Republic of the Philippines The Commission 

en banc believes that appellant-petitioner has a prior right over the pledged share
SUPREME COURT and because of pledgor's failure to pay the principal debt upon maturity, appellant-petitioner can
Manila proceed with the foreclosure of the pledged share.
FIRST DIVISION WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992 are hereby
  SET ASIDE. The auction sale conducted by appellee-respondent Club on December 10, 1986 is
G.R. No. 117604 March 26, 1997 declared NULL and VOID. Finally, appellee-respondent Club is ordered to issue another
CHINA BANKING CORPORATION, petitioner, membership certificate in the name of appellant-petitioner bank.
vs. SO ORDERED. 18
COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents. VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same in its resolution dated 7
December 1993. 19
KAPUNAN, J.: The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994, the Court of Appeals
Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner China Banking Corporation rendered its decision nullifying and setting aside the orders of the SEC and its hearing officer on ground of lack of jurisdiction
seeks the reversal of the decision of the Court of Appeals dated 15 August 1994 nullifying the Securities and Exchange over the subject matter and, consequently, dismissed petitioner's original complaint. The Court of Appeals declared that the
Commission's order and resolution dated 4 June 1993 and 7 December 1993, respectively, for lack of jurisdiction. Similarly controversy between CBC and VGCCI is not intra-corporate. It ruled as follows:
impugned is the Court of Appeals' resolution dated 4 September 1994 which denied petitioner's motion for reconsideration. In order that the respondent Commission can take cognizance of a case, the controversy must
The case unfolds thus: pertain to any of the following relationships: (a) between the corporation, partnership or association
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of private respondent Valley Golf & Country and the public; (b) between the corporation, partnership or association and its stockholders,
Club, Inc. (VGCCI, for brevity), pledged his Stock Certificate No. 1219 to petitioner China Banking Corporation (CBC, for partners, members, or officers; (c) between the corporation, partnership or association and the
brevity).1 state in so far as its franchise, permit or license to operate is concerned, and (d) among the
On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledge agreement be recorded in its stockholders, partners or associates themselves (Union Glass and Container Corporation vs. SEC,
books.2 November 28, 1983, 126 SCRA 31). The establishment of any of the relationship mentioned will not
In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in petitioner's favor was necessarily always confer jurisdiction over the dispute on the Securities and Exchange Commission
duly noted in its corporate books.3 to the exclusion of the regular courts. The statement made in Philex Mining Corp. vs. Reyes, 118
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of which was secured by the aforestated SCRA 602, that the rule admits of no exceptions or distinctions is not that absolute. The better
pledge agreement still existing between Calapatia and petitioner.4 policy in determining which body has jurisdiction over a case would be to consider not only the
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition for extrajudicial foreclosure before status or relationship of the parties but also the nature of the question that is the subject of their
Notary Public Antonio T. de Vera of Manila, requesting the latter to conduct a public auction sale of the pledged stock. 5 controversy (Viray vs. Court of Appeals, November 9, 1990, 191 SCRA 308, 322-323).
On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure proceedings and requested that the pledged Indeed, the controversy between petitioner and respondent bank which involves ownership of the
stock be transferred to its (petitioner's) name and the same be recorded in the corporate books. However, on 15 July 1985, stock that used to belong to Calapatia, Jr. is not within the competence of respondent Commission
VGCCI wrote petitioner expressing its inability to accede to petitioner's request in view of Calapatia's unsettled accounts with to decide. It is not any of those mentioned in the aforecited case.
the club.6 WHEREFORE, the decision dated June 4, 1993, and order dated December 7, 1993 of respondent
Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and petitioner emerged as the Securities and Exchange Commission (Annexes Y and BB, petition) and of its hearing officer dated
highest bidder at P20,000.00 for the pledged stock. Consequently, petitioner was issued the corresponding certificate of sale. 7 January 3, 1992 and April 14, 1992 (Annexes S and W, petition) are all nullified and set aside for
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of lack of jurisdiction over the subject matter of the case. Accordingly, the complaint of respondent
P18,783.24. 8 Said notice was followed by a demand letter dated 12 December 1985 for the same amount 9 and another notice China Banking Corporation (Annex Q, petition) is DISMISSED. No pronouncement as to costs in
dated 22 November 1986 for P23,483.24. 10 this instance.
On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of auction sale of a number of SO ORDERED. 20
its stock certificates, to be held on 10 December 1986 at 10:00 a.m. Included therein was Calapatia's own share of stock Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its resolution dated 5 October
(Stock Certificate No. 1219). 1994. 21
Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his membership due to the sale of Hence, this petition wherein the following issues were raised:
his share of stock in the 10 December 1986 auction. 11 II
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock Certificate No. 1219 by virtue of being ISSUES
the highest bidder in the 17 September 1985 auction and requested that a new certificate of stock be issued in its name. 12 WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth Division) GRAVELY
On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public auction held on 10 ERRED WHEN:
December 1986 for P25,000.00. 13 1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND ORDER DATED
On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and thereafter filed a case with the DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC, AND
Regional Trial Court of Makati for the nullification of the 10 December 1986 auction and for the issuance of a new stock WHEN IT DISMISSED THE COMPLAINT OF PETITIONER AGAINST RESPONDENT VALLEY
certificate in its name. 14 GOLF ALL FOR LACK OF JURISDICTION OVER THE SUBJECT MATTER OF THE CASE;
On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction over the subject matter on 2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE
the theory that it involves an intra-corporate dispute and on 27 August 1990 denied petitioner's motion for reconsideration. COMMISSION EN BANC DATED JUNE 04, 1993 DESPITE PREPONDERANT EVIDENCE
On 20 September 1990, petitioner filed a complaint with the Securities and Exchange Commission (SEC) for the nullification SHOWING THAT PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP CERTIFICATE NO.
of the sale of Calapatia's stock by VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the 1219 FOR ONE SHARE OF RESPONDENT VALLEY GOLF.
issuance of a new certificate in petitioner's name; and for damages, attorney's fees and costs of litigation. The petition is granted.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating in the main that The basic issue we must first hurdle is which body has jurisdiction over the controversy, the regular courts or the SEC.
"(c)onsidering that the said share is delinquent, (VGCCI) had valid reason not to transfer the share in the name of the P. D. No. 902-A conferred upon the SEC the following pertinent powers:
petitioner in the books of (VGCCI) until liquidation of Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all
delinquency." 15 Consequently, the case was dismissed. 16 corporations, partnerships or associations, who are the grantees of primary franchises and/or a
On 14 April 1992, Hearing Officer Perea denied petitioner's motion for reconsideration. 17 license or permit issued by the government to operate in the Philippines, and in the exercise of its
Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an order reversing the decision of its authority, it shall have the power to enlist the aid and support of and to deputize any and all
hearing officer. It declared thus: enforcement agencies of the government, civil or military as well as any private institution,
corporation, firm, association or person.
xxx xxx xxx

1
 Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange In this era of clogged court dockets, the need for specialized administrative boards or commissions
Commission over corporations, partnerships and other forms of associations registered with it as with the special knowledge, experience and capability to hear and determine promptly disputes on
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction technical matters or essentially factual matters, subject to judicial review in case of grave abuse of
to hear and decide cases involving: discretion, has become well nigh indispensable. Thus, in 1984, the Court noted that "between the
a) Devices or schemes employed by or any acts of the board of power lodged in an administrative body and a court, the unmistakable trend has been to refer it to
directors, business associates, its officers or partners, amounting to the former. 'Increasingly, this Court has been committed to the view that unless the law speaks
fraud and misrepresentation which may be detrimental to the interest of clearly and unequivocably, the choice should fall on [an administrative agency.]'" The Court in the
the public and/or of the stockholders, partners, members of associations earlier case of Ebon v. De Guzman, noted that the lawmaking authority, in restoring to the labor
or organizations registered with the Commission. arbiters and the NLRC their jurisdiction to award all kinds of damages in labor cases, as against the
b) Controversies arising out of intra-corporate or partnership relations, previous P.D. amendment splitting their jurisdiction with the regular courts, "evidently, . . . had
between and among stockholders, members, or associates; between second thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award
any or all of them and the corporation, partnership or association of damages in labor cases because that setup would mean duplicity of suits, splitting the cause of
which they are stockholders, members or associates, respectively; and action and possible conflicting findings and conclusions by two tribunals on one and the same
between such corporation, partnership or association and the State claim."
insofar as it concerns their individual franchise or right to exist as such In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as it does the meticulous
entity; analysis and correct interpretation of a corporation's by-laws as well as the applicable provisions of the Corporation Code in
c) Controversies in the election or appointment of directors, trustees, order to determine the validity of VGCCI's claims. The SEC, therefore, took proper cognizance of the instant case.
officers, or managers of such corporations, partnerships or associations. VGCCI further contends that petitioner is estopped from denying its earlier position, in the first complaint it filed with the RTC
d) Petitions of corporations, partnerships or associations to be declared of Makati (Civil Case No. 90-1112) that there is no intra-corporate relations between itself and VGCCI.
in the state of suspension of payments in cases where the corporation, VGCCI's contention lacks merit.
partnership or association possesses property to cover all of its debts In Zamora v. Court of Appeals, 28 this Court, through Mr. Justice Isagani A. Cruz, declared that:
but foresees the impossibility of meeting them when they respectively fall It follows that as a rule the filing of a complaint with one court which has no jurisdiction over it does
due or in cases where the corporation, partnership or association has no not prevent the plaintiff from filing the same complaint later with the competent court. The plaintiff is
sufficient assets to cover its liabilities, but is under the Management not estopped from doing so simply because it made a mistake before in the choice of the proper
Committee created pursuant to this Decree. forum. . . .
The aforecited law was expounded upon in Viray v. CA 22 and in the recent cases of Mainland Construction We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically stated (in its motion to dismiss)
Co., Inc. v. Movilla   and Bernardo v. CA,   thus:
23 24
that the case between itself and petitioner is intra-corporate and insisted that it is the SEC and not the regular courts which
. . . .The better policy in determining which body has jurisdiction over a case would be to consider has jurisdiction. This is precisely the reason why the said court dismissed petitioner's complaint and led to petitioner's
not only the status or relationship of the parties but also the nature of the question that is the recourse to the SEC.
subject of their controversy. Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court of Appeals, this Court likewise
Applying the foregoing principles in the case at bar, to ascertain which tribunal has jurisdiction we have to determine therefore deems it procedurally sound to proceed and rule on its merits in the same proceedings.
whether or not petitioner is a stockholder of VGCCI and whether or not the nature of the controversy between petitioner and It must be underscored that petitioner did not confine the instant petition for review on certiorari on the issue of jurisdiction. In
private respondent corporation is intra-corporate. its assignment of errors, petitioner specifically raised questions on the merits of the case. In turn, in its responsive pleadings,
As to the first query, there is no question that the purchase of the subject share or membership certificate at public auction by private respondent duly answered and countered all the issues raised by petitioner.
petitioner (and the issuance to it of the corresponding Certificate of Sale) transferred ownership of the same to the latter and Applicable to this case is the principle succinctly enunciated in the case of Heirs of Crisanta Y. Gabriel-Almoradie v. Court of
thus entitled petitioner to have the said share registered in its name as a member of VGCCI. It is readily observed that VGCCI Appeals, 29 citing Escudero v. Dulay 30 and The Roman Catholic Archbishop of Manila v. Court of Appeals. 31
did not assail the transfer directly and has in fact, in its letter of 27 September 1974, expressly recognized the pledge In the interest of the public and for the expeditious administration of justice the issue on
agreement executed by the original owner, Calapatia, in favor of petitioner and has even noted said agreement in its infringement shall be resolved by the court considering that this case has dragged on for years and
corporate books. 25 In addition, Calapatia, the original owner of the subject share, has not contested the said transfer. has gone from one forum to another.
By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI and, therefore, the conflict that It is a rule of procedure for the Supreme Court to strive to settle the entire controversy in a single
arose between petitioner and VGCCI aptly exemplies an intra-corporate controversy between a corporation and its proceeding leaving no root or branch to bear the seeds of future litigation. No useful purpose will be
stockholder under Sec. 5(b) of P.D. 902-A. served if a case or the determination of an issue in a case is remanded to the trial court only to
An important consideration, moreover, is the nature of the controversy between petitioner and private respondent corporation. have its decision raised again to the Court of Appeals and from there to the Supreme Court.
VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art VIII of its by-laws which provides that "after We have laid down the rule that the remand of the case or of an issue to the lower court for further
a member shall have been posted as delinquent, the Board may order his/her/its share sold to satisfy the claims of the reception of evidence is not necessary where the Court is in position to resolve the dispute based
Club. . ." 26 It is pursuant to this provision that VGCCI also sold the subject share at public auction, of which it was the highest on the records before it and particularly where the ends of justice would not be subserved by the
bidder. VGCCI caps its argument by asserting that its corporate by-laws should prevail. The bone of contention, thus, is the remand thereof. Moreover, the Supreme Court is clothed with ample authority to review matters,
proper interpretation and application of VGCCI's aforequoted by-laws, a subject which irrefutably calls for the special even those not raised on appeal if it finds that their consideration is necessary in arriving at a just
competence of the SEC. disposition of the case.
We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz 27: In the recent case of China Banking Corp., et al. v. Court of Appeals, et al., 32 this Court, through Mr. Justice Ricardo J.
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative Francisco, ruled in this wise:
commissions and boards the power to resolve specialized disputes in the field of labor (as in At the outset, the Court's attention is drawn to the fact that since the filing of this suit before the trial
corporations, public transportation and public utilities) ruled that Congress in requiring the Industrial court, none of the substantial issues have been resolved. To avoid and gloss over the issues raised
Court's intervention in the resolution of labor-management controversies likely to cause strikes or by the parties, as what the trial court and respondent Court of Appeals did, would unduly prolong
lockouts meant such jurisdiction to be exclusive, although it did not so expressly state in the law. this litigation involving a rather simple case of foreclosure of mortgage. Undoubtedly, this will run
The Court held that under the "sense-making and expeditious doctrine of primary jurisdiction . . . counter to the avowed purpose of the rules, i.e., to assist the parties in obtaining just, speedy and
the courts cannot or will not determine a controversy involving a question which is within the inexpensive determination of every action or proceeding. The Court, therefore, feels that the central
jurisdiction of an administrative tribunal, where the question demands the exercise of sound issues of the case, albeit unresolved by the courts below, should now be settled specially as they
administrative discretion requiring the special knowledge, experience, and services of the involved pure questions of law. Furthermore, the pleadings of the respective parties on file have
administrative tribunal to determine technical and intricate matters of fact, and a uniformity of ruling amply ventilated their various positions and arguments on the matter necessitating prompt
is essential to comply with the purposes of the regulatory statute administered . adjudication.

2
In the case at bar, since we already have the records of the case (from the proceedings before the SEC) sufficient to enable not bound by such by-law by virtue of the assignment alone. (Ireland vs. Globe Milling Co., 21 R.I.,
us to render a sound judgment and since only questions of law were raised (the proper jurisdiction for Supreme Court review), 9.)
we can, therefore, unerringly take cognizance of and rule on the merits of the case. A by-law of a corporation which provides that transfers of stock shall not be valid unless approved
The procedural niceties settled, we proceed to the merits. by the board of directors, while it may be enforced as a reasonable regulation for the protection of
VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor. It contends that the same was the corporation against worthless stockholders, cannot be made available to defeat the rights of
null and void for lack of consideration because the pledge agreement was entered into on 21 August third persons. (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.) (Emphasis
1974 33 but the loan or promissory note which it secured was obtained by Calapatia much later or only on 3 August 1983. 34 ours.)
VGCCI's contention is unmeritorious. In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the transaction or
A careful perusal of the pledge agreement will readily reveal that the contracting parties explicitly stipulated therein that the agreement between said third party and the shareholder was entered into, in this case, at the time the pledge agreement was
said pledge will also stand as security for any future advancements (or renewals thereof) that Calapatia (the pledgor) may executed. VGCCI could have easily informed petitioner of its by-laws when it sent notice formally recognizing petitioner as
procure from petitioner: pledgee of one of its shares registered in Calapatia's name. Petitioner's belated notice of said by-laws at the time of
xxx xxx xxx foreclosure will not suffice. The ruling of the SEC en banc is particularly instructive:
This pledge is given as security for the prompt payment when due of all loans, overdrafts, By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate,
promissory notes, drafts, bills or exchange, discounts, and all other obligations of every kind which govern and control its own actions, affairs and concerns and its stockholders or members and
have heretofore been contracted, or which may hereafter be contracted , by the PLEDGOR(S) directors and officers with relation thereto and among themselves in their relation to it. In other
and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE, including discounts of Chinese words, by-laws are the relatively permanent and continuing rules of action adopted by the
drafts, bills of exchange, promissory notes, etc., without any further endorsement by the corporation for its own government and that of the individuals composing it and having the
PLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY THOUSAND (P20,000.00) PESOS, direction, management and control of its affairs, in whole or in part, in the management and control
together with the accrued interest thereon, as hereinafter provided, plus the costs, losses, damages of its affairs and activities. (9 Fletcher 4166, 1982 Ed.)
and expenses (including attorney's fees) which PLEDGEE may incur in connection with the The purpose of a by-law is to regulate the conduct and define the duties of the members towards
collection thereof. 35 (Emphasis ours.) the corporation and among themselves. They are self-imposed and, although adopted pursuant to
The validity of the pledge agreement between petitioner and Calapatia cannot thus be held suspect by VGCCI. As candidly statutory authority, have no status as public law. (Ibid.)
explained by petitioner, the promissory note of 3 August 1983 in the amount of P20,000.00 was but a renewal of the first Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except
promissory note covered by the same pledge agreement. when they have knowledge of the provisions either actually or constructively. In the case
VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the right to sell the share in of Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting the
question in accordance with the express provision found in its by-laws. transfer of shares cannot have any effect on the transferee of the shares in question as he "had no
Private respondent's insistence comes to naught. It is significant to note that VGCCI began sending notices of delinquency to knowledge of such by-law when the shares were assigned to him. He obtained them in good faith
Calapatia after it was informed by petitioner (through its letter dated 14 May 1985) of the foreclosure proceedings initiated and for a valuable consideration. He was not a privy to the contract created by the by-law between
against Calapatia's pledged share, although Calapatia has been delinquent in paying his monthly dues to the club since 1975. the shareholder  . . . and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as
Stranger still, petitioner, whom VGCCI had officially recognized as the pledgee of Calapatia's share, was neither informed nor a purchaser. (Emphasis supplied.)
furnished copies of these letters of overdue accounts until VGCCI itself sold the pledged share at another public auction. By By analogy of the above-cited case, the Commission en banc is of the opinion that said case is
doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even failed to give petitioner notice of said auction applicable to the present controversy. Appellant-petitioner bank as a third party can not be bound
sale. Such actuations of VGCCI thus belie its claim of good faith. by appellee-respondent's by-laws. It must be recalled that when appellee-respondent
In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues in this wise: communicated to appellant-petitioner bank that the pledge agreement was duly noted in the club's
The general rule really is that third persons are not bound by the by-laws of a corporation since books there was no mention of the shareholder-pledgor's unpaid accounts. The transcript of
they are not privy thereto (Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to this is when stenographic notes of the June 25, 1991 Hearing reveals that the pledgor became delinquent only
third persons have actual or constructive knowledge of the same. In the case at bar, petitioner had in 1975. Thus, appellant-petitioner was in good faith when the pledge agreement was contracted.
actual knowledge of the by-laws of private respondent when petitioner foreclosed the pledge made The Commission en banc also believes that for the exception to the general accepted rule that third
by Calapatia and when petitioner purchased the share foreclosed on September 17, 1985. This is persons are not bound by by-laws to be applicable and binding upon the pledgee, knowledge of the
proven by the fact that prior thereto, i.e., on May 14, 1985 petitioner even quoted a portion of provisions of the VGCI By-laws must be acquired at the time the pledge agreement was contracted.
private respondent's by-laws which is material to the issue herein in a letter it wrote to private Knowledge of said provisions, either actual or constructive, at the time of foreclosure will not affect
respondent. Because of this actual knowledge of such by-laws then the same bound the petitioner pledgee's right over the pledged share. Art. 2087 of the Civil Code provides that it is also of the
as of the time when petitioner purchased the share. Since the by-laws was already binding upon essence of these contracts that when the principal obligation becomes due, the things in which the
petitioner when the latter purchased the share of Calapatia on September 17, 1985 then the pledge or mortgage consists maybe alienated for the payment to the creditor.
petitioner purchased the said share subject to the right of the private respondent to sell the said In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the Commission issued an
share for reasons of delinquency and the right of private respondent to have a first lien on said opinion to the effect that:
shares as these rights are provided for in the by-laws very very clearly. 36 According to the weight of authority, the pledgee's right is entitled to full
VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.: 37 protection without surrender of the certificate, their cancellation, and the
And moreover, the by-law now in question cannot have any effect on the appellee. He had no issuance to him of new ones, and when done, the pledgee will be fully
knowledge of such by-law when the shares were assigned to him. He obtained them in good faith protected against a subsequent purchaser who would be charged with
and for a valuable consideration. He was not a privy to the contract created by said by-law between constructive notice that the certificate is covered by the pledge. (12-A
the shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said by-law cannot operate to Fletcher 502)
defeat his rights as a purchaser. The pledgee is entitled to retain possession of the stock until the pledgor
An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the pays or tenders to him the amount due on the debt secured. In other
corporation for a period of thirty days is not binding upon an assignee of the stock as a personal words, the pledgee has the right to resort to its collateral for the payment
contract, although his assignor knew of the by-law and took part in its adoption. (10 Cyc., 579; of the debts. (Ibid, 502)
Ireland vs. Globe Milling Co., 21 R.I., 9.) To cancel the pledged certificate outright and the issuance of new
When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not certificate to a third person who purchased the same certificate covered
affected by any contractual restriction of which he had no notice. (Brinkerhoff-Farris Trust & by the pledge, will certainly defeat the right of the pledgee to resort to its
Savings Co. vs. Home Lumber Co., 118 Mo., 447.) collateral for the payment of the debt. The pledgor or his representative
The assignment of shares of stock in a corporation by one who has assented to an unauthorized or registered stockholders has no right to require a return of the pledged
by-law has only the effect of a contract by, and enforceable against, the assignor; the assignee is stock until the debt for which it was given as security is paid and

3
 satisfied, regardless of the length of time which have elapsed since debt
was created. (12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities or liens in favor either of the
corporation or of third persons, if he has no notice thereof, but not otherwise. He also takes it free
of liens or claims that may subsequently arise in favor of the corporation if it has notice of the
pledge, although no demand for a transfer of the stock to the pledgee on the corporate books has
been made. (12-A Fletcher 5634, 1982 ed., citing Snyder v. Eagle Fruit Co., 75 F2d739) 38
Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art. 2099 of the Civil Code which
stipulates that the creditor must take care of the thing pledged with the diligence of a good father of a family, fails to convince.
The case of Cruz & Serrano v. Chua A. H. Lee, 39 is clearly not applicable:
In applying this provision to the situation before us it must be borne in mind that the ordinary pawn
ticket is a document by virtue of which the property in the thing pledged passes from hand to hand
by mere delivery of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It
results that one who takes a pawn ticket in pledge acquires domination over the pledge; and it is
the holder who must renew the pledge, if it is to be kept alive.
It is quite obvious from the aforequoted case that a membership share is quite different in character from a pawn
ticket and to reiterate, petitioner was never informed of Calapatia's unpaid accounts and the restrictive provisions
in VGCCI's by-laws.
Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against which the corporation holds any
unpaid claim shall be transferable in 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 indebtedness which a subscriber or stockholder
may owe the corporation arising from any other transaction." 40 In the case at bar, the subscription for the share in question
has been fully paid as evidenced by the issuance of Membership Certificate No. 1219. 41 What Calapatia owed the corporation
were merely the monthly dues. Hence, the aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of Appeals is REVERSED and the order of the
SEC en banc dated 4 June 1993 is hereby AFFIRMED.
SO ORDERED.
Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.