Gibson v. Manuel, 58963

• Decision Date: 16 November 1988
• Docket Number: No. 58963,58963
• Parties: John T. GIBSON, Sr. v. Donald G. MANUEL.
• Court: Mississippi Supreme Court

Page 199

534 So.2d 199

John T. GIBSON, Sr. v. Donald G. MANUEL.

No. 58963.

Supreme Court of Mississippi.

Nov. 16, 1988.

J. Robertshaw, Robertshaw, Terney, Noble & Smith, Greenville, for appellant.

Kenney M. Swain, Swain & Swain, Greenville, for appellee.

Before HAWKINS, P.J., and ROBERTSON and SULLIVAN, JJ.

ROBERTSON, Justice, for the Court:

I.

This interlocutory appeal wherein time is of the essence asks that we articulate the duties of a corporate officer and sole shareholder owed to a pledgee of his shares. The pledgee's legitimate concern is that the pledgor/officer has disposed of the corporate assets out of the ordinary course of business and without receiving fair value in exchange. This, of course, has rendered pledgee's security worthless.

The trial court relied upon the sales and pledge agreement between the parties and held the pledgor entitled to do as he did. Because of the Court's failure to perceive and enforce the pledgor/officer's fiduciary duties of care and loyalty to his pledgee, we reverse and remand.

II.

In the beginning John T. Gibson ¹ of Greenville, Mississippi, was the owner of Clearwater Broadcasting Corporation (CBC). A Florida corporation qualified to do business in Mississippi, CBC's sole business was the operation of Radio Station WDDT in Greenville. WDDT broadcast on AM 900khz, and had experienced declining financial fortunes in the early 1980s. This fact and others led Gibson and his partner to the view that the business should be sold.

In December, 1983, Gibson reached an agreement with Donald G. Manuel of Florida wherein all of CBC's outstanding shares would be sold to Manuel. The sale was consummated pursuant to a written "Memorandum of Sale" executed on March 5, 1984. The stated purchase price for the CBC stock was a sum equal to four hundred percent (400%) of the "book" assets of the corporation. This was so to account for the most valuable asset of the corporation, the FCC license to transmit.

In exchange for Gibson's transfer to him of all outstanding shares in CBC, Manuel executed an installment note in Gibson's favor and delivered it to him. Manuel's payments under the note aggregated $169,954.21 together with interest. To secure performance of his obligations under the note, Manuel pledged his newly acquired shares and in fact delivered to Gibson the certificate evidencing those shares. The agreement was structured so that the note would be paid out of anticipated earnings. It was unusual in one important respect. Gibson agreed that in event of default he would look solely to the collateral and that Manuel would have no personal liability for any deficiency. Manuel paid Gibson $4,985.79 at the time of closing.

Effective March 5, 1984, Manuel assumed complete control of CBC. Not only was he the owner of all outstanding shares, he was also elected president and treasurer of the corporation. Manuel made annual payments of $10,006.57 each on April 10, 1985, and 1986. He defaulted on his payment due April 10, 1987, and has paid Gibson nothing since that time.

On July 8, 1987, Gibson formally commenced this civil action by filing his complaint in the Circuit Court of Washington County. Gibson sought to accelerate the $150,000.00-odd balance on the note, to foreclose his security interest in the pledged stock, and "such other and further relief as the court deems just and proper."

Shortly thereafter, as the parties were engaged in pretrial discovery, Gibson became aware through a radio trade publication that WDDT's license to transmit was to be transferred from a corporation known as Clearwater Communications Corporation (CCC) to a corporation known as Clyma Communications, Inc. This was Gibson's first knowledge that CBC no longer held the FCC license. Upon further investigation Gibson learned that Manuel had effectively stripped CBC of all of its assets and that a new corporation, CCC, had assumed the ownership and operation of WDDT. In April of 1984, Manuel had caused CBC to dispose of a storefront building located on Main Street in Greenville. In May of 1987, after the third installment on the note had matured but prior to the filing of the lawsuit, Manuel caused CBC to deed to CCC the WDDT broadcasting site including its equipment.

On September 21, 1987, Gibson moved for a preliminary injunction to prevent the sale of the license to Clyma Corporation and to restore the assets of CBC. See Rule 65(a), Miss.R.Civ.P. The Circuit Court heard the motion ten days later. ²

At the close of the testimony the Circuit Court denied Gibson any relief. The Court emphasized the provision of the sales agreement that Gibson would look "solely to said stock as collateral for this note and maker shall not be liable for payment of any deficiency between the balance due hereunder and the value of said stock." The Court went on to observe that "I don't know whether at the time of the execution of these documents it was the intent of Mr. Manuel to proceed to loot the corporation, but the documents as drafted and signed certainly gave him the opportunity to do so. And the sellers' failing to take any mortgage against the assets of the corporation cannot be heard now to complain about action taken by Mr. Manuel which they expressly agreed to."

III.

Gibson subsequently filed a motion for an interlocutory appeal. This motion was granted by the Circuit Court. See Rule 5, Miss.Sup.Ct.Rules. ³ In July, 1988, Gibson moved for an expedited hearing because WDDT was off the air and the license expires in June of 1989. Renewal of the license is unlikely unless WDDT returns to the broadcast airways, hence the urgency in this matter.

Interlocutory appeals should be granted only when a substantial basis exists for a difference of opinion on a question of law. American Electric v. Singarayar, 530 So.2d 1319, 1321-23 (Miss.1988).

[A]n interlocutory appeal ought ordinarily be granted only where at its core the question concerns a dispute regarding the content of the applicable law, a dispute to which there is a substantial basis for a difference of opinion ...

American Electric, 530 So.2d at 1323. The question presented today, the common law rights of a pledgee of corporate stock vis-a-vis a pledgor who is an officer and controlling shareholder of the corporation, is in a very real sense directed toward "a dispute regarding the content of the applicable law." There is no clear law in this state resolving the point.

As a practical matter the Circuit Court's October 14, 1987, order leaves the parties with little else to litigate, though formally all that has happened is that the preliminary injunction has been denied. Compare First United Bank v. Philmont Corporation, 533 So.2d 449, 452, (Miss.1988). Given the ruling of the Circuit Court, the nature of the question presented, and the urgency of the situation in which the parties find themselves, we hold this case ripe for review and move to the merits.

IV.

The outcome determinative question is whether Manuel had a duty--and Gibson a right--that the corporation, Clearwater Broadcasting Corporation, not be "looted". As sole shareholder and as president and treasurer, Manuel held effective control of CBC. Gibson held a security interest in the Manuel's shares. That security interest was perfected by possession. Miss.Code Ann. Sec. 75-9-305 (1972). What is important is that Gibson's security interest had attached and had become enforceable. Miss.Code Ann. Sec. 75-9-203(1) and (2) (1972). Beyond this, the Uniform Commercial Code as enacted in this state tells us little.

Unless displaced by the UCC, common-law principles "shall supplement its provisions." Miss.Code Ann. Sec. 75-1-103 (1972), Beck Enterprises, Inc. v. Hester, 512 So.2d 672, 674-75 (Miss.1987); J.L. Teel Co. v. Houston United Sales, Inc., 491 So.2d 851, 861 (Miss.1986). Common law principles defining the rights and duties arising from the relationship of pledgor/pledgee--where the pledgor is an officer and has effective control of the corporation--are the body of law to which we must direct our attention.

We have no case addressing the matter. Under analogous circumstances our law of corporations is well settled. We refer to the duties fiduciary in nature that all corporate officers owe to shareholders. Those duties include one to exercise utmost good faith and loyalty in discharge of the corporate office. ⁴ Ellzey v. Fyr-Pruf, Inc., 376 So.2d 1328, 1332 (Miss.1979). Corporate officers are wholly subject to this duty when they deal with corporate property. Frierson Building Supply Co. v. Pritchard, 253 Miss. 541, 554, 176 So.2d 301, 306 (1965). Corporate officers who participate in illegal diversions of corporate assets are liable therefor. Knox Glass Bottle Co. v. Underwood, 228 Miss. 699, 769, 89 So.2d 799, 828 (1956).

There is no reason on principle why a corporate officer's duties of care and loyalty should not extend to pledgees of corporate shares as well as to shareholders. Beneficial and legal holders would seem similarly situated. A pledgee holding a security interest in corporate shares is a potential shareholder. He has the same interest and concern as a shareholder that the corporate affairs be managed properly. If the officers default, the pledgee suffers harm generically not unlike that experienced by the shareholder.

Beyond our borders we find a considerable body of case law accepting the proposition that a pledgor of corporate stock, when in control of the corporation, has the affirmative duty to preserve the corporate assets for the benefit of the pledgee. For example, ⁵ in Weingand v. Atlantic Savings & Loan Association, 1 Cal.3d 806, 83 Cal.Rptr. 650, 464 P.2d 106 (1970), the Court said that

The pledgee of corporation stock has such an interest in the stock to entitle him to be heard in a court of equity concerning the preservation and protection of the assets and property of the corporation, his rights in this respect being essentially the same as those...