FBI Farms, Inc. v. Moore

• Decision Date: 13 November 2003
• Docket Number: No. 76S03-0209-CV-491.,76S03-0209-CV-491.
• Citation: 798 N.E.2d 440
• Parties: F.B.I. FARMS, INC., Ivan Burger, Freddy L. Burger, Susan Burger Eash, and Linda Moore, Appellants (Defendants below), v. Birchell MOORE, Appellee (Plaintiff below).
• Court: Indiana Supreme Court

798 N.E.2d 440

F.B.I. FARMS, INC., Ivan Burger, Freddy L. Burger, Susan Burger Eash, and Linda Moore, Appellants (Defendants below), v. Birchell MOORE, Appellee (Plaintiff below).

No. 76S03-0209-CV-491.

Supreme Court of Indiana.

November 13, 2003.

J. Richard Ransel, Jacob S. Frost, Elkhart, IN, Attorneys for Appellant.

Leonard E. Eilbacher, Fort Wayne, IN, Attorney for Appellee. BOEHM, Justice.

We hold that as a general proposition, restrictions on corporate share transfers may require approval of the transfer by the corporation's Board of Directors, at least in a family-owned corporation. Although generally valid against purchasers with notice of them, such restrictions may not prevent a creditor from foreclosing a lien on the shares, but a purchaser who buys at a foreclosure sale with notice of the restrictions acquires the shares subject to the restrictions. We also hold that if shares are subject to a right of first refusal, and the holder of the right has notice of the foreclosure, the holder cannot exercise the right against a purchaser at a foreclosure sale after the purchaser has taken title to the shares without objection from the holder of the rights.

Factual and Procedural Background

F.B.I. Farms, Inc., was formed in 1976 by Ivan and Thelma Burger, their children, Linda and Freddy, and the children's spouses. Each of the three couples transferred a farm and related machinery to the corporation in exchange for common stock in the corporation. At the time, Birchell Moore was married to Linda. Linda and Moore deeded a jointly-owned 180-acre farm to F.B.I., and 2,507 shares were issued to Moore and one to Linda. These 2,508 shares represented approximately fourteen percent of the capitalization of F.B.I.

In 1977, the Board of Directors of F.B.I. consisted of Moore, Ivan, Freddy and Linda. The minutes of a 1977 meeting of the Board recite that the following restrictions on the transfer of shares were "adopted":

1) No stock of said corporation shall be transferred, assigned and/or exchanged or divided, unless or until approved by the Directors thereof;

2) That if any stock be offered for sale, assigned and/or transferred, the corporation should have the first opportunity of purchasing the same at no more than the book value thereof;

3) Should said corporation be not interested, and could not economically offer to purchase said stock, any stockholder of record should be given the next opportunity to purchase said stock, at a price not to exceed the book value thereof;

4) That if the corporation was not interested in the stock, and any stockholders were not interested therein, then the same could be sold to any blood member of the family. Should they be desirous of purchasing the same, then at not more than the book value thereof.

Linda's marriage to Moore was dissolved in 1982. As part of the dissolution proceedings, Linda was awarded all of the F.B.I. shares and Moore was awarded a monetary judgment in the amount of $155,889.80, secured by a lien on Linda's shares.

F.B.I. filed for bankruptcy protection in 1989 and emerged from Chapter 11 Bankruptcy in 1991. Moore's judgment against Linda remained unsatisfied, and in April 1998 he sought a writ of execution of his lien. The corporation, through its counsel, responded with a letter to Moore's counsel demanding payment of the $250,700 subscription price for the 2,507 shares that were initially issued to Moore but had since been transferred to Linda. Moore obtained the writ of execution in June 1999, and in October 1999 the corporation, again through counsel, sent a letter to Moore purporting to cancel the 2,507 shares for failure to pay the subscription price. A sheriff's sale went forward and in February 2000 Moore purchased all 2,924 shares owned by Linda at the time for $290,450.67.

In December 2000 Moore instituted this suit against F.B.I., its shareholders, and Linda seeking a declaratory judgment that the attempted cancellation of the shares by the defendants was invalid, that Moore properly retained ownership of the shares, and that the shares were unencumbered by restrictions and were freely transferable. Moore also sought dissolution of the corporation, injunctive relief against alleged fraudulent practices by the defendants, and monetary damages. The trial court granted Moore's motion for partial summary judgment, finding (1) the shares were not "lawfully cancelled"; (2) Moore was the "lawful owner" of the disputed stock; (3) the restriction in paragraph one of the agreement requiring approval by F.B.I.'s directors for a share transfer was "manifestly unreasonable"; and, (4) the provision in paragraph four of the agreement giving "blood members" the option to purchase after the corporation and shareholders was "manifestly unreasonable" and unenforceable. The trial court's findings included those rendering the order appealable as a final judgment pursuant to Indiana Trial Rule 54(B).

On appeal, the Court of Appeals held that the transfer restrictions barred only voluntary transfers. F.B.I. Farms, Inc. v. Moore, 769 N.E.2d 688, 696 (Ind.Ct.App. 2002). Because the sheriff's sale effectuated an involuntary transfer of Linda's shares, Moore, as the purchaser of the shares, acquired the shares. Id. at 692. Although the court found that future transfers of stock would be subject to the restrictions in Moore's hands, it also affirmed the trial court's finding that the two disputed restrictions were manifestly unreasonable. Id. at 695-96. The court reasoned that the several tumultuous years of dispute between the parties rendered the restriction requiring director approval before transfer unreasonable, and the reference to "blood members" of the family was sufficiently ambiguous that that restriction was unenforceable. Id. at 694-96. We granted transfer.

Standard of Review

To support an order granting a motion for summary judgment, the designated evidence must show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Ind. Trial Rule 56(C). On appeal, the standard of review of a grant or denial of a motion for summary judgment is the same as that used in the trial court. Bemenderfer v. Williams, 745 N.E.2d 212, 215 (Ind.2001).

I. Transfer Restrictions

A. General Principles

Most of the issues in this case are resolved by the Indiana statute governing share transfer restrictions. Indiana Code section 23-1-26-8 essentially mirrors Model Business Corporation Act § 6.27, which authorizes restrictions on the transfer of shares. The Indiana statute reads as follows:

(a) The articles of incorporation, bylaws, an agreement among shareholders, or an agreement between shareholders and the corporation may impose restrictions on the transfer or registration of transfer of shares of any class or series of shares of the corporation. A restriction does not affect shares issued before the restriction was adopted unless the holders of the shares are parties to the restriction agreement or voted in favor of the restriction.

(b) A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee of the holder if the restriction is authorized by this section and its existence is noted conspicuously on the front or back of the certificate or is contained in the information statement required by section 7(b) [Ind.Code 23-1-26-7(b)] of this chapter. Unless so noted, a restriction is not enforceable against a person without knowledge of the restriction.

(c) A restriction on the transfer or registration of transfer of shares is authorized:

(1) to maintain the corporation's status when it is dependent on the number or identity of its shareholders;

(2) to preserve exemptions under federal or state securities law; or

(3) for any other reasonable purpose.

(d) A restriction on the transfer or registration of transfer of shares may, among other things:

(1) obligate the shareholder first to offer the corporation or other persons (separately, consecutively, or simultaneously) an opportunity to acquire the restricted shares;

(2) obligate the corporation or other persons (separately, consecutively, or simultaneously) to acquire the restricted shares;

(3) require the corporation, the holders of any class of its shares, or another person to approve the transfer of the restricted shares, if the requirement is not manifestly unreasonable; or

(4) prohibit the transfer of the restricted shares to designated persons or classes of persons, if the prohibition is not manifestly unreasonable. . . .

Corporate shares are personal property. At common law, any restriction on the power to alienate personal property was impermissible. Doss v. Yingling, 95 Ind.App. 494, 500, 172 N.E. 801, 803 (1930). Despite this doctrine, Indiana, like virtually all jurisdictions, allows corporations and their shareholders to impose restrictions on transfers of shares. The basic theory of these statutes is to permit owners of a corporation to control its ownership and management and prevent outsiders from inserting themselves into the operations of the corporation. Id. at 502-03, 172 N.E. 801; 12 William Meade Fletcher et al, Fletcher Cyclopedia of the Law of Private Corporations, § 5454 (1996). Chief Justice Holmes stated the matter succinctly a century ago: "Stock in a corporation is not merely property. It also creates a personal relation analogous otherwise than technically to a partnership.. . . [T]here seems to be no greater objection to retaining the right of choosing one's associates in a corporation than in a firm." Barrett v. King, 181 Mass. 476, 63 N.E. 934, 935 (1902). As applied to a family-owned corporation, this remains valid today.

Transfer restrictions are treated as contracts either between shareholders or between shareholders and the corporation.¹Doss, 95 Ind.App. at 502, 172 N.E. at 803; Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59...