004 China Banking Corporation v. CA (Cristelle) share.

share. Article 2087 of the Civil Code provides that it is also of the essence of these
March 26, 1997 | Kapunan, J. |By-Laws not binding on 3rd parties contracts that when the principal obligation becomes due, the things in which the
PETITIONER: CHINA BANKING CORPORATION pledge or mortgage consists maybe alienated for the payment to the creditor. Further,
RESPONDENTS: COURT OF APPEALS, and VALLEY GOLF and COUNTRY VGCCI's contention that CBC is duty-bound to know its by-laws because of Article
CLUB, INC. 2099 of the Civil Code which stipulates that the creditor must take care of the thing
SUMMARY: Calapatia, a stockholder of private respondent Valley Golf & Country pledged with the diligence of a good father of a family, fails to convince. CBC was
Club, Inc. (VGCCI), pledged his Stock Certificate No. 1219 to petitioner China never informed of Calapatia's unpaid accounts and the restrictive provisions in
Banking Corporation (CBC). CBC wrote VGCCI requesting that the aforementioned VGCCI's by-laws. Furthermore, Section 63 of the Corporation Code which provides
pledge agreement be recorded in its books. VGCCI replied that the deed of pledge that "no shares of stock against which the corporation holds any unpaid claim shall be
executed by Calapatia in petitioner's favor was duly noted in its corporate books. transferable in the books of the corporation" cannot be utilized by VGCCI. The term
Afterwards, Calapatia obtained a loan of P20,000.00 from China Bank, payment of "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not
which was secured by the aforestated pledge agreement. Due to Calapatia's failure to to any indebtedness which a subscriber or stockholder may owe the corporation
pay his obligation, petitioner China bank, filed a petition for extrajudicial foreclosure arising from any other transaction." Herein, the subscription for the share in question
and moved to conduct a public auction sale of the pledged stock. China bank has been fully paid as evidenced by the issuance of Membership Certificate 1219.
informed VGCCI of the above-mentioned foreclosure proceedings and requested that What Calapatia owed the corporation were merely the monthly dues. Hence, Section
the pledged stock be transferred to CBC’s name and the same be recorded in the 63 does not apply.
corporate books. However, VGCCI wrote petitioner expressing its inability to accede DOCTRINE: The nature of by-laws being intramural instruments would mean that
to petitioner's request in view of Calapatia's unsettled accounts with the club. they are not binding on third-parties, except those who have actual knowledge of
Petitioner emerged as highest bidder at the public auction and was issued the their contents [at the time the transaction between the third party & the shareholders
corresponding certificate of sale. VGCCI demanded from Calapatia full payment of was entered into].
his overdue account but the latter failed to pay. VGCCI then sold Calapatia’s share as FACTS:
payment. Petitioner protested the sale by VGCCI of the subject share of stock. 1. 21 August 1974 - Calapatia, a stockholder of private respondent Valley Golf
Issue: Whether or not the by-laws are controlling over the pledge? NO. In order & Country Club, Inc. (VGCCI), pledged his Stock Certificate No. 1219 to
to be bound, the third party must have acquired knowledge of the pertinent by-laws at petitioner China Banking Corporation (CBC).
the time the transaction or agreement between said third party and the shareholder 2. Petitioner CBC wrote VGCCI requesting that the aforementioned pledge
was entered into. Herein, at the time the pledge agreement was executed. VGCCI agreement be recorded in its books.
could have easily informed CBC of its by-laws when it sent notice formally 3. VGCCI replied that the deed of pledge executed by Calapatia in CBC’s
recognizing CBC as pledgee of one of its shares registered in Calapatia's name. CBC's favor was duly noted in its corporate books.
belated notice of said by-laws at the time of foreclosure will not suffice. By-laws 4. Calapatia obtained a loan of P20,000.00 from CBC, payment of which was
signifies the rules and regulations or private laws enacted by the corporation to secured by the aforestated pledge agreement still existing between Calapatia
regulate, govern and control its own actions, affairs and concerns and its stockholders and CBC.
or members and directors and officers with relation thereto and among themselves in 5. Due to Calapatia's failure to pay his obligation, CBC filed a petition for
their relation to it. In other words, by-laws are the relatively permanent and extrajudicial foreclosure before Notary Public Antonio T. de Vera of
continuing rules of action adopted by the corporation for its own government and that Manila, requesting the latter to conduct a public auction sale of the pledged
of the individuals composing it and having the direction, management and control of stock.
its affairs, in whole or in part, in the management and control of its affairs and 6. CBC informed VGCCI of the above-mentioned foreclosure proceedings and
activities. The purpose of a by-law is to regulate the conduct and define the duties of requested that the pledged stock be transferred to (CBC's) name and the
the members towards the corporation and among themselves. They are self-imposed same be recorded in the corporate books.
and, although adopted pursuant to statutory authority, have no status as public law. 7. However, VGCCI wrote petitioner expressing its inability to accede to
Therefore, it is the generally accepted rule that third persons are not bound by by- CBC's request in view of Calapatia's unsettled accounts with the club.
laws, except when they have knowledge of the provisions either actually or 8. Despite this, Notary Public de Vera held a public auction on 17 September
constructively. For the exception to the general accepted rule that third persons are 1985 and CBC emerged as the highest bidder at P20,000.00 for the pledged
not bound by by-laws to be applicable and binding upon the pledgee, knowledge of stock and was issued the corresponding certificate of sale.
the provisions of the VGCCI By-laws must be acquired at the time the pledge 9. 21 November 1985 - VGCCI sent Calapatia a notice demanding full
agreement was contracted. Knowledge of said provisions, either actual or payment of his overdue account in the amount of P18,783.24. It was
constructive, at the time of foreclosure will not affect pledgee's right over the pledged
 followed by a demand letter dated 12 December 1985 for the same amount 23. Petitioner CBC moved for reconsideration but the same was denied by the
and another notice dated 22 November 1986 for P23,483.24. CA in its resolution dated 5 October 1994. Hence, this petition.
10. VGCCI caused to be published in the newspaper Daily Express a notice of ISSUES:
auction sale of a number of its stock certificates, to be held on 10 December 1. W/N regular courts or SEC has jurisdiction over the controversy? Yes, the
1986 at 10:00 a.m. Included therein was Calapatia's own share of stock. need for the SEC's technical expertise cannot be over-emphasized involving
11. Through a letter dated 15 December 1986, VGCCI informed Calapatia of as it does the meticulous analysis and correct interpretation of a
the termination of his membership due to the sale of his share of stock in the corporation's by-laws as well as the applicable provisions of the Corporation
10 December 1986 auction. Code in order to determine the validity of VGCCI's claims. The SEC,
12. Petitioner advised VGCCI that it is the new owner of Calapatia's Stock therefore, took proper cognizance of the instant case.
Certificate No. 1219 by virtue of being the highest bidder in the 17 2. W/N petitioner is a stockholder of VGCCI? Yes, CBC is a stockholder of
September 1985 auction and requested that a new certificate of stock be VGCCI through the purchase of the subject share or membership certificate
issued in its name. at public auction by petitioner (and the issuance to it of the corresponding
13. VGCCI replied that "for reason of delinquency" Calapatia's stock was sold Certificate of Sale) transferred ownership of the same to the latter and thus
at the public auction held on 10 December 1986 for P25,000.00. entitled petitioner to have the said share registered in its name as a member
14. Petitioner CBC protested the sale by VGCCI of the subject share of stock of VGCCI.
and thereafter filed a case with the Regional Trial Court of Makati for the 3. W/N the BY-LAWS are controlling over the pledge? No, due to the
nullification of the 10 December 1986 auction and for the issuance of a new belated notice given by Valley golf to China bank.
stock certificate in its name.
15. RTC of Makati dismissed the complaint for lack of jurisdiction over the RULING: WHEREFORE, premises considered, the assailed decision of the Court of
subject matter on the theory that it involves an intra-corporate dispute and Appeals is REVERSED and the order of the SEC en banc dated 4 June 1993 is
denied petitioner's motion for reconsideration. hereby AFFIRMED.
16. CBC filed a complaint with SEC for the nullification of the sale of
Calapatia's stock by VGCCI; the cancellation of any new stock certificate RATIO:
issued pursuant thereto; for the issuance of a new certificate in petitioner's Issue 1: SEC has jurisdiction over the case:
name; and for damages, attorney's fees and costs of litigation. 1. SECTION 3. The Commission shall have absolute jurisdiction, supervision
17. Case was dismissed by SEC Hearing Officer Manuel P. Perea and rendered and control over all corporations, partnerships or associations, who are the
a decision in favor of VGCCI, stating in the main that "(c)onsidering that grantees of primary franchises and/or a license or permit issued by the
the said share is delinquent, (VGCCI) had valid reason not to transfer the government to operate in the Philippines, and in the exercise of its authority,
share in the name of the petitioner in the books of (VGCCI) until liquidation it shall have the power to enlist the aid and support of and to deputize any
of delinquency. and all enforcement agencies of the government, civil or military as well as
18. Hearing Officer Perea denied petitioner's motion for reconsideration. any private institution, corporation, firm, association or person.
19. Petitioner CBC appealed to SEC en banc and the Commission issued an 2. In the same proceedings before the RTC of Makati, VGCCI categorically
order reversing the decision of its hearing officer. stated (in its motion to dismiss) that the case between itself and petitioner is
20. VGCCI sought reconsideration of the abovecited order. However, the SEC intra-corporate and insisted that it is the SEC and not the regular courts
denied the same in its resolution dated 7 December 1993. which has jurisdiction. This is precisely the reason why the said court
21. VGCCI seek redress from the CA. CA rendered its decision nullifying and dismissed petitioner's complaint and led to petitioner's recourse to the SEC.
setting aside the orders of the SEC and its hearing officer on ground of lack 3. Having resolved the issue on jurisdiction, instead of remanding the whole
of jurisdiction over the subject matter and, consequently, dismissed case to the Court of Appeals, this Court likewise deems it procedurally
petitioner's original complaint. sound to proceed and rule on its merits in the same proceedings.
22. CA declared that the controversy between CBC and VGCCI is not Issue 2: CBC is a stockholder of VGCCI
intra-corporate. It ruled as follows: Indeed, the controversy between 1. The purchase of the subject share or membership certificate at public
petitioner and respondent bank which involves ownership of the stock that auction by petitioner (and the issuance to it of the corresponding Certificate
used to belong to Calapatia, Jr. is not within the competence of respondent of Sale) transferred ownership of the same to the latter and thus entitled
Commission to decide. It is not any of those mentioned in the aforecited petitioner to have the said share registered in its name as a member of
case. VGCCI.
 2. VGCCI did not assail the transfer directly and has in fact, in its letter of 27 6. In order to be bound, the third party must have acquired knowledge of the
September 1974, expressly recognized the pledge agreement executed by pertinent by-laws at the time the transaction or agreement between said third party
the original owner, Calapatia, in favor of petitioner and has even noted said and the shareholder was entered into.
agreement in its corporate books. In addition, Calapatia, the original owner
of the subject share, has not contested the said transfer. 7. In this case, at the time the pledge agreement was executed. VGCCI could
3. By virtue of the afore-mentioned sale, petitioner CBC became a bona have easily informed petitioner of its by-laws when it sent notice formally
fide stockholder of VGCCI and, therefore, the conflict that arose recognizing petitioner as pledgee of one of its shares registered in Calapatia's
between petitioner and VGCCI aptly exemplies an intra-corporate name. Petitioner CBC’s belated notice of said by-laws at the time of foreclosure
controversy between a corporation and its stockholder under Sec. 5(b) will not suffice.
of P.D. 902-A. 8. The ruling of the SEC en banc: By-laws are the relatively permanent and
Issue 3: BY-LAWS are controlling over the pledge (IMPORTANT) continuing rules of action adopted by the corporation for its own government
and that of the individuals composing it and having the direction, management
1. VGCCI's contention is unmeritorious: that the pledge was null and void for and control of its affairs, in whole or in part, in the management and control of
lack of consideration because it was entered into on Aug. 21, 1974 but the loan or its affairs and activities.
promissory note which it secured was obtained by Calapatia much later or only on 3
August 1983. The pledge agreement reveals that the contracting parties explicitly 9. The purpose of a by-law is to regulate the conduct and define the duties of the
stipulated therein that the said pledge will also stand as security for any future members towards the corporation and among themselves. They are self-
advancements (or renewals thereof) that Calapatia (the pledgor) may procure from imposed and, although adopted pursuant to statutory authority, have no status
petitioner. as public law. Therefore, it is the generally accepted rule that third persons are
not bound by by-laws, except when they have knowledge of the provisions either
2. The validity of the pledge agreement between petitioner and Calapatia cannot thus actually or constructively.
be held suspect by VGCCI. As candidly explained by petitioner CBC, the
promissory note of 3 August 1983 in the amount of P20,000.00 was but a 10. Appellant-petitioner China bank as a third party cannot be bound by
renewal of the first promissory note covered by the same pledge agreement. appellee-respondent's (VGCCI) by-laws. It must be recalled that when appellee-
respondent communicated to appellant-petitioner bank that the pledge
3. VGCCI insist that Calapatia's failure to settle his delinquent accounts, gave agreement was duly noted in the club's books there was no mention of the
VGCCI the right to sell the share in question in accordance with the express shareholder-pledgor's unpaid accounts. The transcript of stenographic notes of the
provision found in its by-laws. VGCCI insistence comes to naught, VGCCI began June 25, 1991 Hearing reveals that the pledgor (Calaptia) became delinquent
sending notices of delinquency to Calapatia after it was informed by petitioner only in 1975. Thus, appellant-petitioner was in good faith when the pledge
(through its letter dated 14 May 1985) of the foreclosure proceedings initiated agreement was contracted.
against Calapatia's pledged share, although Calapatia has been delinquent in paying
his monthly dues to the club since 1975. 11. Similarly, VGCCI's contention that petitioner CBC is duty-bound to know its by-
laws because of Art. 2099 of the Civil Code which stipulates that the creditor must
4. CBC whom VGCCI had officially recognized as the pledgee of Calapatia's take care of the thing pledged with the diligence of a good father of a family, fails to
share, was neither informed nor furnished copies of these letters of overdue convince.
accounts until VGCCI itself sold the pledged share at another public auction.
By doing so, VGCCI completely disregarded petitioner's rights as pledgee. It 12. Sec. 63 of the Corporation Code which provides that "no shares of stock
even failed to give petitioner notice of said auction sale. Such actuations of against which the corporation holds any unpaid claim shall be transferable in
VGCCI thus belie its claim of good faith. the books of the corporation" cannot be utilized by VGCCI. The term "unpaid
claim" refers to "any unpaid claim arising from unpaid subscription, and not to any
5. The general rule is that the by-laws are an intramural document which cannot indebtedness which a subscriber or stockholder may owe the corporation arising
affect third parties, as the by-laws only affect intra-corporate affairs. The exception, from any other transaction." In the case at bar, the subscription for the share in
which allows the bylaws to have an effect on third persons, is when said third question has been fully paid as evidenced by the issuance of Membership Certificate
persons have been given notice. Valley Golf claimed that China Bank actually fell in No. 1219. What Calapatia owed the corporation were merely the monthly dues.
the exception, since China Bank had actually quoted a portion of the by-law Hence, the aforequoted provision does not apply.
provision in a letter it sent to Valley Golf at the time the shares were to be
foreclosed. The Court, however, stated that Valley Golf MISUNDERSTOOD the
application of that rule, which had been derived from previous jurisprudence.