In re Whitaker, Bankruptcy No. 81-20207

• Decision Date: 15 March 1982
• Docket Number: Adv. No. 81-0209.,Bankruptcy No. 81-20207
• Citation: 18 BR 314
• Parties: In re John Clarence WHITAKER, Mary Ruth Whitaker, Debtors. FEDERAL DEPOSIT INSURANCE CORPORATION AS LIQUIDATOR OF the MISSION STATE BANK AND TRUST COMPANY, Plaintiff, v. John Clarence WHITAKER, Mary Ruth Whitaker, and F. Stannard Lentz, Trustee, Defendants.
• Court: U.S. Bankruptcy Court — District of Kansas

18 B.R. 314 (1982)

In re John Clarence WHITAKER, Mary Ruth Whitaker, Debtors FEDERAL DEPOSIT INSURANCE CORPORATION AS LIQUIDATOR OF the MISSION STATE BANK AND TRUST COMPANY, Plaintiff, v. John Clarence WHITAKER, Mary Ruth Whitaker, and F. Stannard Lentz, Trustee, Defendants.

Bankruptcy No. 81-20207, Adv. No. 81-0209.

United States Bankruptcy Court, D. Kansas.

March 15, 1982.

A. Glenn Sowders, Jr., Kansas City, Mo., for debtors/defendants.

William O. Isenhour, Jr., Mission, Kan., for debtors.

R.H. Foerschler, Kansas City, Kan., for plaintiff.

F. Stannard Lentz, Shawnee Mission, Kan., trustee.

MEMORANDUM OPINION

BENJAMIN E. FRANKLIN, Bankruptcy Judge.

This matter came on for pretrial on October 8, 1981, upon plaintiff's Complaint to Modify Stay and for Order of Abandonment or Turnover. Plaintiff, Federal Deposit Insurance Corporation (FDIC), appeared by Robert H. Foerschler of McAnany, Van Cleave & Phillips, P.A. The trustee, F. Stannard Lentz, appeared in person and as his own attorney. The debtors' attorney, A. Glenn Sowders, Jr., had previously advised the Court that neither he nor the debtors would appear.

At the pretrial, plaintiff and trustee agreed that the matter could be resolved upon the submission of stipulations and briefs to the Court. Plaintiff and trustee filed stipulations within the Pre-Trial Order. The debtors were not a party to said stipulations, but the debtors do not contest the truth of the stipulations. Plaintiff and trustee also filed briefs in support of their respective positions.

FINDINGS OF FACT

Based on the pleadings, briefs and file herein, this Court finds as follows:

1. That this Court has proper venue and jurisdiction.

2. That on August 1, 1979, the debtors obtained a $79,017.67 loan from the Mission State Bank & Trust Co. (MSB). As security for the loan, the debtors pledged certain corporate stock to MSB, including:

Stock certificate # S252053 for 100 shares in Exxon Corp.

Stock certificate # N62849 for 100 shares in Exxon Corp.

Stock certificate # VN176881 for 100 shares in American Brands, Inc.

The debtors executed a standardized security agreement that said the security interest applied to proceeds and profits.

3. That the three stock certificates were manually delivered to MSB.

4. That on March 6, 1981, the debtors filed a Chapter 7 petition in bankruptcy.

5. That effective May 26, 1981, a 2 for 1 split of the American Brands, Inc. stock occurred. Effective June 12, 1981, a 2 for 1 split of the Exxon Corp. stock occurred.

6. That two stock certificates representing the stock splits were mailed to debtor, Mary Whitaker, as stockholder of record. On August 21, 1981, the debtors, through their attorney, mailed the two certificates to the trustee:

Stock certificate # T-309237 for 200 shares in Exxon Corp.

Stock certificate # M228780 for 100 shares in American Brands, Inc.

7. That on August 20, 1981, FDIC, as liquidator of MSB, filed a proof of claim herein for the balance due on the loan, $69,315.64.

ISSUE

WHETHER A CREDITOR/PLEDGEE OF STOCK IS ENTITLED TO ADDITIONAL SHARES ARISING FROM A POST PETITION STOCK SPLIT, OR WHETHER THE TRUSTEE IS SO ENTITLED.

CONCLUSIONS OF LAW

The general rule is that property acquired by the estate or the debtor after the commencement of the case is not subject to security agreements executed prior to the commencement of the case. The exception to the rule is found in 11 U.S.C. § 552(b), which states:

"§ 552. Postpetition effect of security interest.

(b) Except as provided in section 363, 506(c), 544, 545, 547, and 548 of this title, if the debtor and a secured party enter into a security agreement before the commencement of the case and if the security interest created by such security agreement extends to property of the debtor acquired before the commencement of the case and to proceeds, product, offspring, rents, or profits of such property, then such security interest extends to such proceeds, product, offspring, rents, or profits acquired by the estate after the commencement of the case to the extent provided by such security agreement and by applicable nonbankruptcy law, except to the extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise."

The trustee argues that § 552(b) is inapplicable because the additional shares of stock are neither proceeds, product, offspring, rents or profits of the original stock. He argues that the U.C.C. definition of proceeds indicates that proceeds are what arise from a disposition of collateral; and that no disposition has occurred here. Furthermore, the trustee argues, the additional shares are not proceeds even under the more liberal definition of proceeds alluded to in the legislative history of § 552:

"The term `proceeds\' is not limited to the technical definition of that term in the U.C.C. but covers any property into which property subject to the security interest is converted." H.R. 95-595, 95th Cong., 1st Sess. 376-377 (1977) (emphasis supplied), U.S.Code Cong. & Admin.News 1978, p. 5787.

To discern the nature of the additional shares of stock, one must understand the nature of a stock split. It is stated in 19 Am.Jur.2d Corporations § 808:

". . . The essential distinction between a stock dividend and a stock split is that in the former there is a capitalization of earnings or profits, together with a distribution of the added shares which evidence the assets transferred to capital, while in the latter there is a mere increase in the number of shares which evidence ownership without altering the amount of capital, surplus, or segregated earnings. In brief, a stock split is merely a dividing up of the outstanding shares of a corporation into a greater number of units, without disturbing the stockholder\'s original proportional participating interest in the corporation. A stock split is essentially one of form and not of substance."

Thus, a stock split is an accounting device, not a distribution of corporate earnings, like a cash or stock dividend. Technically, in a stock split, the original shares are neither disposed of or converted into the new shares. Rather, the original shares are devalued, but supplemented by the new shares so that the stockholder retains the same proportionate interest in the corporation.

When a creditor takes a security interest in shares of stock, he is really taking a security interest in the proportionate interest in the corporation that those shares represent. By definition, a share of stock is a unit of interest in a corporation. It entitles the shareholder to a proportionate part of the property or its proceeds when distributed according to law and equity. 18 Am.Jur.2d Corporations § 194.

Thus, when a creditor takes a security interest in shares of stock it is a fair inference that he intends that his security interest continue in the additional shares from a stock split, so that he may retain a security interest in the same proportionate interest in the corporation. This Court finds, therefore, that the additional shares from a stock split are proceeds within the meaning of the parties' security agreement and within the meaning of § 552(b). Thus, the additional shares acquired in the post-petition stock split are subject to the security agreement between MSB and the debtors.

The trustee further alleges that § 552(b) is subject to § 544(a); and that his status as an ideal lien creditor results in his interest in the additional shares being superior to FDIC's unperfected interest. FDIC contends that this Court should find an equitable lien in its favor, particularly since it was stayed from perfection because the petition was filed before the stock split occurred.

In a case very similar to the one at bar, the Bankruptcy Court held that the trustee prevailed, pursuant to section 70(c...