FUA CUN vs. CHINA BANKING CORPORATION (G.R. No.

L-19441 March 27, 1923) Facts: Chua Soco subscribed for 500 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.

Soco executed a promissory note in favor of the plaintiff Fua Cun for the sum of P25,000 payable in 90 days drawing an interest of 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. With part of the terms of their contract that reads - 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 therefore by the Board of Directors.

Soco is indebted to the defendant bank of P37,731.68 for dishonored acceptances of commercial paper so an action was brought against him to recover the amount and his 500 shares of stock and its receipt seized by the sheriff. The attachment was levied after defendant bank had received the notice of the facts.

Plaintiff brought an action maintaining that by virtue of the payment of the one-half 500 shares, Soco should in effect become the owner of the 250 shares and prays that 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 and that defendant-bank should deliver the receipt in question to him and be awarded P5,000 for damages for wrongful attachment.

The trial court rendered judgment in favour of the plaintiff declaring that Soco, through the payment of P25,000 acquired the right to the 250 shares fully paid upon and that the plaintiff holds lien superior to that of the defendant-bank and ordered the return of the receipt.

Issue: Whether or not the chattel mortage should prevail over the liens of the third party, Soco. Held: No. The interest held by Soco were merely an equity which could not be made the subject of a chattel mortgage, the chattel mortgage here in question would NOT prevail over liens of third parties. Rationale: Section 120 of the Corporation Act states 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..., for the reason that 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. The Supereme court held that 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. Aan equity in shares of stock may be assigned and such is valid between parties and to whom notice is brought home, as stated in the contract that Soco assigned all his rights in the shares to the plaintiff. Such endorsement was accompanied by the delivery of the receipt to the plaintiff and further strengthened by the execution of the chattel mortgage thus operating as a conditional equitable assignment. The defendant bank had 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. Thus, against these rights the defendant bank holds no lien whatever. The Superme Court held that the trial court court erred in holding the plaintiff as the owner of the 250 shares of stock, such appealed judgment was modified accordingly and all other respects affirmed, with cost against the defendant bank.