Timberland Bancshares, Inc. v. Garrison (In re Garrison)

• Decision Date: 16 November 2011
• Docket Number: Adversary No. 1:10–ap–07061.,Bankruptcy No. 1:08–bk–74072.
• Citation: 462 B.R. 666
• Parties: In re Johney Lee & Benita Sue GARRISON, Debtors.Timberland Bancshares, Inc., Plaintiff v. Johney L. Garrison, Benita Sue Garrison, Renee S. Williams, Chapter 7 Trustee, & Lacamas Laboratories, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Western District of Arkansas

462 B.R. 666

In re Johney Lee & Benita Sue GARRISON, Debtors.Timberland Bancshares, Inc., Plaintiff
v.
Johney L. Garrison, Benita Sue Garrison, Renee S. Williams, Chapter 7 Trustee, & Lacamas Laboratories, Inc., Defendants.

Bankruptcy No. 1:08–bk–74072.

Adversary No. 1:10–ap–07061.

United States Bankruptcy Court, W.D. Arkansas, El Dorado Division.

Nov. 16, 2011.

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Robert L. Depper, Jr., Depper Law Firm, El Dorado, AR, for Debtors.

Frederick S. Wetzel, III, Frederick S. Wetzel, P.A., Little Rock, AR, for Plaintiff.

Thomas S. Streetman, Streetman & Meeks, PLLC, Crossett, AR, for Defendants.MEMORANDUM OPINION JAMES G. MIXON, Bankruptcy Judge.

Timberland Bancshares, Inc. (Bank) initiated this adversary proceeding against Johney and Benita Garrison (Debtors),¹ Renee Williams (Trustee), and Lacamas Laboratories, Inc. (Lacamas). The Bank seeks a declaratory judgment that it holds a valid perfected security interest in the Debtors' Lacamas stock that is superior to any interest held by the Trustee and all

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other parties. Further, the Bank contends that the Debtors and Lacamas should be estopped from denying the validity of the Bank's security interest and requests a mandatory injunction directing the Debtors and Lacamas to convey all right, title, interest and equity in the stock to any buyer purchasing the stock in conformity with the Arkansas Uniform Commercial Code.

Each defendant answered the complaint. Lacamas responded that the Bank's security interest is invalid because of a Stock Restrictive Agreement (SRA) between Lacamas shareholders and the corporation. Lacamas counterclaimed for a declaratory judgment that the Bank's security interest is null and void and requested an award of its attorney fees in accordance with the SRA.

The Trustee also asserted a counterclaim. Pursuant to Section 544 of the Bankruptcy Code, the Trustee claimed that the Bank's security interest in the Debtors' Lacamas shares is voidable by the Trustee because the security interest was not perfected upon the petition filing and, therefore, inferior to the Trustee's interest as a hypothetical judgment lien creditor. Further, the Trustee seeks turnover of the shares of stock at issue.

The parties tried the lawsuit before the Court on February 1, 2011, in El Dorado, Arkansas, after which the matter was taken under advisement following the submission of briefs. The Court has jurisdiction to enter a final judgment in this case, which is a core proceeding in accordance with 28 U.S.C. § 157(b)(2)(0) (2006). The following opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

FACTS

Most of the relevant events in this case occurred prior to the Debtors' Chapter 7 bankruptcy filing on October 10, 2008, and involve the Debtors' ownership and subsequent pledge of shares of stock in Lacamas as collateral for loans from the Bank. Lacamas is an Oregon corporation formed in 1984–85 with funds contributed by four original shareholders, including the Debtor and Dr. Allen S. Erickson, who currently serves as president. (Tr. at 112.) Lacamas was formed as a Subchapter S corporation pursuant to the Internal Revenue Code and is subject to restrictions on the number of the corporation's shareholders. (Lacamas Ex. B.)

The Stock Restrictions

In connection with their ownership interest in Lacamas, the Debtors were issued Stock Certificate Number 25, representing that John and Sue Garrison are registered holders of 104,625 shares of Lacamas stock with $1.00 par value on January 1, 1999. (Pl.'s Ex. 18.) The stock certificate bears the following language on its reverse side, which the Court will refer to as “the first restriction”:

The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares have been acquired without a view to distribution and may not be offered, sold, transferred, pledged or hypothecated in the absence of an effective registration statement for the shares under the Act and under any applicable state securities laws, or an opinion of counsel to the corporation that such registration is not required as to such sale or offer. The stock transfer agent has been ordered to effectuate transfers of this certificate only in accordance with the above instructions.

Pl.'s Ex. 3, Pl's Ex. 18.

On December 20, 2001, the shareholders of Lacamas, including the Debtors, entered into the SRA with the corporation.

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(Lacamas Ex. A.) ² The SRA detailed the means by which the corporation could redeem shares of stock from the shareholders and included the following restriction, which the Court will refer to as “the second restriction”:

NO LIFETIME TRANSFER: No SHAREHOLDER shall have any right to transfer, encumber, hypothecate, sell or dispose of any stock other than as contained herein without the express written consent of all signatories hereto. Any permitted transferee shall concurrently, with the issuance of said stock, sign an agreement to be bound by the terms and conditions of this Agreement.Lacamas Ex. A.

Erickson testified that the purpose of the SRA was to restrict the number of shareholders to maintain the corporation's Sub–Chapter S status with the Internal Revenue Service. (Tr. at 113.)

The Loans

Nine months after they signed the SRA limiting the transfer of the stock, the Debtors entered into a commercial line of credit agreement and note with the Bank for $55,035.00 on October 7, 2002. (Pl.'s Ex. 1.) Collateral for the loan was described as “Assign of 104,625 Shares of Lacamas Laboratories, Inc. Stock # 25 in the name of John L & B Sue Garrison, as joint tentants [sic] with right of survivorship....” (Pl.'s Ex. 1.)

Ken Goudy was the Bank's loan officer who made this and subsequent loans to the Debtors. (Tr. at 20–21.) The Debtors delivered Stock Certificate Number 25 to the Bank when they pledged their stock as collateral for the first loan on October 7, 2002. As mentioned above, the first restriction was described on the reverse side of the certificate but because the certificate was issued three years prior to the December 2001 SRA, it made no mention of the second restriction agreed upon in the SRA. (Tr. at 31.)

Goudy stated that in connection with the loans, the Bank maintained in its possession Stock Certificate Number 25, two Stock Assignments, and an Irrevocable Stock or Bond Power endorsed in blank by the Debtors.³ (Tr. at 24, Pl.'s 2, Trustee's Ex. 3, Pl's Ex. 18.) Gary Burbank, the Bank's attorney, testified that the original stock certificate and stock power signed in blank were maintained together in the Bank's records so that if the security agreement had to be foreclosed, the Bank was authorized by the documents to transfer the stock. (Tr. at 99–100.)

Following the October 7, 2002 note, the Garrisons executed a second note in favor of the Bank for $100,035.00 on December 4, 2002, with a maturity date of March 4, 2003. (Pl.'s Ex. 4.) The note recited that the collateral was an assignment of the 104,625 shares of Lacamas stock. Additionally, the Note contained language granting the Bank a security interest in the listed collateral and stating that the

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Debtors granted the security interest free and clear of any other interest or adverse claim. (Pl's Ex. 4 at 2.)

Both the first and second notes evidence that they were paid by renewal on February 11, 2003, and February 10, 2003, respectively.⁴ (Pl.'s Ex. 1 & 4.) After the October 7 and December 4, 2002 notes, the Bank entered into three successive loan transactions with Garrison Speciality Chemicals, Inc. (Garrison Inc.), the Debtors' corporation, to provide a revolving line of credit for working capital.

The Debtor signed the three notes as president and CEO of the corporation. Each of the three notes listed the Debtors' Lacamas stock as collateral, along with various other items of property. These loans were dated February 7, 2003, with Garrison Inc. listed as the borrower of $250,000.00, a renewal note on December 5, 2003, and another renewal note on August 27, 2004, for $50,000. ⁵ (Pl.'s Ex. 5, 7, 8.)

The August 27, 2004 loan was paid by a renewal note for $250,150.00 signed by the Debtors individually on October 17, 2005. (Pl.'s Ex. 9.) Collateral included the Debtor's shares of Lacamas stock. A renewal note on November 27, 2006, from the Debtors individually to the Bank included an additional advance, so that the amount borrowed was $275,300.00. (Pl.'s Ex. 10.) Collateral included real estate and various items of personal property, including the Lacamas stock.

The November 27, 2006 note was paid on June 21, 2007, by a renewal note from the Debtors individually for $300,150.00. (Pl.'s Ex. 11.) The purpose of the loan was to refinance the previous loan and advance additional funds to the Debtors. The collateral for the loan included a security interest in the 104,625 shares of Lacamas stock and other personal and real property. The Debtors filed their Chapter 7 petition on October 10, 2008, at which time the obligation represented by the June 21, 2007 note remained outstanding.

Consent to Stock Pledge

On February 7, 2003, a few days prior to the renewal of the first two notes to the Debtors and on the same date as the first note made by the Debtors' corporation, Goudy received a facsimile transmission from the Debtor with an attached Consent to Stock Pledge. (Pl.'s Ex. 12.) The first page of the facsimile contains a one-sentence message addressed to Goudy from the Debtor and informs Goudy that “Allen Erickson sent this pledge agreement to the other stockholders for their signatories [sic].” (Pl.'s Ex. 12.) The Debtor testified that the facsimile was sent in connection with the February 7, 2003 loan to the Debtors' corporation. (Tr. at 81.)

The Consent to Stock Pledge provides for the consent of the Lacamas stockholders to the pledge of the Debtors' Lacamas stock to secure the Debtors' indebtedness to the Bank....