Simcox v. San Juan Shipyard, Inc.

• Citation: 754 F.2d 430
• Decision Date: 07 February 1985
• Docket Number: No. 84-1336,84-1336
• Parties: Marion SIMCOX, et al., Plaintiffs, Appellees, v. SAN JUAN SHIPYARD, INC., etc., et al., Defendants, Appellees. International Shipbuilding Corporation, Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 430

754 F.2d 430

Marion SIMCOX, et al., Plaintiffs, Appellees, v. SAN JUAN SHIPYARD, INC., etc., et al., Defendants, Appellees.

International Shipbuilding Corporation, Defendant, Appellant.

No. 84-1336.

United States Court of Appeals, First Circuit.

Argued Nov. 9, 1984.

Decided Feb. 7, 1985.

Harvie DuVal, North Miami, Fla., with whom Greenfield & DuVal, North Miami, Fla., was on brief for defendant, appellant.

Arnaldo Velez, Miami, Fla., with whom Taylor, Brion, Buker & Greene, Miami, Fla., was on brief for Marion Simcox and Mary Simcox.

Before BOWNES, Circuit Judge, McGOWAN, ^* Senior Circuit Judge, and BREYER, Circuit Judge.

BOWNES, Circuit Judge.

Defendant, International Shipbuilding Corporation (International) appeals from the judgment of the district court in a jury-waived trial that International purchased stock in San Juan Shipyard, Inc., with notice that the stock had been issued and transferred in a complicated series of transactions designed to defraud plaintiffs, Marion and Mary Simcox, and that, consequently, International has no interest in such stock. International contends that the court erred because: (1) the plaintiffs had no standing to assert a fraudulent issuance; (2) the plaintiffs did not sufficiently plead fraud in their complaint to recover on that theory; (3) there was insufficient evidence to find that the issuance of 2,100 shares of San Juan Shipyard, Inc., stock was fraudulent; (4) International meets the requirements of a good faith purchaser; and (5) even if it does not, International as a transferee inherits the rights of its transferor(s) who were not shown to have acquired the stock with notice of defect. Although we diverge from the path taken by the district court in two instances, we affirm the judgment.

The issues in this case arise from a complicated series of financial transactions that occurred between 1968 and 1982 and evolved from the plaintiffs' sale of San Juan Shipyard. The sale was effectuated via a transfer of all of the company's outstanding stock in exchange for a promissory note and a security interest in the stock and company assets. The buyer defaulted on the note and the plaintiffs learned that their security had been eroded by the issuance and subsequent transfer of additional shares of stock.

To understand the rationale for our decision, it is necessary to consider the controversy in its full factual context. In 1965, the Simcoxs bought Stateside Services, Inc. (Stateside), a shipyard in Puerto Rico engaged in the hauling and repairing of small boats, barges, and vessels. On May 15, 1968, the Simcoxs bought certain assets and fixtures for the shipyard with money borrowed from the Puerto Rico Industrial Development Company (PRIDCO). As part of the financing arrangement, the Simcoxs executed a pledge agreement in which they pledged all 156 outstanding shares of Stateside stock to PRIDCO and Banco Credito y Ahorro Ponceno (BCAP) as security for payment of the loan. The pledge agreement provided, inter alia, that, during the pendency of the pledge, Stateside would not issue any additional stock, that no stock dividend would be declared by stockholders or the board of directors, that no cash dividend could be declared, and that no stock split could be authorized.

In November of 1972 the Simcoxs endeavored to sell the shipyard to Klein Enterprises and Kenneth Klein. ¹ For accounting reasons related to the sale, the Simcoxs, with PRIDCO's permission, issued an additional 1,000 shares of $100 par value Stateside stock on November 22, 1972. The new shares were encumbered by the same agreement as the original 156 shares. The Simcoxs then executed the purchase and sale agreement with Klein Enterprises as purchaser and Kenneth Klein as comaker for the 1,156 outstanding shares of Stateside stock. The purchase and sale agreement called for sixty monthly payments of approximately $11,565 beginning January 1, 1973. Attached to the purchase and sale agreement and executed contemporaneously were: (1) a promissory note for $598,000 from Klein Enterprises and Klein as comaker to the Simcoxs; (2) a pledge and escrow agreement whereby Klein Enterprises pledged its interest in the "1,156 shares of common stock issued and outstanding of Stateside Services, Inc., consisting of all of the outstanding stock of all classes of the corporation ..." to the Simcoxs, upon satisfaction of the PRIDCO debt, to secure performance of all obligations of the purchase and sale agreement; (3) an agreement stating that Klein Enterprises accepted and guaranteed the pledge obligation between the shipyard and PRIDCO; and (4) a chattel mortgage on the assets of Stateside Services, Inc., executed in favor of the Simcoxs.

On December 6, 1972, pursuant to the purchase and sale agreement, Stateside issued a stock certificate representing the total outstanding shares (1,156) to Klein Enterprises to replace the certificates the Simcoxs had owned. Subsequently, the name of Stateside Services, Inc., was changed to Stateside Shipyard, Inc., and then to San Juan Shipyard, Inc. Klein Enterprises changed its name to Maritime Enterprises (Maritime).

On May 10, 1973, the Simcoxs and Klein, both on behalf of Maritime Enterprises and himself, amended the amount due on the November 1972 contract to take into account uncollectible accounts receivable, and extended the payment schedule six months. In all other respects the agreement between the parties was unchanged.

On January 25, 1974, Maritime wrote a letter to PRIDCO requesting permission to issue additional stock in order to capitalize a loan from Kenneth Klein to San Juan Shipyard in excess of $200,000. It appears from the testimony of the plaintiffs' expert accountant witness, from the testimony of employees of the shipyard, and from financial records submitted in evidence that Klein never lent money to the shipyard. Based on the representation that a $200,000 capital contribution had been made to the shipyard, PRIDCO authorized San Juan Shipyard to issue 2,100 additional shares of stock to Klein on January 29, 1974. PRIDCO's authorization was conditioned on the new stock being subject to the same conditions as the other 1,156 shares.

On February 4, 1974, the shipyard issued stock certificate No. 7 representing 1,344 shares and stock certificate No. 8 representing 756 shares. The shares issued pursuant to certificate No. 7 brought the total number of outstanding shares issued by the shipyard to 2,500, the maximum number authorized by the corporate charter. The shares issued pursuant to certificate No. 8 constituted an overissuance of 756 shares. Both certificates, signed by Klein, erroneously stated that San Juan Shipyard, Inc., was authorized to issue up to 5,000 shares. The same day as the 2,100 new shares were issued to Klein, according to the backs of the certificates, Klein transferred the certificates to a Eugene Farrow subject to the terms and conditions of the pledge agreement of 1968 between the Simcoxs, Stateside (San Juan Shipyard), PRIDCO, and BCAP as required by PRIDCO. No mention was made of the security interest running directly to the Simcoxs.

Sixteen days later, on February 20, 1974, the Simcoxs entered into a supplemental agreement with Klein that enabled Maritime and San Juan Shipyard to enter a sale and leaseback arrangement with a finance company to refinance the shipyard. The agreement provided that the Simcoxs would: subordinate their chattel mortgage on the assets of the shipyard to the finance company; reduce Klein's debt to the Simcoxs by $100,000; and extend the payment period in exchange for a proxy vote and power of attorney, exercisable in the event of default, on all the outstanding common shares of San Juan Shipyard owned by Maritime. ² The supplemental agreement further provided that Klein, Maritime and the San Juan Shipyard understood that in the event of default the Simcoxs would be entitled to elect a new Board of Directors, and appoint Marion Simcox custodial and operating receiver of the property and business of the shipyard on behalf of the San Juan Shipyard. ³ Klein, of course, did not tell the Simcoxs that sixteen days earlier he had sold the majority of the shipyard's outstanding stock to Farrow.

The money obtained from the leaseback arrangement was diverted to another business venture of Klein's and Maritime defaulted before making a single payment to the Simcoxs. On July 26, 1974, San Juan Shipyard filed a petition in bankruptcy under Chapter XI. The petition contained a sworn statement that the total issued and outstanding stock was 1,156 shares and that all of the stock was owned by Maritime Enterprises. San Juan Shipyard's attorney thereafter wrote all creditors and claimants of San Juan Shipyard and enclosed a financial statement showing that the total issued and outstanding stock of San Juan Shipyard was 1,156 shares. The Simcoxs filed a claim with the bankruptcy court in 1974. After unsuccessfully trying to collect on their promissory note, the Simcoxs obtained a proxy vote from the escrow agent and voted themselves directors. They were not, however, able to take control of the shipyard.

On August 4, 1980, Farrow executed two transfers of stock forms to Viking Investments Limited, an entity for whom Farrow would serve as a director but which had not yet been chartered at the time of the purported transfer. The transfer forms have a notary's initials and the date August 4, 1980, ascribed on the bottom of each, but the lines where the date is to be inserted by the transferor or transferee were left blank. The signature and authority of the Florida notary were not authenticated at trial.

On December 12, 1980, the Simcoxs filed this declaratory action against Klein, Maritime Enterprises and the acting president of the shipyard seeking a judicial determination that Marion Simcox was entitled to manage and control the shipyard and an injunction restraining defendants from interfering with pla...