Lim Tay vs. Court of Appeals

A pledgee does not acquire ownership of pledged shares prior to foreclosure and sale, and thus cannot compel the corporate secretary to record the transfer of such shares via mandamus; absent prima facie ownership, the SEC lacks jurisdiction over the dispute. The Court held that because the contract of pledge only authorized the pledgee to foreclose and sell the shares upon default—and the pledgee never executed such foreclosure or sale—ownership remained with the pledgor pursuant to Article 2103 of the Civil Code.

On January 8, 1980, respondents Sy Guiok and Alfonso Sy Lim each obtained a loan of P40,000 from petitioner Lim Tay, payable within six months with 10% annual interest. To secure the loans, Guiok and Sy Lim executed separate contracts of pledge, each covering 300 shares of stock in respondent Go Fay & Co., Inc. The contracts stipulated that upon default, the pledgee was authorized to foreclose the pledge by selling the shares at public or private sale, at which sale the pledgee could be the purchaser, and thereafter transfer the shares to his name on the corporate books. The pledgors endorsed the certificates in blank and delivered them to the petitioner. When the loans matured, Guiok and Sy Lim defaulted.

• The Contracts of Pledge: Sy Guiok and Alfonso Sy Lim each pledged 300 shares of Go Fay & Co., Inc. to Lim Tay. The contracts expressly authorized the pledgee, upon the pledgors' failure to pay within six months, to foreclose the pledge by selling the shares at public or private sale, purchase the shares at the sale, and transfer the shares on the corporate books to his name.
• Default and Refusal to Transfer: The pledgors defaulted on the loans. Petitioner demanded that the corporate secretary of Go Fay & Co., Inc. register the transfer of the 600 shares in his name and issue new certificates, but the secretary refused.
• The SEC Petition: Petitioner filed a Petition for Mandamus with the SEC, alleging that the controversy was intra-corporate due to the corporate secretary's obstinate refusal to record the transfer. Petitioner claimed that under the contracts of pledge, ownership of the shares automatically passed to him upon the pledgors' default.
• Respondents' Defense: Respondent corporation argued that petitioner was not a stockholder and therefore the SEC lacked jurisdiction, and that the pledge did not automatically vest ownership in the petitioner. The intervenors (Guiok and the Estate of Sy Lim) contended that there was no valid foreclosure or sale, that the automatic appropriation of the shares constituted pactum commissorium, and that they had previously attempted to pay the loan and redeem the shares, but petitioner unjustifiably refused.

Petitioner maintained that the SEC had jurisdiction over the action because it involved an intra-corporate dispute between a stockholder and the corporation. Petitioner argued that he was entitled to the writ of mandamus to compel the corporate secretary to record the transfer, claiming that ownership of the shares passed to him upon the pledgors' default. Alternatively, petitioner contended that he acquired ownership of the shares through extraordinary prescription under Article 1132 of the Civil Code, through a novation of the contracts of pledge, through dacion en pago, and that respondents were barred from recovering the shares by laches.

Respondent countered that the SEC lacked jurisdiction because petitioner was not a stockholder and no intra-corporate relationship existed. Respondent argued that the petition stated no cause of action for mandamus because petitioner had no clear legal right to the shares, as ownership does not automatically pass to the pledgee upon default. Intervenors argued that the contracts of pledge required foreclosure and sale, which never occurred, and that the automatic appropriation of the shares without compliance with the law amounted to pactum commissorium. They further asserted that the delivery of certificates and receipt of dividends were merely statutory incidents of the pledge, not novation or dacion en pago, and that they had the right to redeem the shares.

• Procedural Issues: Whether the Securities and Exchange Commission had jurisdiction over the complaint filed by the petitioner.
• Substantive Issues: Whether the petitioner is entitled to the relief of mandamus to compel the transfer of pledged shares; whether a pledgee acquires ownership of pledged shares upon the pledgor's default without foreclosure and sale; whether the petitioner acquired ownership through prescription, novation, dacion en pago, or laches.

• Procedural: The Court held that the SEC lacked jurisdiction over the dispute. Jurisdiction is determined by the allegations in the complaint. Because the complaint and its annexes demonstrated that petitioner was merely a pledgee and not an owner—since the contracts required foreclosure and sale, which never occurred—petitioner lacked prima facie status as a shareholder. Absent a shareholder-corporation relationship, the dispute was not intra-corporate, and jurisdiction lay with the regular courts.
• Substantive: The Court ruled that the petitioner was not entitled to mandamus. Mandamus requires a clear legal right to the thing demanded; it will not issue to establish a right, but only to enforce one already established. Because the pledgee had not foreclosed the pledge or purchased the shares at auction as required by Article 2112 of the Civil Code and the contracts of pledge, ownership never passed to him. Under Article 2103, the pledgor remains the owner of the pledged property pending foreclosure. The Court rejected petitioner's alternative theories: (1) Prescription did not accrue because possession as a pledgee is not in the concept of an owner and cannot ripen into ownership by acquisitive prescription unless the juridical relation is first expressly repudiated; (2) Novation and dacion en pago cannot be presumed, and the acts of indorsing certificates and receiving dividends were merely in compliance with the Civil Code on pledge; (3) Laches did not bar respondents, as their right to recover the shares would only arise upon payment of the loan.

• Ministerial Duty of Corporate Secretary — The duty of a corporate secretary to record transfers of stocks is ministerial; however, the secretary cannot be compelled to do so when the transferee's title to the shares has no prima facie validity or is uncertain. The Court applied this doctrine to deny the writ of mandamus, as the petitioner's claim of ownership was invalid on the face of the complaint.
• Mandamus Will Not Issue to Establish a Right — The principal function of the writ of mandamus is to command and expedite, not to inquire and adjudicate; it will not issue to establish a legal right, but only to enforce one that is already clearly established. The Court held that because the petitioner's ownership was disputed and legally unfounded, mandamus was improper.
• Ownership of Pledged Property — A pledgor remains the owner of the pledged property during the pendency of the pledge and prior to foreclosure and sale. The Court applied Article 2103 of the Civil Code to affirm that the petitioner, as a mere pledgee who had not foreclosed, did not acquire ownership of the shares.
• Acquisitive Prescription by a Pledgee — Possession with a juridical title, such as that of a pledgee, is not in the concept of an owner and cannot ripen into ownership by acquisitive prescription unless the juridical relation is first expressly repudiated and such repudiation has been communicated to the other party. The Court found that petitioner only repudiated the pledge when he filed the complaint, so his possession could not ripen into ownership.

• "The duty of a corporate secretary to record transfers of stocks is ministerial. However, he cannot be compelled to do so when the transferee's title to said shares has no prima facie validity or is uncertain."
• "Mandamus will not issue to establish a right, but only to enforce one that is already established."
• "Without Foreclosure and Purchase at Auction, Pledgor Is Not the Owner of Pledged Shares."
• "Possession with a juridical title, such as by a usufructuary, a trustee, a lessee, agent or a pledgee, not being in the concept of an owner, cannot ripen into ownership by acquisitive prescription unless the juridical relation is first expressly repudiated and such repudiation has been communicated to the other party."

• Abejo v. De la Cruz, 149 SCRA 654 (1987) — Distinguished. The Court explained that in Abejo, the contract of sale was already perfected, making the transferee a prima facie owner and shareholder, thus vesting the SEC with jurisdiction. In the present case, the contract of pledge did not transfer ownership without foreclosure, so no intra-corporate relationship existed.
• Rural Bank of Salinas, Inc. v. Court of Appeals, 210 SCRA 510 (1992) — Distinguished. In Rural Bank, deeds of assignment were executed, which transferred prima facie ownership to the respondents, making them shareholders. Here, only a contract of pledge was executed, which did not transfer ownership.

• Article 2112, Civil Code — Requires the creditor to sell the thing pledged at a public auction before appropriating it; only after a second auction fails may the creditor appropriate the thing pledged. The Court applied this provision to show that petitioner could not have acquired ownership without complying with the public sale requirement.
• Article 2103, Civil Code — Provides that unless the thing pledged is expropriated, the debtor continues to be the owner thereof. The Court relied on this article to affirm that respondents remained the owners of the shares.
• Article 1132, Civil Code — Provides for the extraordinary prescription of movables through uninterrupted possession for four years in good faith or eight years without any other condition. The Court held this inapplicable because possession as a pledgee is not in the concept of an owner.
• Article 2093, Civil Code — Requires that the thing pledged be placed in the possession of the creditor. The Court noted that the delivery of the shares was merely in compliance with this requirement.
• Article 2095, Civil Code — Provides that shares of stock may be pledged and the instrument proving the right pledged must be delivered to the creditor, and if negotiable, must be endorsed. The Court found that the blank endorsement was required under this article.
• Article 2102, Civil Code — Provides that if the pledge earns fruits or dividends, the creditor shall compensate what he receives with those which are owing him. The Court held that the receipt of dividends was pursuant to this article, not an act of novation.
• Section 5, Presidential Decree No. 902-A — Sets forth the original and exclusive jurisdiction of the SEC over intra-corporate controversies. The Court held that because petitioner was not a shareholder, no intra-corporate relationship existed, depriving the SEC of jurisdiction under this provision.

Davide, Jr., Bellosillo, Vitug, and Quisumbing, JJ., concur.