GARCIA VS. LIM CHU SING CASE DIGEST

 G.R. No. L-39427             February 24, 1934
TIRSO GARCIA, in his capacity as receiver of the Mercantile Bank of China, plaintiff-appellee,
vs.
LIM CHU SING, defendant-appellant.

CORPORATION LAW; EQUITY SECURITIES

FACTS:

• The complaint was the indebtedness of Lim Cuan Sy, who had an account with the plaintiff bank in the form of "trust receipts" guaranteed by defendant-appellant Lim Chu Sing as surety and with chattel mortgage securities.

• The plaintiff bank, without the knowledge and consent of the defendant, foreclosed the chattel mortgage and privately sold the property covered thereby.

• Inasmuch as Lim Cuan Sy failed to comply with his obligations, the plaintiff required the defendant, as surety, to sign a promissory note. The defendant had been paying the corresponding installments until the debt was reduced. 

• The proceeds of the sale of the mortgaged chattels together with other payments made were applied to the amount of the promissory note in question, leaving the balance which the plaintiff now seeks to collect.

• Note that the defendant Lim Chu Sing is an owner of shares of stock of the plaintiff Mercantile Bank of China.

ISSUE:

Whether or not it is proper to compensate the defendant-appellant's indebtedness of which is claimed in the complaint, with the sum representing the value of his shares of stock with the plaintiff entity, the Mercantile Bank of China.

HELD:

• A share of stock or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and, therefore, it is not a credit . Stockholders, as such, are not creditors of the corporation. It is the prevailing doctrine that the capital stock of a corporation is a trust fund to be used more particularly for the security of creditors of the corporation, who presumably deal with it on the credit of its capital stock. Therefore, the defendant-appellant Lim Chu Sing not being a creditor of the Mercantile Bank of China, although the latter is a creditor of the former, there is no sufficient ground to justify a compensation.

• In view of the foregoing, this court is of the opinion and so holds that the shares of a banking corporation do not constitute an indebtedness of the corporation to the stockholder and, therefore, the latter is not a creditor of the former for such shares and that the indebtedness of a shareholder to a banking corporation cannot be compensated with the amount of his shares therein, there being no relation of creditor and debtor with respect to such shares.