In re Kontaratos
| Decision Date | 08 May 1981 |
| Docket Number | Adv. No. 180-0077.,180-00190,Bankruptcy No. 180-00189 |
| Parties | In re Peter KONTARATOS, Valerie Kontaratos, Debtors. Roger P. HALE, Plaintiff, v. Peter KONTARATOS, Valerie Kontaratos, Defendants. |
| Court | United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Maine |
Louis H. Kornreich, Goodman, Goodman & Kornreich, Bangor, Me., for debtors.
George Burns, Daniel Amory, Drummons, Woodsum, Plimpton & MacMahon, Portland, Me., for Roger Hale.
The intricacies of pertinent provisions of the Uniform Commercial Code necessitate a detailed statement of the operative facts underlying these adversary proceedings for relief from stay. The ensuing discussion deals with interesting and important issues of commercial law.
The defendants debtors, husband and wife, entered into an agreement on June 18, 1979 for the purchase of all of the corporate stock of Casco Bay Lines, Inc. CBL with Donald F. Singer, Esquire, Executor of the Estate of Norman C. Thomas, and with James F. McLaughlin, trustee under a revocable living trust agreement with Peter T. McLaughlin, sellers. With the exception of a $50,000 deposit advanced by the debtors, the entire $359,750 purchase price was borrowed; $200,000 from Depositors Trust Company of Southern Maine DTC and the balance from the plaintiff Hale. The Hale loan closing took place on September 14, 1979. The DTC loan closing occurred later that day.
The debtors executed promissory notes in favor of Hale in the principal amounts of $40,000 payable in seven days and $80,000 payable in ninety days, as well as stock pledge agreements, stock powers, a loan equity participation and work agreement, and a stock redemption agreement. At the time of the Hale loan closing, the debtors owned all of the stock of Sea Queen Kontaratos Lines, Ltd., Sea Queen III, Inc., and Offshore Maritime Service, Inc., which they pledged to Hale together with all issued and outstanding CBL stock, to be acquired later that day. The debtors further agreed, as additional consideration for the $110,000 loan, to pay or provide Hale: (a) 15% interest; (b) a $10,000 bonus included in the $80,000 note; (c) 20% of the stock of CBL; (d) an option in favor of Hale Sand & Gravel, a Hale proprietorship, to perform all CBL marine work; (e) 10% of the debtors' salaries from CBL; (f) 10% of debtors' CBL dividends; (g) 10% of the stock of Sea Queen Kontaratos Lines, Ltd., Offshore Maritime Service, Inc., and Sea Queen III, Inc.; (h) 10% ownership in any company organized by the debtors whose assets include any vessel acquired from CBL, or 10% of the fair market value of any CBL vessel conveyed; and (i) payment of all expenses incurred by Hale for legal services in connection with the loan between August 7 and September 18, 1979, amounting to $10,007.88.
At the time of the closing of the CBL stock purchase, after the Hale loan closing on September 14, 1979, the debtors warranted to DTC, in consideration of the $200,000 loan, that they were the sole legal and beneficial owners of all CBL stock and that no encumbrances would be created without the prior written approval of DTC. Any misrepresentation or breach concerning the existence or creation of competing liens or claims of ownership was made an event of default. The debtors pledged to DTC all outstanding shares of stock of Sea Queen Kontaratos Lines, Ltd., Sea Queen III, Inc., Offshore Maritime Service, Inc., and CBL, and delivered the stock certificates to DTC upon their receipt from the sellers. DTC retains possession of the certificates.
The debtors satisfied the $40,000 note in full on September 24, 1979. During January, 1980, $2,000 was paid on the $80,000 note. At the commencement of these chapter 11 proceedings, Hale claimed a $96,348.47 balance, which was later increased to $126,843.80. On December 18, 1979 and after default, the debtors executed amended Hale loan documents, the principal effect of which was to reduce Hale's CBL stock ownership to ten percent.
On January 2, 1980, Hale caused a financing statement signed by him, for himself and the debtors, to be filed with the Secretary of State, describing the collateral as follows:
This financing statement evidences the existence of a pledge and all rights, interest, and equity in all of the outstanding common stock of Casco Bay Lines, Sea Queen III, Inc., Sea Queen Kontaratos Lines, Ltd., and Offshore Maritime Service, Inc. under agreements dated in September, 1979 under which debtors pledged all of the stock to secure a promissory note and work agreement of even date.
On the same day, Hale served the debtors with a written notice of default for failure to satisfy their note on or before December 15, 1979, simultaneously notifying the debtors of Hale's intention to redeem the pledged stock certificates from DTC.
On January 9, 1980, an attorney representing Hale notified counsel for DTC of the stock pledge and related agreements between Hale and the debtors, and of Hale's intention to redeem the stock from DTC. Copies of the relevant Hale loan documents were enclosed. On January 18, 1980, Hale wrote the president of DTC demanding the right of redemption. DTC refused to permit Hale to redeem. On or about February 4, 1980, Hale filed a complaint against the debtors and DTC in the Maine Superior Court for specific performance, declaratory and injunctive relief, and damages. The debtors filed voluntary chapter 11 petitions on June 13, 1980. Hale commenced these adversary proceedings for relief from stay on August 4, 1980.
The gravamen of the action presently before the court concerns the perfection of a security interest in personal property of the defendants. Article 9, Uniform Commercial Code — Secured Transactions,1 points the way to perfection. UCC § 9-102(1)(a) & (2).
UCC § 9-2032 prescribes certain requisites of an enforceable security interest; inter alia, that the security interest attach.3 UCC § 9-203(1). A security interest does not attach until there is agreement, value is given and the debtor acquires rights in the collateral.4 Hale gave value and was granted a security interest in the CBL stock prior to the delivery of the stock certificates to the debtors later that day. It remains to be determined when the debtors acquired rights in the collateral.
The time of acquisition of rights in collateral is dependent upon the type of collateral.5 The CBL stock certificates were issued in registered form, within the meaning of UCC § 8-102(1)(a)(i) & (c), are of a class or series of instruments, id. § 8-102(1)(a)(iii), and evidence a share or interest in Casco Bay Lines, Inc., as required by UCC § 8-102(1)(a)(iv). CBL stock would rather clearly appear to qualify as "investment securities"6 subject to Article 8, Uniform Commercial Code — Investment Securities,7see UCC § 8-102(1)(b), were it not for the fact that the Maine Supreme Judicial Court has held that shares of stock in a small, closely-held, family corporation are not "investment securities," within the meaning of UCC § 8-102(1)(a)(ii), because not of the type "commonly dealt in upon securities exchanges or markets, nor commonly recognized in area securities exchanges or markets as a medium for investment."8 The Zamore rule does not quite reach regulated public utilities of substantial (if precarious) proportions whose stock is not family owned. There is no evidence that CBL was family owned before its acquisition by the debtors. Therefore, CBL stock constituted "investment securities" immediately prior to its delivery to the debtors. Did it become something else upon delivery to the debtors?
Compelling policy considerations militate against extension of the Zamore rule.9 Simplicity,10 clarity11 and uniformity12 in the law governing commercial transactions are not promoted by a rule dictating different collateral classifications on the basis of the presence or absence of a family relationship among stockholders. The Uniform Commercial Code implies no such distinctions. It classifies certain types of instruments as "investment securities,"13 without regard to the identity of the holders,14 and without reference to the size or function of the enterprise.15
The certificated CBL stock constituted "investment securities" in the hands of James F. McLaughlin and the Estate of Norman C. Thomas, and remained "investment securities" upon delivery to the debtors. Article 8 governs the determination as to when and what rights were acquired by the debtors in the CBL stock.
The debtors acquired the rights of their transferors in the CBL stock, upon its delivery. UCC § 8-301(1). Delivery occurred during the DTC loan closing, following the Hale closing. UCC § 8-313(1)(a). The debtors then acquired ownership rights in the CBL stock, enabling the security interests of Hale and DTC to attach at that time or as soon thereafter as there was agreement and value was given. UCC § 9-203(2).16
Hale also asserts a security interest in the common stock of Sea Queen Kontaratos Lines, Ltd., Sea Queen III, Inc., and Offshore Maritime Service, Inc. owned by the debtors at and before the Hale closing. Is the certificated stock of these closely-held, family corporations to be considered "investment securities"?
The record evidences that Hale recognized the stock of these three corporations as a medium for investment, but for which he would not have loaned the debtors the funds with which to finance the purchase of the CBL stock. As additional consideration for the loan, the debtors agreed to convey ten percent of the common stock in each of these three corporations to Hale.17 There is no evidence that the stock of these corporations is not of a type commonly recognized as a medium for investment.18 Furthermore, the agreement whereby Hale, a stranger, would become the owner of ten percent of the stock of these corporations vitally alters the nature of these entities as family corporations. As a general rule and absent countervailing...
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