United Independent Ins. Agencies, Inc. v. Bank of Honolulu

• Decision Date: 07 April 1986
• Docket Number: No. 9569,9569
• Citation: 718 P.2d 1097,6 Haw.App. 222
• Parties: , 1 UCC Rep.Serv.2d 866 UNITED INDEPENDENT INSURANCE AGENCIES, INC., a Hawaii corporation, Plaintiff-Appellant, v. BANK OF HONOLULU, Defendant-Appellee, and Mario R. Ramil, Receiver of Financial Security Insurance Company, Intervenor on Appeal.
• Court: Hawaii Court of Appeals

Page 1097

718 P.2d 1097

6 Haw.App. 222, 1 UCC Rep.Serv.2d 866

UNITED INDEPENDENT INSURANCE AGENCIES, INC., a Hawaii

corporation, Plaintiff-Appellant, v. BANK OF HONOLULU, Defendant-Appellee, and Mario R. Ramil, Receiver of Financial Security Insurance

Company, Intervenor on Appeal.

No. 9569.

Intermediate Court of Appeals of Hawai'i.

April 7, 1986.

Syllabus by the Court

1. Capital stock of a closely-held corporation constitutes a "security" within the meaning of Hawaii Revised Statutes (HRS) § 490:8-102(1)(a), and its transfer is generally governed by Article 8 of the Hawaii Uniform Commercial Code (UCC), HRS §§ 490:8-101, et seq.

2. A pledge of capital stock is a secured transaction governed by Article 9 of Hawaii UCC, HRS §§ 490:9-101, et seq.

3. HRS § 490:9-311 permits the voluntary or involuntary transfer of the debtor's rights in collateral even if the security agreement prohibits any transfer or provides that a transfer will constitute a default.

4. HRS § 490:9-311 does not serve to avoid a security agreement provision making unconsented transfer of a collateral a default. Such default provision is enforceable by the secured party.

5. Hawaii UCC Article 8 may be likened to a negotiable instruments law dealing with securities, and its sections dealing with transfer of securities generally involve the legal title only and do not embrace the field of equitable rights and interest in securities and the methods of their transfer.

6. As between a transferor and a transferee of capital stock, an unregistered transfer gives the transferee a perfect equitable title.

7. Although generally the registered owner of stock as shown on the issuer corporation's books is entitled to vote the stock, the sellers and the purchaser of stock may make their own arrangements regarding the right to vote, and their agreement will be definitive as between them.

8. Where the sellers sold and transferred to the purchaser their interest in capital stock pledged to a bank, but the stock purchase agreement was silent whether the sellers retained the voting rights pending the liquidation of the bank loan or sold the rights to the purchaser, the intention of the parties will be gleaned from other evidence.

9. Where from the record it is unclear whether the sellers intended to transfer or retain the voting rights when the pledged capital stock was sold and transferred to the purchaser, there is a genuine issue of a material fact and the granting of defendant's motion for summary judgment was improper.

James P. Dandar (Gary Y. Shigemura and Randall Y.C. Ching, with him on briefs; Shigemura & Ching, A Law Corp., of counsel), Honolulu, for plaintiff-appellant.

Steven H. Levinson (Denis C.H. Leong, with him on brief and position brief; Damon, Key, Char & Bocken, A Law Corp., of counsel), Honolulu, for defendant-appellee.

Don Jeffrey Gelber (Robert J. Faris, with him on position brief; Gelber & Gelber, A Law Corp., of counsel), Honolulu, for intervenor on appeal.

Before BURNS, C.J., and HEEN and TANAKA, JJ.

TANAKA, Judge.

This is an appeal by plaintiff United Independent Insurance Agencies, Inc. (UIIA) from a summary judgment in favor of defendant Bank of Honolulu (Bank). The crucial legal question in the case is whether the sellers or the purchaser of all of the shares of stock of UIIA's parent corporation, Federated Insurance Agency, Inc. (Federated), which had been pledged by the sellers to Bank, had the right to vote those shares. We hold that because the record discloses a genuine issue of material fact determinative of the legal question, the lower court erred in granting the summary judgment.

I. FACTS

A. Pre-Complaint Facts

The following facts are not in dispute. In 1974, Paul I. Brown (Brown) and other investors incorporated Federated, a general insurance agency. On February 11, 1977, as Federated's president, Brown entered into an agreement to acquire UIIA, another general insurance agency. Subsequently, Federated's board of directors ratified the agreement and authorized Brown to negotiate a loan from Bank to finance the acquisition. Brown successfully negotiated a 90% United States Small Business Administration (SBA) guaranteed loan of $330,000 with Bank.

On March 14, 1977, Bank, Federated, and Federated shareholders Brown, Richard H. Arimizu (Arimizu), Charles E. McGee (McGee), and Arthur E. Harris (Harris) executed various documents regarding the $330,000 loan. ¹ The documents included collateral pledge agreements whereby Federated, as borrower, pledged 100% of the acquired shares of UIIA stock and the Federated shareholders, as guarantors, pledged their respective shares of Federated stock, constituting 100% thereof, to Bank to secure the $330,000 loan. The certificates evidencing the ownership of all 3,180 shares of UIIA stock and all 2,000 shares of Federated stock, indorsed in blank by the respective owners, were delivered to Bank. Each collateral pledge agreement included, inter alia, the following provisions:

6. VOTING RIGHTS. For the term of this agreement Pledgor shall have the right, where applicable, to vote securities on all corporate questions, but, at Pledgee's request, Pledgor shall execute due and timely proxies in favor of Pledgee for this purpose.

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13. NO TRANSFER OF PLEDGOR'S INTEREST. Pledgor shall not in any way sell, transfer, diminish, or encumber its interest in said collateral, and any attempt to so sell, transfer, diminish, or encumber shall be invalid and without effect, and shall constitute a default hereunder.

Unbeknownst to Bank, on December 5, 1980, Brown, Arimizu, and Harris (collectively Sellers) ² executed a "Stock Purchase Agreement" (Purchase Agreement) with Robert J. Keller (Keller). The Purchase Agreement provided for the acquisition by Keller or his nominee, Imperial Holdings, Inc. (Purchaser), ³ from Sellers of (1) "all of the capital stock, issued and outstanding, of Federated," which owned 100% of the issued and outstanding stock of UIIA, and (2) the capital stock of three other related corporations. ⁴ The consideration was $20.00 and the assumption by Purchaser of a $25,000 debt of Sellers to UIIA. The Purchase Agreement expressly subordinated the sale to

[t]he rights of the Bank of Honolulu with respect to the stock of Federated and UIIA which is pledged to said bank under a Small Business Administration loan.

On February 25, 1981, the closing of the sale occurred. At that time, each Seller signed a blank stock power form. Subsequently, on a date undisclosed in the record, Purchaser installed its set of directors and officers for Federated and UIIA thereby replacing the Sellers' set.

In December 1981, Bank learned of the sale of the Federated stock to Purchaser and that Brown was no longer a director and officer of Federated and UIIA. On December 18, 1981, Bank gave written notice to Keller and Federated that (1) Federated was in default of the loan because of a number of reasons including the sale of the Federated stock which violated the collateral pledge agreements, (2) the entire balance of the loan was being accelerated, and (3) $228,000 of UIIA's checking account at Bank was being frozen until the matter was resolved. ⁵

On December 30, 1981, in response to Bank's suggestion, Sellers and McGee met in Bank's boardroom with Bank's representatives and attorneys and an SBA representative. In chronological sequence, special meetings of Federated's stockholders, its directors, UIIA's stockholders, and its directors were held. The minutes of those meetings indicate the occurrence of the following: (1) Sellers and McGee, ⁶ as Federated stockholders, removed the current directors and elected Sellers as the new directors; (2) the new Federated directors removed the current officers and elected Brown and Arimizu as the new officers; (3) UIIA's current directors were removed and Sellers were elected as the new directors; (4) the new UIIA directors removed the current officers and elected Brown and Arimizu as the new officers and authorized Brown to pay off Federated's loan to Bank; and (5) at each meeting Bank's freezing of UIIA's checking account was "ratified, confirmed and approved."

UIIA's new officers, Brown and Arimizu, then signed three checks made payable to Bank and drawn on the account with Bank. The three checks were made out for (1) $213,709.97 to pay off Federated's loan to Bank, (2) $5,000 for attorney's fees, and (3) $25,086.29, the balance of UIIA's account, for future attorney's fees and costs associated with Federated's loan.

Mop-up actions then commenced. Meetings of Federated and UIIA's stockholders and directors were held and the new Federated and UIIA directors and officers were removed and the previous directors and officers reinstated. All of the foregoing actions on December 30, 1981, were accomplished in about two and one-half hours.

B. Post-Complaint Facts

On January 21, 1982, UIIA filed a four-count complaint against Bank alleging (1) wrongful appropriation of UIIA's checking account, (2) wrongful dishonoring of checks drawn on the account by UIIA, (3) wrongful conversion of UIIA funds, and (4) "knowing, willful, intentional, malicious, and in conscious and/or reckless disregard of the rights of [UIIA]." UIIA sought injunctive relief, general and punitive damages, costs, interest, and attorney's fees.

On April 18, 1983, the circuit court granted Bank's motion for summary judgment. Thereafter, UIIA timely appealed.

On April 29, 1985, Mario R. Ramil, ⁷ Receiver of Financial Security Insurance Company, Limited (FSIC) (Receiver), filed an application for leave to intervene on appeal. Receiver alleged that as FSIC's "sister corporation," UIIA mainly sold FSIC insurance policies, that UIIA collected the premiums due on FSIC insurance policies and held them in bank accounts before remitting them to FSIC, and that the funds in UIIA's checking account paid over to Bank on December 30, 1981, did not belong to UIIA but were...