Pierce Interlink Securities, Inc. v. Interport Resources Corp.

[SEC-SICD * CASE NO. 03-95-5013. August 2, 1996.] PIERCE INTERLINK SECURITIES, INC. , complainant , vs . INTERPORT RESOURCES CORP. , respondent . D E C I S I O N This is an action for sum of money against INTERPORT RESOURCES, INC. (hereinafter referred to as INTERPORT) filed by PIERCE INTERLINK SECURITIES, INC. (hereinafter referred as PIERCE), alleging among others, that sometime in April, 1994, Mr. Cesar Roque engaged the services of PIERCE to trade 135,300,000 INTERPORT shares of stock covered by stock certificates in the name of his father, Dr. Felipe C. Roque, of his aunt, Mrs. Elpidia R. Siochi and of F.C. Roque Agro-Industrial Corporation which were endorsed by them; that PIERCE accordingly sold the said Interport shares through the Philippine Stock Exchange for the net amount of P1,778,319.37, which was paid to Cesar Roque; that this stock certificate covering the shares sold were presented and delivered to the clearing house, which, in turn, forwarded the same to the transfer agent of INTERPORT Rizal Commercial Banking Corporation (RCBC); that RCBC, referred the matter to Interport, which did not immediately act on the same, making it necessary for plaintiff to purchase a similar number of shares of stock at a higher price in the amount of P3,616,800.00 to avoid being penalized for failure to deliver shares acceptable to RCBC and Interport; that as a result thereof, PIERCE suffered damages in the said amount of P3,616,800.00, plus interest at the rate of three (3%) a month from the time of its purchase; and that Pierce is entitled to exemplary damages in the amount of P2,000,000.00 and attorney's fees in the amount of P300,000.00 plus expense of litigation. cdll In answer thereto, INTERPORT alleged that it was justified in refusing to immediately transfer the certificates subject of this case because of the following facts and circumstances, to wit: "a) The stock certificates subject of this case did not appear in the Stock and Transfer Book of respondent Interport; b) The serial number of the Stock Certificates appeared to be out of sequence to the numbers of the stock certificates issued on the same day; c) At the time the stock certificates were traded, Felipe Roque was already dead. Thus, the shares of stocks should have been included in his estate; d) The genuineness and/or validity of the signature/endorsement of Felipe Roque on the stock certificates and the authority of Felipe Roque to sign for and in behalf of F.C. Roque Agro-Industrial Corporation need be established; e) Felipe Roque's failure to respond to respondent Interport's notice for him to validate his stock certificate in September 1992 need be explained." INTERPORT further claims that it has as a matter of fact, agreed to honor the transfer as soon as the National Bureau of Investigation (NBI) shall have certified to the genuineness of the certificate and the endorsements of the late Dr. Felipe C. Roque at the back thereof; that the instant case is premature and without merit and the same was filed for no other purpose than to harass and force respondent to honor the said certificates without the benefit of verification and of being assured of their genuineness and validity. In the preliminary conference held on July 21, 1995, PIERCE raised the following issues: 1) Whether the certificates of stocks in question are genuine or not; 2) Whether the return of the stock certificates is justified and based on valid reasons; 3) Whether respondent is liable for actual exemplary and nominal damages including attorney's fees. INTERPORT, on the other hand, raised the following issues: 1) Whether this Commission has jurisdiction over the case; 2) Whether complainant has cause of action against the respondent; 3) Whether respondent has a valid and legal ground to refuse the immediate transfer of the certificates subject of this case pending verification of their genuineness and validity; 4) Whether the instant case is premature and without merit. Hearings were conducted wherein both parties submitted their respective testimonial and documentary evidence. From the evidence adduced, both oral and documentary, the following facts appeared to have been conclusively established. That on February 10, 1994, Dr. Felipe C. Roque, a client of PIERCE died; that Jose Salak, an accountant an agent of PIERCE, attended the wake on the night of February 12, 1994, wherein the wife of Dr. Felipe C. Roque introduced him to her son, Mr. Cesar R. Roque, who according to Mrs. Roque, will continue all the transactions of Dr. Felipe C. Roque. When Mr. Salak went to see Mr. Cesar Roque in April, 1994 to deliver the stocks which PIERCE had bought for Dr. Felipe C. Roque, Mr. Salak was informed that when the safe of Dr. Felipe C. Roque was opened, he saw Interport Certificates of Stocks covering 4,600,000 shares in the name of Dr. Felipe C. Roque, Mr. Salak was asked to sell the same. Subsequently, thereafter, Mr. Salak was informed that the Roques discovered another envelope in a different safe of Dr. Felipe C. Roque, which also contained Stock Certificates of INTERPORT covering 17,500,000 shares, and he was again asked to sell the same. The said shares were sold on the following dates at the following prices: June 17, 1994 7,500,000 P.013 June 20, 1994 10,000,000 .013 July 26, 1994 26,000,000 .012 July 26, 1994 24,000,000 .011 July 28, 1994 32,000,000 .013 August 08, 1994 20,000,000 .017 August 08, 1994 15,300,000 .016 August 08, 1994 500,000 .016 The certificates covering the shares of stock of INTERPORT which were sold by PIERCE were accordingly delivered to the clearing house within a period of five (5) days after the sale. RCBC, INTERPORT's transfer agent, however, noted that the said certificates were not recorded in the stock and transfer book of the said corporation, RCBC, therefore, referred the matter to INTERPORT which asked for time to further conduct verification on the genuineness and validity of the said shares, considering that: 1) The aforementioned stock certificates do not appear in INTERPORT's Stock and Transfer Book; 2) The serial numbers of the stock certificates appear to be out of sequence to the number of the stock certificates issued on those dates; 3) At the time the stock certificates were traded, Dr. Felipe C. Roque was already dead. The shares of stocks should have been included in the estate of the late Dr. Felipe C. Roque; 4) The genuineness and/or validity of the signatures/endorsements of Dr. Felipe C. Roque on the stock certificates has yet to be established; 5) the genuineness and/or validity of the signature/endorsements of Dr. Roque on the stock certificates and the authority of Dr. Roque to sign for an in behalf of F.C. Roque Agro-Industrial Corp. have yet to be established; 6) Dr. Roque's failure to respond to the notice for him to validate his stock certificates in September 1992 must be explained. The matter was referred by PIERCE to the Brokers and Exchange Department of this Commission which conducted conferences wherein lawyers for both parties agreed to submit the genuineness of the certificates and the signatures of Dr. Felipe C. Roque for the verification by the NBI. It appears, however, that the agreed verification by the NBI did not materialize. Instead, PIERCE filed this case. The right of PIERCE to the damages claimed hinges on whether or not INTERPORT was justified in withholding validation and acceptance of the Stock Certificates on the grounds it had presented. The authorities are to the effect that: Since a corporation will be liable to the owner of stock if it allows a transfer on its books under a forged or unauthorized assignment and power of attorney, or otherwise in violation of his rights, it has a right to protect itself against liability. So it has the right and it is its duty, to make inquiry as to the authority of a person asking for such transfer, and may require him to produce evidence of his identity and of his right to the transfer, and therefore its refusal to register a transfer and issue a new certificate without such evidence is not wrongful. In a leading case in the Supreme Court of the United States, it was said by Mr. Justice Field: "The officers of the company are the custodians of its stock books, and it is their duty to see that all transfer of shares are properly made, either by the stockholders themselves or persons having authority for them. If upon the presentation of a certificate for transfer they are at all doubtful of the identity of the party offering it and the owner, or if not satisfied of the genuineness of a power of attorney produce, they can require the identity of the party in the one case, and the genuineness of the document in the other, to be satisfactorily established before allowing the transfer to be made". (Fletcher Cyclopedia Corporations, Permanent Edition, Vol. 12, Chap. 58, Secs. 5389-5564, p. 443) prcd It is clear, therefore, that INTERPORT does not only have a right but a duty to make inquiries as to the authority of the person asking for such transfer, and may require him to produce evidence of his right to the transfer. The eleven (11) Interport Stock Certificates subject of this case are in the names of Felipe Roque, F.C. Roque, Agro-Industrial Corporation and Elpidio Siochi. The stock certificate in the name of Felipe Roque are: Exh. No. Cert. No. No. of Shares Date Issue "A-5" 24666 11,875,000 09-07-88 "A-6" 24668 4,000,000 09-07-88 "A-7" 24669 1,875,000 09-07-88 "A-8" 24670 28,750,000 09-07-88 "A-9" 24671 3,000,000 09-07-88 "A-10" 24673 16,000,000 09-07-88 The said stock certificate appear to have been endorsed by Dr. Felipe C. Roque in blank but two (2) witnesses for PIERCE admitted that Dr. Felipe C. Roque had not delivered the said certificates to anybody, particularly to Mr. Cesar R. Roque, during his lifetime. In the very words of Mr. Jose Salak, accountant and agent of PIERCE, the stock certificates covering the shares were discovered in the safe of Dr. Felipe C. Roque. This was confirmed by Mr. Cesar R. Roque himself. Such being the case, the shares of stock did not belong to Mr. Cesar Roque, the person who caused its sale, but to the estate of Dr. Felipe C. Roque, Mr. Cesar Roque did not, therefore, have the authority to sell or transact the shares covered by the stock certificate. The only one who had the authority to sell the same was the administrator or executor of the estate of Dr. Felipe C. Roque or the heir to whom the same had been adjudicated in a deed of extra-judicial settlement. This is clear from the very wordings of Section 63 of the Corporation Code which states: SECTION 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 of 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 of certificates endorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer . . . ." Applying the above-quoted provision of the Corporation Code, this Commission has, in a long line of Opinions and Rulings, held that: "Mere endorsement of the certificate of stock is sufficient to legally effect transfer of shares of stock, provided the same is couple with delivery and recorded in the stock and transfer book." (Atty. Helena F.M. Dauz, June 25, 1991, SQB Dec. 91, p. 21; See also Private Development Corporation, Aug. 8, 1986, SQB Sept. and Dec. '86, p. 23; Eli C. Busa, Feb. 1, 89, SQB Mar. 89, p. 28; Dr. Pacifico Marcos, Feb. 22, 1982 SQB Mar. 82, p. 21; Atty. Fe Becina-Macalino, July 8, 1988, Atty. Pedro M. Ferrer, Aug. 4, 1989, SQB Sep. 89, p. 46; and Oriental Photographic & Equipment Corporation, May 2, 1983, Sec. 80 '83, 9.70; Emphasis supplied). In the particular opinion of this Commission dated May 12, 1988 addressed to Mr. Antonio D. Ibanez, SEC Quarterly Ruling of September, 1988, p. 4, this Commission stated that: It is settled that on death of a shareholder, his executor or administrator becomes vested with the legal title to the stock and entitled to vote the same at all meetings and that until a settlement and division of the estate is effected, the stock of the decedent belong to said administrator or executor as his personal representative. This rule is then even if the shares stand in the books of the corporation in the name of the decedent, or without a formal transfer of the stock in the books of the corporation. (Letter to Casino Espaol de Manila, dated March 3, 1986) dctai It is likewise advised that to transfer the shares of stock in favor of the heirs of the deceased stockholder, a judicial or extra-judicial partition of her estate is necessary if she died intestate or without a will otherwise it be necessary to wait for the testimony proceedings and the final adjudication of the shares of stock in accordance with the will of the decedent." It is thus clear that a corporation which transfers a share of stock appearing in the name of a stockholder who is known by the corporation to have clearly died without a judicial or extra-judicial partition of his estate may be liable for such action upon suit filed by any of the heirs of the estate of the deceased stockholder. A corporation will, therefore, be exercising its rights to refuse such transfer unless necessary judicial or extra-judicial partition of the estate was presented. Also, since the stock certificates subject of this case are part of the estate of Dr. Felipe C. Roque, the same is subject to estate tax. The same should not be transferred without the necessary clearance from the Bureau of Internal Revenue authorizing the same. Section 8 of Revenue Regulations No. 2-82, implementing Batas Pambansa Blg. 221 , warns that corporate secretaries may be held liable for registering and transferring shares without proof of payment of the pertinent taxes, to wit: Any stock transfer agent or secretary of the corporation who caused the registration in violation of the aforementioned requirement shall be punished by a fine of not more than P2,000.00 or by imprisonment for not more than months or both." The stock certificates in the name of F.C. Roque Agro-Industrial Corporation are: Exh. No. Cert. No. No. of Shares Date Issue "A" 6583 40,000,000 11-12-1979 "A-1" 6584 800,000 11-12-1979 "A-2" 12816 5,000,000 06-03-1980 "A-3" 12999 23,000,000 06-24-1980 As in the case of Stock Certificates in the name of Dr. Felipe C. Roque, the above stock certificates were, likewise, endorsed by Dr. Felipe C. Roque. The said stock certificates were, however, likewise, not delivered by Dr. Felipe C. Roque to Mr. Cesar Roque or for that matter, to anyone during the former's lifetime. They were part of INTERPORT certificates which were inside the envelope found in the safe of Dr. Felipe C. Roque after his death. They were, therefore, never delivered by Dr. Felipe C. Roque and consequently, there was no valid transfer of the same to Mr. Cesar Roque or to anyone. Moreover, the stock certificates are in the name of F.C. Roque Agro-Industrial Corporation. The same could not, therefore, have been validly endorsed or transferred by Dr. Felipe C. Roque without a board resolution authorizing him to do so. Apparently realizing the need for such board authority, PIERCE submitted a Secretary's Certificate (Exhibit "D") purportedly executed by the Corporate Secretary F.C. Roque Enterprises, Inc. certifying to the fact that the board of directors of the said corporation had adopted a resolution authorizing Dr. Felipe C. Roque "to enter into any contract with the INTERPORT RESOURCES and to sign all the necessary papers in connection thereon". As correctly observed by INTERPORT in its memorandum, the Secretary's Certificate refers to a board resolution adopted by F.C. Roque Enterprises, Inc. and not by F.C. Roque Agro-International Corporation. Besides, the authority given to Dr. Felipe C. Roque was not to sell, transfer or convey title to or ownership of INTERPORT shares of stock in the name of the corporation but to enter into any contract with INTERPORT; and, the sale of INTERPORT shares of stock, through the Philippine Stock Exchange, cannot, by any stretch of imagination, be considered as a contract with INTERPORT. There is, for all intent and purposes no authority for Mr. Cesar Roque and PIERCE to sell said shares of stock in the name of F.C. Roque Agro-Industrial Corporation. It is noteworthy that the initial reasons for INTERPORT's request for time to verify the genuineness and validity of the stock certificates in question are valid grounds. Indeed, the fact alone that the stock certificates in question are not in INTERPORT's Stock and Transfer Book and that the same were not validated is enough ground for this request. INTERPORT's agreement to have genuineness of the certificates and the signatories therein determined by the NBI and to be bound by its findings, to our mind, is a sign of its good faith in seeking verification to protect itself against over issuance of its shares of stocks. And, the fact that it subsequently discovered that there was no valid transfer of the shares to Mr. Cesar Roque, who tried to sell the same, justified its vigilance in protecting itself and its investors. In the light of the above findings justifying INTERPORT's refusal to immediately transfer the stock certificates subject of the instant case pending verification of the validity thereof and in subsequently refusing the transfer after it discovered that Dr. Felipe C. Roque died without conveying title thereto, then INTERPORT cannot be held liable for damages under the principle that any injury or damages resulting from a valid exercise of a legal right is damnum absque injuria. This Commission also cannot overlook the fact that PIERCE tried to sell the shares of stock subject of this case despite the knowledge of its accountant and sole agent, Mr. Jose Salak, that they do not belong to and were not validly transferred to Mr. Cesar Roque, the person who requested him to sell the same. While this is primarily a tax-evasion matter which pertains to the Bureau of Internal Revenue, PIERCE, nevertheless, as a duly licensed stock broker, and Mr. Salak as a licensed stock salesman, are hereby admonished against a repetition of the same with a warning that such repetition will be dealt with more severely. WHEREFORE, the instant case is hereby DISMISSED, with cost against the complainant. SO ORDERED. (SGD.) ALBERTO P. ATAS Hearing Officer