Monserrat vs. Ceron, et al.

A chattel mortgage on shares of stock is not a “transfer” within the meaning of Section 35 of the Corporation Law and need not be entered or noted in the corporate books to be valid as against third persons; a mortgagee who takes the shares in good faith and without notice of a prior unrecorded usufruct is a conditional purchaser entitled to protection.

Enrique Monserrat was president and manager of Manila Yellow Taxicab Co., Inc. and owner of 1,200 common shares; Carlos G. Ceron was the corporation’s secretary. Erma, Inc. was a corporation represented by its president, Eduardo R. Matute. The controversy required construction of Section 35 of the Corporation Law (Act No. 1459), which requires notation of stock transfers in corporate books, and of the Chattel Mortgage Law (Act No. 1508, as amended by Act No. 2496), which defines a chattel mortgage as a conditional sale.

Enrique Monserrat was the president and manager of the Manila Yellow Taxicab Co., Inc. and the owner of 1,200 common shares of stock thereof. Carlos G. Ceron, one of the defendants, was the corporation’s secretary. On March 25, 1930, in consideration of the interest and financial aid Ceron had shown and extended in organizing the corporation, Monserrat assigned to Ceron the usufruct of half of those common shares, and certificate of stock No. 7 was issued in Ceron’s name on March 24, 1930. The assignment, Exhibit A, gave Ceron only the right to enjoy during his lifetime the profits derived from the shares; it prohibited him from selling, mortgaging, encumbering, alienating, or otherwise exercising any act implying absolute ownership. Monserrat reserved for himself and his heirs the right to vote the shares and to recover ownership at the termination of the usufruct. Certificate No. 7 was recorded in Ceron’s name, and Exhibit A was noted by Ceron as secretary on page 22 of the Stock and Transfer Book of the Manila Yellow Taxicab Co., Inc.

On February 20, 1931, Eduardo R. Matute, president of Erma, Inc., and Ceron appeared at Monserrat’s office on Mabini Street, Manila. Ceron, from a distance of about three meters, showed Matute the stock book of the Manila Yellow Taxicab Co., Inc. Matute did not see the annotation on page 22 regarding Exhibit A. Ceron alleged that, upon Monserrat’s instructions, he did not make any notation of Exhibit A in the stock book until May 5, 1931, the date on which the shares in question were to be sold at public auction to satisfy his debt to Matute.

On February 26, 1931, Ceron mortgaged to Eduardo R. Matute several shares of stock of the Manila Yellow Taxicab Co., Inc., including the 600 common shares in question, for the sum of P30,000. Ceron endorsed certificate of stock Exhibit 1 to Matute, who remained in possession of it. When Ceron mortgaged the shares, he did not inform Matute of the existence of Exhibit A, and Matute never had any knowledge thereof. At the beginning of March 1931, when Monserrat asked Ceron whether he had succeeded in carrying out his transaction with Matute, Ceron informed him of the mortgage. Ceron continued as secretary of the corporation until May 5, 1931. The 600 common shares, together with preferred shares, were delivered to the sheriff by Erma, Inc. for public auction because Ceron defaulted on the loan secured by them, and the certificate remained in Erma’s possession without any notation of Exhibit A.

The evidence showed that when Matute examined the stock book on February 20, 1931, the shares in question were recorded in Ceron’s name free from all liens and encumbrances, with no reference to Exhibit A. Ceron himself testified that when he mortgaged the shares, he said nothing to Erma, Inc. about Exhibit A for fear that he might not obtain the loan he had applied for with those shares as security. The notation of Exhibit A was placed in the corporate books only on May 5, 1931. On these facts, the Supreme Court found that Erma, Inc., as a conditional purchaser of the shares given as security for the payment of its credit, acquired in good faith Ceron’s right and title to the 600 common shares and was entitled to the protection of the law.

• Validity of Chattel Mortgage on Shares: Whether a chattel mortgage constituted on shares of stock must be entered and noted in the corporation’s stock and transfer book under Section 35 of the Corporation Law in order to be valid and effective as against third persons.
• Good Faith of Mortgagee: Whether Erma, Inc. had knowledge of Exhibit A, the deed limiting Carlos G. Ceron’s rights to a usufruct, such that its mortgage over the ownership of the 600 shares should be invalidated.

• Validity of Chattel Mortgage on Shares: No. A chattel mortgage is not a “transfer” within Section 35; only an absolute conveyance of title and ownership must be noted, so non-notation does not invalidate the mortgage.
• Good Faith of Mortgagee: No. Erma, Inc. had no knowledge of Exhibit A; the stock book showed Ceron as owner free of liens, and the certificate was in Erma’s possession without notation. As a conditional purchaser in good faith, Erma is protected.

• Validity of Chattel Mortgage on Shares: Section 35 of the Corporation Law provides that no transfer shall be valid, except as between the parties, until entered and noted upon the books of the corporation. The word “transfer” must be taken in its natural, plain, and ordinary signification, meaning the act of assigning or waiving the right or dominion over a thing and making another the owner thereof. A chattel mortgage under Section 3 of Act No. 1508, as amended by Act No. 2496, is a conditional sale of personal property as security for a debt; although it transfers title to the mortgage creditor, the transfer is not absolute and becomes void once the debt is paid. A chattel mortgage is therefore not the transfer referred to in Section 35, which means the absolute and unconditional conveyance of the title and ownership of a share of stock. Because the mortgage is not a complete and absolute alienation of dominion and ownership, its entry and notation upon the corporate books is not a necessary requisite to its validity.
• Good Faith of Mortgagee: The evidence showed that when Matute, as president of Erma, Inc., examined the stock and transfer book on February 20, 1931, Ceron, as secretary and custodian of the book, showed it to him; the shares were recorded in Ceron’s name free from all liens and encumbrances, and no reference was made to Exhibit A. Ceron testified that he did not tell Erma, Inc. about Exhibit A for fear he would not obtain the loan, and the notation of Exhibit A was made only on May 5, 1931. From February 26, 1931, the certificate of stock remained in Erma’s possession without any notation of Exhibit A. Erma, Inc., as a conditional purchaser of the shares given as security for the payment of its credit, thus acquired in good faith Ceron’s right and title to the 600 common shares and was entitled to the protection of the law.

• Chattel Mortgage Is Not a “Transfer” under Section 35 of the Corporation Law — A chattel mortgage on shares of stock is a conditional sale by way of security, not an absolute and unconditional conveyance of title and ownership. Section 35 of the Corporation Law requires entry and notation in the corporate books only for a “transfer,” which means the absolute conveyance of shares; hence, a chattel mortgage need not be recorded in the stock and transfer book to be valid as against third persons. The Court applied this by holding that Ceron’s mortgage to Erma, Inc. was valid despite the absence of notation.
• Good Faith Mortgagee of Shares — A mortgagee who takes shares as security without knowledge of a prior unrecorded restriction or usufruct, where the corporate books show the mortgagor as owner free of liens and the certificate is delivered without notation of the restriction, is a conditional purchaser in good faith entitled to the protection of the law. The Court applied this by protecting Erma, Inc.’s mortgage over the 600 shares against Monserrat’s claim of ownership.
• Statutory Construction: Ordinary Meaning of “Transfer” — Words of a statute are to be taken in their natural, plain, and ordinary signification, unless the context indicates a technical or special meaning. The Court used this rule to construe “transfer” in Section 35 as an absolute conveyance, not a chattel mortgage.

• "No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer the number of the certificate, and the number of shares transferred." — Section 35 of the Corporation Law, quoted by the Court, supplies the statutory basis for the ruling that only transfers must be recorded in the corporate books.
• "Therefore, the chattel mortgage is not the transfer referred to in section 35 of Act No. 1459 commonly known as the Corporation law, which transfer should be entered and noted upon the books of a corporation in order to be valid, and which, as has already been said, means the absolute and unconditional conveyance of the title and ownership of a share of stock." — This is the ratio decidendi distinguishing a chattel mortgage from the “transfer” that Section 35 requires to be noted.
• "It is obvious, therefore, that the defendant entity Erma, Inc., as a conditional purchaser of the shares of stock in question given as security for the payment of his credit, acquired in good faith Carlos G. Ceron's right and title to the 600 common shares of stock evidenced by certificate No. 7 of the Manila Yellow Taxicab Co., Inc., and as such conditional purchaser in good faith, it is entitled to the protection of the law." — This passage states the good-faith mortgagee ruling.
• "Wherefore, the judgment appealed from is hereby reversed and the defendants are absolved from the complaint herein which is dismissed with costs against the appellee. So ordered." — This is the dispositive portion.

• Wallach vs. Stein, 136 A. 209, 210 (N.J.) — Cited in Words and Phrases for the definition of “transfer” as any act by which property of one person is vested in another and for the proposition that “transfer of shares” implies any means whereby one may be divested of and another acquire ownership of stock; the Court used the definition in construing Section 35.
• Noble vs. Ft. Smith Wholesale Grocery Co., 127 Pac. 14, 17; 34 Okl. 662; 46 L.R.A. (N.S.) 455 — Cited for the proposition that a “transfer” is the act by which the owner of a thing delivers it to another with the intent of passing the rights he has in it, and that a chattel mortgage is not within the meaning of such term; this supported the holding that a chattel mortgage need not be noted under Section 35.

• Section 35, Corporation Law (Act No. 1459) — Provides that shares of stock are personal property transferable by delivery of the certificate indorsed by the owner, but that no transfer shall be valid, except as between the parties, until entered and noted upon the books of the corporation. The Court construed “transfer” to mean absolute conveyance of title and ownership, not a chattel mortgage, so notation was not required for the validity of the mortgage.
• Section 3, Act No. 1508, as amended by Act No. 2496 (Chattel Mortgage Law) — Defines a chattel mortgage as a conditional sale of personal property as security for the payment of a debt or performance of an obligation, the sale to be avoided upon payment. The Court used this definition to distinguish a chattel mortgage from an absolute transfer under Section 35.

Malcolm, Abad Santos, Hull, and Imperial, JJ., concur.