Fil-Estate Golf and Development, Inc. v. Vertex Sales and Trading, Inc.

G.R. No. 202079, 10 June 2013

FACTS:

Petitioner Fil-Estate Golf and Development, Inc (FEGDI) is a stock corporation engaged in the development of golf courses. and FIL­-ESTATE LAND, INC. (FELI) is also a stock corporation but is engaged in real estate development. FEGDI was the developer of the Forest Hills Golf and Country Club (Forest Hills) and, in consideration for its financing support and construction efforts, was issued several shares of stock of Forest Hills.

FEGDI sold, on installment, to corporation A one Class “C” Common Share of Forest Hills. Prior to the full payment of the purchase price, corporation A sold the Class “C” Common Share to respondent Vertex Sales and Trading, Inc. (Vertex). Corporation A advised FEGDI of the sale to Vertex and FEGDI, in turn, instructed Forest Hills to recognize Vertex as a shareholder. For this reason, Vertex enjoyed membership privileges in Forest Hills.

Despite Vertex’s full payment, the share remained in the name of FEGDI. Seventeen (17) months after the sale, Vertex wrote FEDGI a letter demanding the issuance of a stock certificate in its name. Although Vertex complied with the request FEDGI to first pay the necessary fees for the transfer, no certificate was issued. This prompted Vertex to make a final demand and as the demand went unheeded, Vertex filed a Complaint for Rescission with Damages and Attachment against FEGDI, FELI and Forest Hills. It averred that the petitioners defaulted in their obligation as sellers when they failed and refused to issue the stock certificate covering the subject share despite repeated demands. During the pendency of the rescission action a certificate of stock was issued in Vertex’s name, but Vertex refused to accept it.

The RTC dismissed the complaint for insufficiency of evidence. It ruled that delay in the issuance of stock certificates does not warrant rescission of the contract as this constituted a mere casual or slight breach. It also observed that notwithstanding the delay in the issuance of the stock certificate, the sale had already been consummated; the issuance of the stock certificate is just a collateral matter to the sale and the stock certificate is not essential to “the creation of the relation of shareholder.” The CA reversed the RTC and rescinded the sale of the share. Citing Section 63 of the Corporation Code, the CA held that there can be no valid transfer of shares where there is no delivery of the stock certificate. It considered the prolonged issuance of the stock certificate a substantial breach that served as basis for respondent Vertex to rescind the sale. The CA ordered the petitioners to return the amounts paid by respondent by reason of the sale.

ISSUE:

Whether the delay in the issuance of a stock certificate can be considered a substantial breach as to warrant rescission of the contract of sale.

RULING:

Yes, the delay in the issuance of a stock certificate is considered a substantial breach that entitles one the right to rescind the sale.

Physical delivery is necessary to transfer ownership of stocks. The factual backdrop of this case is similar to that of Raquel-Santos v. Court of Appeals, where the Court held that in a sale of shares of stock, physical delivery of a stock certificate is one of the essential requisites for the transfer of ownership of the stocks purchased.

Section 63 of the Corporation Code provides:

SEC. 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.

In this case, Vertex fully paid the purchase price by February 11, 1999 but the stock certificate was only delivered on January 23, 2002 after Vertex filed an action for rescission against FEGDI.

Under these facts, considered in relation to the governing law, FEGDI clearly failed to deliver the stock certificates, representing the shares of stock purchased by Vertex, within a reasonable time from the point the shares should have been delivered. This was a substantial breach of their contract that entitles Vertex the right to rescind the sale under Article 1191 of the Civil Code. It is not entirely correct to say that a sale had already been consummated as Vertex already enjoyed the rights a shareholder can exercise. The enjoyment of these rights cannot suffice where the law, by its express terms, requires a specific form to transfer ownership.

“Mutual restitution is required in cases involving rescission under Article 1191” of the Civil Code; such restitution is necessary to bring back the parties to their original situation prior to the inception of the contract. Accordingly, the amount paid to FEGDI by reason of the sale should be returned to Vertex. On the amount of damages, the CA is correct in not awarding damages since Vertex failed to prove by sufficient evidence that it suffered actual damage due to the delay in the issuance of the certificate of stock.

*Case Digest by Rezeile S. Morandarte, Refresher, Andres Bonifacio College, SY 2019 – 2020

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