• Re Murphy, 51 Wisc. 519, 8 N. W. 419 — Cited for the statement, quoted with approval in Uson vs. Diosomito, that an unrecorded transfer is “absolutely void” as to the registered owner and the beneficial owner.

• Section 35, Corporation Law (Act No. 1459) — Provides that shares of stock may be transferred by delivery of the certificate endorsed by the owner or his attorney in fact, but that no transfer shall be valid, except as between the parties, until entered and noted upon the books of the corporation. The Court applied this provision to hold that the alleged transfer to plaintiffs, not having been recorded, did not bind Madrigal or the Mitsuis.
• Philippine Property Act — Provides that all property vested in the United States, or any of its officials, under the Trading with the Enemy Act, as amended, located in the Philippines at the time of vesting, or the proceeds thereof, shall be transferred to the Republic of the Philippines. The Republic intervened in the case pursuant to this Act.
• Trading with the Enemy Act, as amended — The statute under which the shares were vested in the Alien Property Custodian as enemy property. The Court upheld the vesting order because the shares belonged to the Mitsuis, an enemy corporation.
• Uniform Stock Transfer Act, Section 5 — Not in force in the Philippines. The majority refused to apply it, noting that it gives full negotiability to certificates of stock but had not been incorporated into Philippine law.

Paras, C.J.; Pablo; Padilla; Montemayor; Reyes, A.; Jugo; and Labrador, JJ.

• Justice Bengzon — Dissented. He maintained that the trial judge’s findings on credibility should be upheld because of the trial judge’s opportunity to observe the witnesses, and that the majority improperly substituted its own assessment of the evidence. He argued that plaintiffs had possession of certificates endorsed in blank, which shifted the burden to defendants to prove looting; that presumptions of innocence and ownership favored plaintiffs; that the deaths of Campos and Hess during wartime were not suspicious; that Kitajima and Miwa had only official, not physical, possession and other officials had access; that no inventory was presented to corroborate the transfer to Miwa; and that Miwa’s statement that important documents were burned suggested the shares were not among those kept. He further argued that plaintiffs were bona fide purchasers for value, that stock certificates endorsed in blank have a quasi-negotiable character, that the Uniform Stock Transfer Act and commercial-law principles should protect a bona fide purchaser even from a thief or unauthorized seller, and that Section 35’s phrase “except as between the parties” means parties and their privies and does not require every transfer to be recorded. In his view, equity favored plaintiffs.