Matter of Sandefer
| Decision Date | 25 February 1985 |
| Docket Number | Bankruptcy No. 81-05498. |
| Citation | 47 BR 133 |
| Parties | In the Matter of Fred James SANDEFER d/b/a Fremar Corp., Inc. f/d/b/a Circle S Homes, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Alabama |
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Thomas B. Hanes, Birmingham, Ala., for debtor.
James J. Odom, Birmingham, Ala., for First City Developments.
Richard K. Mauk, Birmingham, Ala., Trustee.
Fred James Sandefer, the debtor, is the owner of all of the capital stock in the Fremar Corporation, Inc. The Fremar Corporation, Inc. entered into bankruptcy simultaneously with Mr. Sandefer. The assets of the corporation were sold, the corporate creditors were paid in full from the proceeds and the surplus was paid into the bankruptcy estate of Mr. Sandefer. First City Developments Corp. is the holder of a judgment against Mr. Sandefer, a certificate evidencing which was filed in the Probate Office of Jefferson County, Alabama, more than ninety (90) days prior to the filing of the petition herein. First City Developments contends that its judgment lien attached to the surplus of the funds generated by the sale of the assets of Fremar; hence this objection to the claim of First City Developments filed by the Trustee herein.
Pursuant to Alabama Code § 6-9-211 (1975) a certificate of judgment filed for record constitutes a lien on all property of the judgment debtor which is subject to levy and sale under execution. A corporation, however, is an independent legal entity, separate and distinct from its shareholders. The legal title and ownership of corporate property is in the corporation. Warrior River Terminal Co. v. State, 257 Ala. 208, 58 So.2d 100 (1952); Martin Truck Line, Inc. v. Alabama Tank Lines, Inc., 261 Ala. 163, 73 So.2d 756 (1954). A share of stock in a corporation merely entitles a shareholder to an aliquot portion of the proceeds of the assets of the corporation, over and above the indebtedness of the corporation. Hall & Farley v. Alabama Terminal & Improvement Co., 173 Ala. 398, 56 So. 235 (1911). A shareholder is not, however, entitled to share in the assets of the corporation until a dividend is declared or except upon liquidation of the corporation. First National Bank of Birmingham v. Perfection Bedding Co., 631 F.2d 31 (5th Cir.1980); Jones Valley Finance Co. v. Tennille, 40 Ala.App. 284, 115 So.2d 495 (1959), cert. denied, 270 Ala. 738, 115 So.2d 504 (1959). Until either of said events occur, the shareholders are but the equitable owners of corporate property. First National Bank of Birmingham v. Perfection Bedding Co., 631 F.2d at 33; Martin Truck Line, Inc. v. Alabama Tank Lines, Inc., 73 So.2d at 759. Admittedly, while a corporation is in esse, shareholders may, by unanimous consent and in the absence of objecting creditors, deal with, encumber or dispose of corporate property, as the equitable owners of that property, with virtual impunity. See e.g., Muckle v. Fitts, 5 F.Supp. 41 (S.D.Ala.1933), modified, Salmon v. Fitts, 67 F.2d 681 (5th Cir.1933); First National Bank v. Winchester, 119 Ala. 168, 24 So. 351 (1898). Even so, a mere equitable interest in property, except an equity of redemption and the perfect equity of a purchaser of real estate, is not subject to execution. Powell v. Knox, 16 Ala. 364 (1849). Ala.Code § 6-9-40 (1975). Therefore, the judicial lien of First City Developments could not have attached to the assets of the corporation, so as to thereby entitle First City Developments to the funds realized from the sale of those assets.
First City Developments contends, however, that the judicial lien did attach to the corporate stock of Fremar, Johnston v. Bates, 209 Ala. 16, 95 So. 375 (1923), and that the funds involved herein are the proceeds of the Fremar stock, see, In re Gursey, 224 F.Supp. 1008 (S.D.N.Y.1964); Seifert v. Kepner, 227 Md. 517, 177 A.2d 859 (Md.App.1962); BLACK'S LAW DICTIONARY 1084 (5th ed. 1979) (defining "proceeds") and, as such, must be applied first to the payment of the debt secured by the lien on said stock, namely, the debt owed to First City Developments. Pearce v. Mills, 190 Ala. 616, 67 So. 581 (1914); Strictland v. Hardie, 82 Ala. 412, 3 So. 40 (1887); cf., First Nat. Bank v. Wellborn, 237 Ala. 183, 186 So. 549 (1939) (). Whether or not First City Developments' contention is correct depends on whether the Fremar stock is ". . . subject to levy and sale under execution . . ." Ala.Code § 6-9-211 (1975). As a general rule it is essential to a valid levy on personal property that the officer executing the levy ". . . have a view of the property, and assume dominion over it, or bring it under his control, by such acts as would constitute him a trespasser but for the protection of the process, and so that he may have it present on the day and the place of sale for delivery to the purchaser." Kennedy v. Mary Lee Coal & Ry. Co., 93 Ala. 494, 9 So. 608 (1891). Historically, in the absence of statute, shares of stock in private corporations have been considered intangible, and in the nature of choses in action, and therefore not capable of manual caption and delivery. White v. Rankin & Co., 90 Ala. 541, 8 So. 118 (1890); Kennedy v. Mary Lee Coal & Ry. Co., 9 So. at 608. Hence, at common law, shares of stock were not subject to levy and sale under execution. White v. Rankin & Co., 90 Ala. at 542, 8 So. 118; Kennedy v. Mary Lee Coal & Ry. Co., 9 So. at 608. In order to remedy that ". . . defect in the law . . .," White v. Rankin & Co., 90 Ala. at 542, 8 So. 118, the Alabama legislature enacted a statute which declared that: "The shares or interest of any person in any incorporated company are personal property, and transferable on the books of the company in such manner as is or may be prescribed by the charter or articles of incorporation, or by-laws and regulations of the company; and such shares or interest may be levied on by attachment or execution, and sold as goods and chattels." Code of Alabama, 1876 § 2041. Pursuant to Code, 1876, § 2041, a levy could be made on corporate stock without the officer having possession of the stock certificate, by endorsement on the execution or other process, stating the number of shares levied on, and by giving notice of the levy to the custodian of the books of transfer. The object of that section was to provide a mode by which the sheriff could obtain ". . . constructive control, so as to prevent transfer of the shares on which the levy is made to any other person, . . . and also to provide the mode of delivery to the purchaser by requiring the sheriff's certificate of the sale to be registered on the books of the corporation." Kennedy v. Mary Lee Coal & Ry. Co., 9 So. at 609. Because shares of stock were made subject to levy and sale under execution by the statute, they were, by that fact, also subject to the lien of a properly recorded judgment. Berney National Bank v. Pinckard, DeBardelaben & Co., 87 Ala. 577, 6 So. 364 (1889); Oden v. Vaughn, 204 Ala. 445, 85 So. 779 (1920).
In 1931, the Alabama statutes making stock subject to levy and sale under execution were repealed and the Uniform Stock Transfer Act was adopted.1 Code of Alabama, 1928, §§ 7004(1)-(25). Section 13 of the Act, codified as Code, 1928, § 7004(13), provided that, "No attachment or levy upon shares of stock for which a certificate is outstanding shall be valid until such certificate be actually seized by the officer making the attachment or levy, or be surrendered to the corporation which issued it, or its transfer by the holder enjoined." In 1965 the Uniform Act was repealed and supplanted by the adoption in this state of Article 8 of the Uniform Commercial Code. Ala.Code § 7-8-101 et seq. (1975). Section 7-8-317 provides: "No attachment or levy upon a security or any share or other interest evidenced thereby which is outstanding shall be valid until the security is actually seized by the officer making the attachment or levy but a security which has been surrendered to the issuer may be attached or levied at the source." No Alabama statute purports to govern the circumstances under which or means by which shares of stock in corporations, per se, may be levied upon by execution. Section 7-8-317 by its terms is applicable to securities, as that term is defined in Section 7-8-102. As an initial consideration, therefore, unless the shares of stock involved herein can be classified as securities, then that stock, according to the common law of this state, is not, under any circumstances, subject to levy and sale under execution, and, hence, not subject to the lien of a recorded judgment.
The term "security" is defined in Section 7-8-102 as (a) an instrument; (b) issued in bearer or registered form; (c) which is of a type commonly dealt in upon securities exchanges or markets or commonly recognized in any area in which it is issued or dealt in as a medium of investment; (d) is either one of a class or series or by its terms is divisible into a class or series of instruments; and (e) evidences a share, participation or other interest in property or in an enterprise or evidences an obligation of the issuer. Involved herein are shares of common stock in a closely held, privately owned corporation. It is unknown whether or not the stock is represented by a certificate. If not evidenced by a certificate or other writing, the shares are not "instruments," and plainly are not governed by Article 8, including Section 7-8-317.2 If the shares are represented by a certificate, it is unknown whether or not the certificate was issued in bearer or registered form. Section 7-8-102(c) declares that a security is in registered form if it specifies the person entitled to the security and when its transfer may be registered upon books maintained for that purpose on behalf...
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