981 F.2d 1474 (5th Cir. 1993), 91-9502, Matter of Hill

Docket Nº:91-9502
Citation:981 F.2d 1474
Party Name:In the Matter of J. Lawrence HILL, Debtor. David V. ADLER, Appellant, v. J. Lawrence HILL and Whitney National Bank, Appellees.
Case Date:February 04, 1993
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 1474

981 F.2d 1474 (5th Cir. 1993)

In the Matter of J. Lawrence HILL, Debtor.

David V. ADLER, Appellant,


J. Lawrence HILL and Whitney National Bank, Appellees.

No. 91-9502

United States Court of Appeals, Fifth Circuit

February 4, 1993

Page 1475

Emile Louis Turner, Jr., Wilber Joseph Babin, Jr., Turner, Young & Hebbler, New Orleans, LA, for appellant.

Stephen Fitchie Cameron, Law Offices of Cecil M. Burglass, Jr., New Orleans, LA, for Hill.

Richard W. Bussoff, Richard Bussoff, W. Reed Smith, Monroe & Lemann, New Orleans, LA, for Whitney Nat. Bank.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before JONES, DUHE and WIENER, Circuit Judges.

WIENER, Circuit Judge:

On appeal from the district court's affirmation of a ruling by the bankruptcy court in the Eastern District of Louisiana, Appellant David V. Adler, trustee of the estate of the Debtor, J. Lawrence Hill, complains that those courts misconstrued the Civil Law meaning of the verb, to hypothecate, as used in a corporate charter provision purporting to restrict alienation of corporate stock, the purported pledge of which is the subject of the instant litigation. The district court affirmed the bankruptcy court's holding that, although the restriction

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in question was properly referred to by a legend on the stock certificate representing the stock that the Debtor, J. Lawrence Hill, purportedly pledged to Appellee, Whitney National Bank (the Bank), the act of pledge did not fall within the ambit of the restriction and thus was neither a void nor a voidable transaction. The ruling was grounded on the bankruptcy court's determination that under current Louisiana law the meaning of to hypothecate is limited to mortgage and does not include the pledge of corporate stock.

Agreeing with Adler's contrary view that in current Louisiana legal parlance, to hypothecate may connote to mortgage only but may also be synonymous with to pledge or to encumber, depending on the context, circumstances and manner in which that verb is used, we conclude that the use of "hypothecate" in the stock restriction provision here under consideration must mean pledge or mean nothing at all, the latter being a result not permitted if any sensible meaning can be attributed to a word employed in a writing. We therefore reverse and remand this case to the bankruptcy court for further proceedings consistent with this opinion.



  1. Operable Facts

    The facts on which the bankruptcy court based its rulings were stipulated and are not at issue here. Over time, Hill entered into various loan agreements with the Bank. By early 1988, he owed the Bank in excess of $700,000, and it insisted that he furnish additional collateral. The collateral demanded included Hill's 25 shares of the capital stock of Lucullus, Inc., a closely-held Louisiana business corporation. Hill's shares represent 25% of all issued and outstanding stock of Lucullus. The rest is owned by Patrick J. Dunne (50 shares or 50%) and John A. Pico (25 shares or 25%).

    Under date of June 23, 1988, Hill signed a Pledge Agreement on the Bank's standard printed form, purporting to pledge his Lucullus stock to the Bank. He did not endorse his stock certificate, which he deposited with the Bank, but did execute and deliver to the Bank an undated and unwitnessed "Assignment Separate from Certificate," signed in the blank by Hill.

    Hill's 25 shares of Lucullus, Inc. is represented by Certificate No. 2. That certificate is registered in the name of J. Lawrence Hill; it bears a reference on its face instructing "See Restrictions on Transfer on Reverse Hereof"; and its reverse side bears the following legend:

    The securities represented by this certificate are subject to restrictions on transferability as set forth in the by-laws (or articles as the case may be) of the corporation. No stock may be transferred or encumbered in any fashion without prior compliance with the requirements set forth herein. All persons are referred thereto, a copy of which is on file with the Secretary of this Corporation at the registered office of the corporation, for a full statement of the restrictions on this stock. (emphasis added).

    Article VIII of the Articles of Incorporation of Lucullus, Inc. states, in pertinent part:

    No shareholder shall sell, transfer, hypothecate, assign, or in any manner convey his stock without first offering same, in writing through the Board of Directors for a period of thirty (30) days to the remaining shareholders, who shall be notified of such offer at once by the Board of Directors. Within said thirty-day period, the remaining shareholders shall have the right to purchase the stock so offered, at book value as reflected by the books of the corporation as of the end of the month preceding the month in which said stock is first offered for sale. (emphasis added).

    Notice of the June 23, 1988, stock pledge by Hill was sent to the corporation by letter dated July 5, 1988, addressed to the attention of Patrick J. Dunne, President. Signed by Julian F. Neill, Vice President of the Bank, that three-sentence letter stated:

    Larry Hill has pledged 25 shares of Lucullus stock to us to secure any indebtedness of his to the bank. This

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    stock is legended so it has to be offered to the company before it is sold to anyone else. At this time we do not plan to dispose of the stock; however, I want you to know that it is pledged to us.

    No response from the corporation was requested and none was given.

    The record does not reflect additional correspondence among the Bank, the corporation, and the shareholders of Lucullus until November 21, 1989, when counsel for the Bank wrote to the corporation and all three shareholders, notifying them, "pursuant to Article 8 [sic] of the Articles of Incorporation of Lucullus, Inc.," of the Bank's intention to sell the pledged stock. By letter dated November 29, 1989, Dunne as President and a stockholder, and Pico as Secretary-Treasurer and a stockholder, jointly wrote to counsel for the Bank, formally repudiating the validity of Hill's pledge. Additionally, the letter advised counsel that the corporation and the remaining shareholders had a continuing interest in purchasing the stock on the terms provided in Article VIII of the charter and that they desired to cooperate with the Bank for the benefit of their fellow shareholder, Hill. The record does not reflect the book value of Hill's Lucullus stock as of the date he purported to pledge it to the Bank, but the bankruptcy court found, presumably based on a stipulation, that the book value of that stock was $69,347.50 as of March 31, 1990.

    On December 1, 1989, two days after the corporation, Dunne and Pico had responded to counsel for the Bank, a state court consent judgment was entered into by the Bank and Hill. That judgment purports to recognize rights of the Bank under the Pledge Agreement of June 23, 1988. Less than two weeks later, on December 12, 1989, Hill filed a Petition for Relief under Chapter 7 of the Bankruptcy Code.

  2. Judicial Proceedings

    Procedurally, this matter first came before the bankruptcy court on the Bank's motion to lift the automatic stay as it applied to Hill's 25 shares of Lucullus stock. In the capacity of trustee, Adler countered by filing an adversary proceeding against the Bank, seeking to have Hill's pledge of June 23, 1988 declared null and void. The bankruptcy court considered the facts stipulated, the memoranda submitted by the parties, the arguments of counsel, and the record in the case, then entered its memorandum opinion, the net result of which was to validate the stock pledge. The bankruptcy court reached that result by holding the charter restriction on hypothecation inapplicable to pledge. The court then superimposed on the Bank an obligation to "comply" with Article VIII of the charter by offering the stock to the shareholders of Lucullus in the event the Bank decides to foreclose the pledge by selling the stock.

    Adler appealed the bankruptcy court's ruling to the district court, which made a one sentence minute entry on August 15, 1991, that "[t]he ruling of [the bankruptcy court] is upheld." Thereafter, the district court entered a separate judgment dated November 6, 1991, ordering that the bankruptcy court's ruling "be, and it hereby is, upheld and affirmed." The district court made no independent findings of fact or conclusions of law. Adler timely appealed the district court's affirmance of the bankruptcy court's decision.



    As the facts found by the bankruptcy court and affirmed without comment by the district court were either stipulated by the parties or based on documentary evidence filed in the record without objection, the standard by which we review the factual findings of the bankruptcy court that reach us following appeal to the district court is of no moment. The only issues before us are legal ones, which we review de novo.



  3. Bankruptcy Court Opinion

    As a preliminary matter the bankruptcy court found that Adler, as trustee, has

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    standing to bring the adversary complaint under 11 U.S.C. § 544. The court reasoned that even though "[t]he Trustee has no independent power of avoidance, but may act only upon the right of one unsecured creditor holding an allowable claim, against whom the transfer or obligation was invalid under state law," the claim of John Pico--an unsecured creditor and stockholder in Lucullus who is entitled to claim the benefit of the transfer restriction--supplies the necessary derivative standing.

    Having found standing, the bankruptcy court considered whether the restrictions specified in...

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