Ling & Co., Inc. v. Trinity Sav. & Loan Ass'n

• Decision Date: 17 May 1972
• Docket Number: No. B--3019,B--3019
• Citation: Ling & Co., Inc. v. Trinity Sav. & Loan Ass'n, 10 UCCRep.Serv. 1090, 53 A.L.R.3d 1265, 482 S.W.2d 841 (Tex. 1972)
• Parties: , 10 UCC Rep.Serv. 1090 LING AND COMPANY, INC., Petitioner, v. TRINITY SAVINGS AND LOAN ASSOCIATION, Respondent.
• Court: Texas Supreme Court

Page 841

482 S.W.2d 841

53 A.L.R.3d 1265, 10 UCC Rep.Serv. 1090

LING AND COMPANY, INC., Petitioner, v. TRINITY SAVINGS AND LOAN ASSOCIATION, Respondent.

No. B--3019.

Supreme Court of Texas.

May 17, 1972.

Geary, Brice, Barron & Stahl, G. Leroy Street, Dallas, Tex., for petitioner.

Freedman, Day & Waters, Harry I. Freedman, Dallas, Tex., for respondent.

REAVLEY, Justice.

Trinity Savings and Loan Association sued Bruce W. Bowman for the balance owed on a promissory note and also to foreclose on a certificate for 1500 shares of Class A Common Stock in Ling & Company, Inc. pledged by Bowman to secure payment of the note. Ling & Company was made a party to the suit by Trinity Savings and Loan because of Ling & Company's insistence that the transfer of its stock was subject to restrictions that were unfulfilled. Bowman did not appear and has not appealed from the judgment against him. The trial court entered summary judgment in favor of Trinity Savings and Loan, against the contentions of Ling & Company, foreclosing the security interest in the stock and ordering it sold. The court of civil appeals affirmed. 470 S.W.2d 441. We reverse the judgments and remand the case to the trial court.

The objection to the foreclosure and public sale of this stock is based upon restrictions imposed upon the transfer of the stock by the articles of incorporation of Ling & Company. It is conceded that no offer of sale has been made to the other holders of this class of stock and that the approval of the pledge of the stock has not been obtained from the New York Stock Exchange. It is the position of Trinity Savings and Loan that all of the restrictions upon the transfer of any interest in this stock are invalid and of no effect. This has been the holding of the courts below.

The face and back of the stock certificate are reproduced and attached to this opinion.

The restrictions appear in Article Four of the Ling & Company articles of incorporation, as amended and filed with the Secretary of State in 1968. Section D requires the holder to obtain written approval of the New York Stock Exchange prior to the sale or encumbrance of the stock if, at the time, Ling & Company is a member corporation of the Exchange. Then Section E(4) prevents the sale of the stock without first affording the corporation the opportunity to buy and, if it fails to purchase, giving that opportunity to all holders of the same class of stock. The method of computation of the price, based upon the corporate books, is provided in this section of the articles.

The court of civil appeals struck down the restrictions for three reasons: the lack of conspicuous notice thereof on the stock certificate, the unreasonableness of the restrictions, and statutory prohibition against an option in favor of other stockholders whenever they number more than twenty. These objections will be examined in that order.

CONSPICUOUSNESS

The Texas Business Corporation Act as amended in 1957, V.A.T.S. Bus.Corp.Act, art. 2.22, subd. A, provides that a corporation may impose restrictions on the transfer of its stock if they are 'expressly set forth in the articles of incorporation . . . and . . . copied at length or in summary form on the face or so copied on the back and referred to on the face of each certificate . . .' Article 2.19, subd. F, enacted by the Legislature at the same time, permits the incorporation by reference on the face or back of the certificate of the provision of the articles of incorporation which restricts the transfer of the stock. The court of civil appeals objected to the general reference to the articles of incorporation and the failure to print the full conditions imposed upon the transfer of the shares. However, reference is made on the face of the certificate to the restrictions described on the reverse side; the notice on the reverse side refers to the particular article of the articles of incorporation as restricting the transfer or encumbrance and requiring 'the holder hereof to grant options to purchase the shares represented hereby first to the Corporation and then pro rata to the other holders of the class A Common Stock . . .' We hold that the content of the certificate complies with the requirements of the Texas Business Corporation Act.

There remains the requirement of the Texas Business and Commerce Code that the restriction or reerence thereto on the certificate must be conspicuous. Sec. 8.204, V.T.C.A. Bus. & C., requires that a restriction on transferability be 'noted conspicuously on the security.' Sec. 1.201(10) of the Business and Commerce Code defines 'conspicuous' and makes the determination a question of law for the court to decide. It is provided that a conspicuous term is so written as to be noticed by a reasonable person. Examples of conspicuous matter are given there as a 'printed heading in capitals . . . (or) larger or other contrasting type or color.' This means that something must appear on the face of the certificate to attract the attention of a reasonable person when he looks at it. Hunt v. Perkins Machinery Co., 352 Mass. 535, 226 N.E.2d 228 (1967); Boeing Airplane Co. v. O'Malley, 329 F.2d 585 (8th Cir. 1964); 1 Anderson, Uniform Commercial Code 87 (2nd ed. 1970). The line of print on the face of the Ling &amp Company certificate does not stand out and cannot be considered conspicuous.

Our holding that the restriction is not noted conspicuously on the certificate does not entitle Trinity Savings and Loan to a summary judgment under this record. Sec. 8.204 of the Business and Commerce Code provides that the restriction is effective against a person with actual knowledge of it. The record does not establish conclusively that Trinity Savings and Loan...