Carr v. Marietta Corp.

• Decision Date: 01 August 1998
• Docket Number: Docket No. 98-7961
• Parties: (2nd Cir. 2000) KATHLEEN CARR, Plaintiff Appellant, v. MARIETTA CORPORATION, Defendant Appellee
• Court: U.S. Court of Appeals — Second Circuit

Page 724

211 F.3d 724 (2nd Cir. 2000)

KATHLEEN CARR, Plaintiff Appellant, v. MARIETTA CORPORATION, Defendant Appellee.

Docket No. 98-7961

August Term, 1998

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Argued: March 26, 1999

Decided: May 05, 2000

Appeal from a judgment of the United States District Court for the Northern District of New York (Frederick J. Scullin, Jr., Judge) entered June 12, 1998, denying Plaintiff-Appellant's motion for summary judgment and granting Defendant-Appellee's cross-motion for summary judgment.

Affirmed.

Robert E. Greenberg, Friedlander, Misler, Friedlander, Sloan & Herz, Washington DC (Thomas Buckel, Jr. and Eric Nordby, Hancock & Estabrook, LLP, Syracuse, New York, of counsel), for Plaintiff-Appellant.

Thomas E. Myers, Bond, Schoenenck & King, LLP, Syracuse, NY (Henry Morris, of counsel), for Defendant-Appellee.

Before: FEINBERG, PARKER, and POOLER, Circuit Judges.

PARKER, Circuit Judge:

Plaintiff-Appellant Kathleen Carr appeals from a judgment of the United States District Court for the Northern District of New York (Frederick J. Scullin, Jr., Judge) entered June 12, 1998, denying Carr's motion for summary judgment and granting Defendant-Appellee Marietta Corporation's ("Marietta") cross-motion for summary judgment. Carr seeks to enforce her rights as the purported owner of 10,000 shares of stock in Marietta. She alleges that Marietta wrongfully refused to purchase the stock from her pursuant to a tender offer (the "Tender Offer") in conjunction with Marietta's privatization plan. Marietta responds that Carr's alleged right to sell the stock to Marietta is unenforceable because the party to whom it was originally issued never paid for it. For the reasons set forth below, we affirm.

I. FACTUAL BACKGROUND

Marietta is a New York corporation specializing in the manufacture and marketing of products for the hotel and guest service industries. Marietta's stock was publicly traded on the NASDAQ Stock Exchange from 1986 until March 1996. In 1996, Marietta's stock was delisted pursuant to a privatization plan (the "Plan of Merger"), which included a tender offer by the company to repurchase all publically held shares.

Thomas Walsh, Carr's brother and the party to whom the disputed shares were first issued, served on Marietta's board of directors from 1980 until 1996. In 1989, Marietta offered Walsh, along with other directors on the board, certain "bonus" Marietta stock, certain options to purchase Marietta stock, and the right to purchase additional Marietta stock in exchange for a small cash downpayment and a promissory note payable to Marietta. Pursuant to this offer, Walsh purchased 10,000 shares of stock (the "Walsh Shares") in exchange for an initial $1,000 cash payment and a promissory note for $121,500 (the "1989 Note"). The Walsh Shares are unregistered,¹ restricted Marietta shares, which are represented by a single share certificate dated July 9, 1989. The restriction on the share certificate states:

THE SHARES REPRESENTED HEREBY (I) ARE SUBJECT TO THE PROVISIONS OF A CERTAIN STOCK PURCHASE AGREEMENT, DATED AS OF FEBRUARY 9, 1989, BETWEEN THE HOLDER HEREOF AND MARIETTA CORPORATION . . . WHICH AGREEMENT PERMITS, INTER ALIA, THE COMPANY TO REACQUIRE THE SHARES UNDER CERTAIN CIRCUMSTANCES AND (II) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER, AND MAY NOT BE SOLD, OFFERED FOR SALE OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR AN EXEMPTION THEREFROM.

Paragraph 4 of the Stock Purchase Agreement provides that 20% of the Walsh Shares would vest annually on each anniversary of the Stock Purchase Agreement. It further states that:

all Shares are vested in the Director if he has not resigned from the Board or given notice to the company of his refusal to stand for re-election of the Board of the Company on or prior to the fifth anniversary of the date hereof. All Shares which shall have vested shall be free and clear of the restrictions of this Agreement. . . .

In the event that the Director shall sell any of the Shares, the portion of the principal amount of the Note, together with accrued interest, corresponding to the number of the Shares sold shall, to the extent not previously paid, immediately be due and payable and no transfer in the stock ledger of the company will be made until such payment is received.

Seven months after Walsh obtained the Walsh Shares, he pledged them to Sequoia National Bank in Maryland pursuant to a Security Agreement dated September 14, 1989 (the "Sequoia Security Agreement").² Plaintiff concedes that Sequoia had notice of the two restrictions on alienation that appear on the share certificate legend, but nonetheless contends that Sequoia was a bona fide purchaser ("BFP") of the Walsh Shares.

Neither Walsh nor any other party has ever paid Marietta the $121,500 due under the 1989 Note. According to Carr, Walsh nonetheless became 100% vested in the Walsh Shares in accordance with Paragraph 4 of the Stock Purchase Agreement in February 1994, even though he had not made any principal payments on the 1989 Note.³ Instead of requiring payment on the Note, the Board of Directors decided to extend the repayment date on the 1989 Note by canceling it and issuing a new one. On February 9, 1994, Walsh executed a new non-negotiable promissory note to Marietta in the amount of $121,500 (the "1994 Note"), which replaced the 1989 Note.

On April 1, 1994, Walsh borrowed $108,470.06 from Sequoia Bank and executed a promissory note (the "Sequoia Promissory Note"), which contained a security/pledge agreement stating "[t]his Note is secured by 10,000 shares of Marietta Corporation common stock." According to the terms of the Sequoia Promissory Note, Walsh was responsible for repaying the loan, with interest, by August 1, 1994.

In 1995, Marietta entered discussions with a Barry W. Florescue that led to a merger and the privatization of Marietta. Under the Plan of Merger that was eventually approved by proxy, Marietta was to purchase all of its 3,319,788 shares of outstanding stock at the offered price of $10.25 per share. The proxy solicitation that explained the Plan of Merger stated that, "[f]rom and after the Effective Time, the shares held by former shareholders of Marietta [would] represent the right to receive $10.25 per Share in cash but [would] not represent any equity interest in the Surviving Corporation."

At the time the Plan of Merger was being formulated, the officers of Marietta were aware that Walsh still owed Marietta $121,500, and they appear to have made some effort to collect payment from him. According to Marietta, Walsh repeatedly represented to Marietta's directors that he would deliver his share certificate to Marietta in partial payment of the 1994 Note. Walsh further represented that he would pay the balance of his stock debt to Marietta prior to the merger closing. Walsh apparently neglected to mention that he was no longer in possession of the certificate, having surrendered it to Sequoia in either 1989 or 1994. See supra, note 2.

In reliance on these representations, Marietta once again extended Walsh's time to pay his stock debt. Walsh's 1994 Note was replaced by a third note dated February 9, 1996 (the "1996 Note"), which had a maturity date of March 15, 1996. The Plan of Merger specifically stated that it had accelerated payment of the 1996 Note.

The merger closed on March 8, 1996, and since March 11, 1996, no share of Marietta has been publicly traded. The privatization of Marietta essentially renders the Walsh Shares worthless unless Marietta purchases them from their current owner under the Plan of Merger.

According to Carr, sometime in early 1996 Sequoia sought to redeem the Walsh Shares because Walsh was unable to repay the Sequoia Promissory Note. With Walsh's cooperation, Sequoia attempted to tender the shares to Marietta. Because Walsh was not actually in possession of the share certificate, having presented it to Sequoia in 1989 or 1994, he had his attorney attempt to tender the Walsh Shares certificate and irrevocable stock power "on behalf of Sequoia." Marietta refused Sequoia's tender, and Marietta has since maintained that it owes no payment to Sequoia (or to Carr) because the value of the Walsh Shares was to be offset against the sum due on the 1996 Note.

In the meantime, Sequoia attempted to collect on the $108,000 that Walsh owed Sequoia by virtue of the Sequoia Promissory Note. At a date unspecified in the record, Sequoia secured a consent judgment against Walsh in the Circuit Court of Montgomery County, Maryland, for the sum of $132,633.62, plus post-judgment interest. Sequoia also secured a consent judgment for the same amount in the Combined Court of Routt County, Colorado.

By this point, it had become obvious to all parties involved that Walsh was virtually insolvent. Marietta reports that:

in the early summer of 1996, Sequoia continued collection efforts against Walsh [to collect on the $108,000 loan]. Carr again intervened "on her brother's behalf," contacted the President of Sequoia Paul McNamara . . . and initiated a transaction with Sequoia to "stop" Sequoia and its "henchmen" from "hounding" her brother Walsh with legal action to enforce Sequoia's Judgments against Walsh.

Appellant's Br. at 7-8 (citations omitted).

On August 5, 1996, Carr purchased all of Sequoia's rights against Walsh, including the Sequoia Promissory Note (face amount $108,407.06), the Security Agreement, the Walsh Shares, and the judgments Sequoia had obtained against Walsh for $132,633.62 in both the Circuit Court of Montgomery County, Maryland and the Combined Court of Routt County, Colorado. As a Senior Vice President at Washington Area Banks, Carr had more than sixteen years experience in commercial lending, investment management, trusts and loans. Carr was also well aware that...