GARCIA VS.

LIM CHU SING,

59 PHIL. 562, NO. 39427 FEBRUARY 24, 1934

PONENTE: VlLLAREAL, J.:

FACTS:
On June 20, 1930, the defendant-appellant Lim Chu Sing executed and delivered to the
Mercantile Bank of China a promissory note for the sum of P19,605.17 with interest thereon at
6 percent per annum, payable monthly until the amount of the promissory note together with
the interest thereon is fully paid. One of the conditions stipulated in said promissory note is that
in case of defendant's default in the payment of any of the monthly installments, as they
become due, the entire amount or the unpaid balance thereof together with interest thereon at
6 percent per annum, shall become due and payable on demand. The defendant had been
making several partial payments thereon, leaving an unpaid balance of P9,105.17. However, he
defaulted in the payment of several installments by reason of which the unpaid balance of
P9,105.17 on the promissory note has ipso facto become due and demandable.
The debt which is the subject matter of the complaint was not really an indebtedness of
the defendant but of Lim Cuan Sy, who had an account with the plaintiff bank in the form of
"trust receipts" guaranteed by the defendant 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 for the sum of P19,105.17 payable in the manner hereinbefore stated. The defendant had
been paying the corresponding installments until the debt was reduced to the sum of P9,105.17
claimed in the complaint. The defendant is the owner of shares of stock of the plaintiff
Mercantile Bank of China amounting to P10,000. The plaintiff bank is now under liquidation.

ISSUE:
Whether or not it is proper to compensate the defendant-appellant's indebtedness of
P9,105.17, which is claimed in the complaint, with the sum of P10,000 representing the value of
his shares of stock with the plaintiff entity, the Mercantile Bank of China.

RULING:
No. 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 are not creditors of the
corporation. It is the prevailing doctrine of the American courts, repeatedly asserted in the
broadest terms, 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 (art. 1195, Civil Code; Acuña Co Chongco vs, Dievas,
12 Phil., 250).