Cohen v. Rains
| Decision Date | 27 April 1989 |
| Docket Number | No. 2-87-115-CV,2-87-115-CV |
| Citation | 769 S.W.2d 380 |
| Parties | 10 UCC Rep.Serv.2d 1021 David M. COHEN, Appellant, v. Raymond L. RAINS, Donald W. Moore, Al Curry, and Tim Curry, Appellees. |
| Court | Texas Court of Appeals |
HOPKINS, Justice (Retired, Sitting by Assignment).
Motions for rehearing have been filed by appellant and by appellees. Although we deny both motions for rehearing, in order to clarify our prior holding in this case we hereby withdraw our opinion and judgment of November 23, 1988, and substitute this Opinion on Rehearing.
Appellant, David M. Cohen, 1 appeals from a judgment decreeing that he take nothing in his lawsuit seeking the principal balance of $355,480.45 due on a promissory note signed by appellees, and foreclosure of his security interest in and to 80,000 shares of common stock in Allied Auto Supply, Inc. Based upon a jury verdict that Cohen exercised ownership rights in the stock shares, the trial judge ruled in favor of appellees on their affirmative defense that Cohen was precluded from suing for the balance due on the note because his action in notifying appellees that he had voted the shares of stock amounted to a foreclosure of his security interest in full satisfaction of the debt under article nine of the Uniform Commercial Code.
The judgment is reversed and the cause is remanded to the trial court.
The parties are essentially in agreement as to the basic factual history of the case, which originated in January 1976. At that time, David M. Cohen agreed to sell the stock and assets of his auto parts supply business, Allied Auto Supply, Inc., to appellees. The sale of this closely held corporation was accomplished on March 12, 1976, by appellees' purchase of the 50,000 outstanding shares of Allied Auto Supply, Inc. stock owned by Cohen. The consideration given by appellees was: $20,000 paid; execution by all appellees of a promissory note in the principal amount of $533,600; and execution by appellees of a security agreement granting a security interest to Cohen in all of the corporation's common stock.
Later that year appellees re-incorporated Allied Auto Supply, Inc. as a Subchapter-S Corporation, and 80,000 shares of stock in the new corporation were issued (20,000 shares in the name of each of the four appellees). Simultaneously, Cohen released his security interest in the 50,000 shares of Allied Auto Supply, Inc.'s stock, and appellees pledged the inventory and other tangible property of the new corporation (also known as Allied Auto Supply Inc.--hereinafter "Allied") as security for the original March 12, 1976 promissory note.
On September 26, 1978, Cohen released his security interest in Allied's inventory and other tangible property, and accepted a third Security Agreement pursuant to which appellees granted Cohen a security interest in the 80,000 shares of Allied stock that had been issued in appellees' names when the new Subchapter-S Corporation was formed. The four stock certificates (one for each appellee--each stock certificate was for 20,000 shares) were retained by appellees and not delivered to Cohen at this time. Thereafter, appellees borrowed substantial sums from a bank and pledged the inventory, equipment, and other tangible assets as security for the debt.
In April 1983 appellees defaulted in their payments under the 1976 promissory note to Cohen. That same month, Cohen wrote to each appellee stating:
Failure to receive current payments has placed your note in default.
Unless remittance is received in full for the delinquency no later than Friday, April 29, 1983, I regret no alternative exists but to file suit to accelerate note to maturity. [Emphasis added.]
Cohen received no response to his letter.
On June 3, 1983 Cohen's attorney, Walter Zivley, wrote to each appellee on Cohen's behalf informing him that Cohen was accelerating the maturity of the note and demanding immediate payment.
During this period of time Allied was experiencing major financial difficulties, and on June 17, 1983 Gateway National Bank, the secured creditor holding the security interest in Allied's tangible assets, foreclosed upon this collateral. At that point appellee Rains, acting as president of Allied, wrote all creditors informing them of the foreclosure and the fact that appellees had "exhausted all possibilities to secure proper capitalization or to restructure the corporation's debt," and would be unable to meet its obligations to creditors.
On June 24, 1983, pursuant to Cohen's prior request, 2 appellees' attorney mailed the four stock certificates, representing appellees' ownership of the 80,000 shares of Allied stock, to Cohen's attorney. It is undisputed that appellees never endorsed the stock certificates, nor was Cohen ever given any instrument authorizing him to endorse the stock certificates or transfer ownership of the Allied stock from appellees to himself or to a third party.
On June 28, 1983 Cohen filed the instant lawsuit against appellees seeking payment of the unpaid principal sum ($355,480.45) under the promissory note, plus interest and attorneys' fees. Cohen also sought judicial foreclosure of the security interest held by him in the 80,000 shares of Allied's common stock. In this regard, Cohen requested that the judgment entered provide for the transfer of ownership of the stock "in the manner provided for under the bylaws of the corporation and the laws of the State of Texas." Cohen further asked that the judgment provide a definite date by which such transfer from appellees to Cohen shall be accomplished, and the court should also set a specific date on which such shares shall be sold by Cohen at public sale with the proceeds, if any, being credited against the amount of the judgment. On June 29, 1983, the day after filing suit, Cohen's attorney, Walter Zivley, wrote to Gateway National Bank and Allied, with a copy to each appellee, notifying them that Cohen had: elected to vote the shares of stock "under the Security Agreement" (emphasis added); removed appellees as officers and directors; elected himself president; and determined he would repudiate all transfer of assets made after June 28th unless made with his prior written consent. The entire text of the letter is set out below:
On behalf of David M. Cohen, we do hereby notify you that he has heretofore elected under the Security Agreement covering 80,000 shares of the capital stock of Allied Auto Supply, Inc. to vote such shares. He has removed the officers and directors of Allied Auto Supply, Inc. who have heretofore served in such capacity and has elected himself as President of Allied Auto Supply, Inc. We would specifically notify you that no transfer of assets of Allied Auto Supply, Inc. in which you participate, directly or indirectly, made on or after June 28, 1983, will be valid or effective, without the prior written consent of Mr. Cohen. [Emphasis added.]
Zivley testified at trial that when he wrote this letter he was relying upon section 5A of the September 26, 1978 Security Agreement (the Security Agreement in effect at that time and at trial). In pertinent part, this document provides:
SECTION 3. EVENTS OF DEFAULT.
Debtor will be in default under this pledge agreement upon the happening of any of the following events or conditions (hereinafter called "Event of Default"):
A. Debtor fails to pay when due any principal or interest owing under any of the obligations secured by the security interest created herein, or otherwise breaches any of the covenants, terms or conditions contained in any writings evidencing such obligations.
....
SECTION 5. MISCELLANEOUS.
A. It is agreed that the securities are pledged to the Secured Party solely for the purpose of Collateral, and that the Debtor shall have the voting privileges which will continue unimpaired unless and until the Debtor commits an Event of Default as set forth in the note or as defined herein. [Emphasis added.]
As is apparent, the Security Agreement does not specify whether the secured party, Cohen, must obtain judicial foreclosure of the stock prior to being able to vote the shares. There is nothing in the record indicating that prior to trial appellees challenged Cohen's right to vote the stock under the Security Agreement, or whether appellees just ignored the letter.
At trial, as their defense to Cohen's claim that they owed the balance of the promissory note, appellees pled that the Security Agreement did not provide for the voting of the stock prior to foreclosure by Cohen. Therefore, appellees contended that Cohen's action in notifying them that he had voted such stock and removed Allied's officers and directors was, in effect, a foreclosure, and Cohen thereby accepted such stock in full satisfaction of appellees' obligations, and Cohen was precluded from suing for any balance allegedly due under the promissory note. See TEX.BUS. & COM.CODE ANN. secs. 9.504 and 9.505 (Vernon Supp.1989).
Since the evidence presented was conclusive as to the execution of the note and Security Agreement, and as to the default and the unpaid balance owed by appellees, only two questions were submitted to the jury. These questions pertained to appellees' affirmative defense, and both were answered in appellees' favor:
QUESTION 1
Did Plaintiff on or before June 29, 1983, intend to, and did he, exercise the same or similar rights of ownership with regard to the 80,000 shares of common stock of Allied Auto Supply, Inc., which a third party would have usually exercised if the stock had been owned by such a third party,...
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