Finvest Securities Co., Inc., Petitioner, vs. Trans-Phil Marine Enterprises, Inc. and Roland H. Garcia; G.R. No. 181415
Facts:
Trans-Phil Marine Enterprises, Inc. (TMEI) and Roland Garcia filed a complaint against Finvest Securities Co., Inc. (Finvest) praying for the delivery of stock certificates and payment of dividends on the stocks they purchased. The Complaint alleged that, from February 4, 1997 to July 31, 1997, TMEI and Roland Garcia purchased shares of stock of Piltel Corporation through Finvest. Finvest failed to deliver to them the stock certificates despite several demands.
During the pre-trial stage, TMEI amended its complaint by modifying its prayer for a refund of the value of the undelivered shares of stock, instead of the delivery of the stock certificates plus payment of dividends.
On April 29, 2003, the RTC rendered a Decision in Civil Case No. 00-1579, ordering the respondent to return to complainants the value of the undelivered shares of stock of Piltel, with interest thereon at the legal rate from the date of the filing of the Complaint.
Finvest appealed to the Court of Appeals (CA). On September 3, 2007, the CA rendered a Decision affirming the RTC Decision. Applying Article 1191 of the Civil Code, the CA declared that since Finvest failed to comply with its obligation to deliver to TMEI and Garcia the shares of stock, Finvest was bound to return the amounts paid by them.
Issue:
Whether or not the failure of Petitioner to deliver the certificates of stock gave Respondents the right to rescind the sale under Article 1191 of the Civil Code.
Ruling:
Yes.
Right to rescind under Article 1191 of the Civil Code
The CA was correct in applying Article 1191 of the Civil Code, which indicates the remedies of the injured party in case there is a breach of contract:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
The right of a party to rescission under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them. In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate thing, and the buyer to pay therefor a price certain in money or its equivalent. In some contracts of sale, such as the sale of real property, prior physical delivery of the thing sold or its representation is not legally required, as the execution of the Deed of Sale effectively transfers ownership of the property to the buyer through constructive delivery. Hence, delivery of the certificate of title covering the real property is not necessary to transfer ownership.
Transfer of ownership over shares of stock
In the 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, thus:
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 so as to show 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.
For a valid transfer of stocks, the requirements are as follows:
- there must be delivery of the stock certificate;
- the certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and
- to be valid against third parties, the transfer must be recorded in the books of the corporation.
Right to rescind
Clearly, Finvest’s failure to deliver the stock certificates representing the shares of stock purchased by TMEI and Garcia amounted to a substantial breach of their contract which gave rise to a right to rescind the sale.