Wakefield v Crawley

• Decision Date: 01 November 1999
• Docket Number: 99-00029
• Citation: 6 S.W.3d 442
• Parties: STEVEN A. WAKEFIELD, Plaintiff/Appellee, v. MICHAEL F. CRAWLEY, MacTENN VALVE COMPANY, a Tennessee Corporation, and MACAWEBER SYSTEMS, INC., a Tennessee Corporation, Defendants/Appellants. NO. 03S01-9903-IN THE SUPREME COURT OF TENNESSEE AT KNOXVILLE Filed:
• Court: Tennessee Supreme Court

STEVEN A. WAKEFIELD, Plaintiff/Appellee v MICHAEL F. CRAWLEY, MacTENN VALVE COMPANY, a Tennessee Corporation, and MACAWEBER SYSTEMS, INC., a Tennessee Corporation, Defendants/Appellants

NO. 03S01-9903-CH-00029

IN THE SUPREME COURT OF TENNESSEE AT KNOXVILLE

Filed: November 1, 1999

Blount Chancery

Hon. Chester S. Rainwater, Chancellor.

For Plaintiff-Appellee:

H. Allen Bray, Maryville, Tennessee

For Defendants-Appellants:

William S. Lockett, Jr., Kennerly, Montgomery & Finley, PC, Knoxville, Tennessee

FOR PUBLICATION

TRIAL COURT AND COURT OF APPEALS REVERSED; CAUSE DISMISSED

DROWOTA, J.

OPINION

We granted this appeal to determine whether stock in a closely-held corporation is a "security," as defined by Tenn. Code Ann. 47-8-102 (1992 Repl. & Supp. 1998)¹, so that Chapter 8 of the Uniform Commercial Code (UCC) governs its sale or transfer. In Blasingame v. American Materials, Inc., 654 S.W.2d 659, 664 (Tenn. 1983), we concluded that closely-held stock was not a security within the meaning of Chapter 8 of the UCC. Because we have determined that the Official Comments of the 1977 version of the UCC, adopted by the Tennessee General Assembly in 1986, as well as the 1995 and 1997 amendments to the Code, overrule the reasoning in Blasingame, we now hold that closely-held stock is a security within the meaning of the UCC's Chapter 8, and that the closely-held stock at issue in this case is governed by Chapter 8. Because the plaintiff cannot produce a signed writing that comports with the statute of frauds found at Tenn. Code Ann. 47-8-319 (1992 Repl. & 1996 Repl.), nor can he satisfy one of the statutory exemptions, we reverse the judgments of the lower courts and find in favor of the defendant.

FACTS AND PROCEDURAL HISTORY

The parties in this action became acquainted in 1986 when the defendant, Michael Crawley, acting through Macawber Engineering, Inc., a corporation of which he was the sole shareholder, became involved with a project involving the development of technology to clean the accumulation of impure residue in coal mines. Mr. Crawley approached the plaintiff, Steven Wakefield, an investment banker, and solicited his help in obtaining financing for the project. While the mining project never materialized, the defendant enlisted the plaintiff's assistance in financial consulting. Specifically, the defendant sought help in revamping Macawber Engineering's failing financial situation. Without a formal employment agreement between the parties, the plaintiff assented to assisting the defendant, and began consulting with creditors in an attempt to obtain financing for various company projects.

Between 1987 and 1992 the plaintiff continued to perform financial consulting for Macawber Engineering. In compensation for his services, the parties agreed in September 1990 that the plaintiff would be placed on the corporation's payroll and would receive $10,000 per month. That fee was later reduced to $6,000 per month, and finally to $4,000 per month due to the company's strained financial situation.

By 1991 Macawber Engineering continued to struggle financially and was on the brink of bankruptcy. The plaintiff maintained that in order to remedy the corporation's poor image and financial status and to protect its creditors it was essential to create a "clean" company that would be more successful at obtaining and performing contracts. The defendant agreed that the employees and creditors of Macawber Engineering would best be protected if the company could exist and transact business in a different form. To achieve this, the plaintiff suggested that two new companies be formed. Accordingly, Macawber Systems, Inc. ("MSI") and MacTenn Valve Company ("MacTenn") were incorporated during 1991 and 1992. The defendant was the sole shareholder in each new corporation.

The defendant, an engineer, contends that he was ignorant about the nuances of this transaction and that he was completely dependant upon the plaintiff and Frederick Gertz, an attorney whose help the plaintiff had enlisted, in implementing the necessary corporate changes. The defendant asserts that in 1991 and 1992 he was instructed by the plaintiff and Mr. Gertz to prepare a series of documents that would facilitate the creation of the new corporations and would transfer licenses and assets so that the businesses could continue to operate. The plaintiff and Mr. Gertz provided the defendant with a list of documents to be prepared, the compilation of which the defendant describes as a "bogus stock transfer." The documents represented several ongoing transfers that were made over an extended period, including transfers of intellectual property, technology licenses, patents and certain company rights. Some of these rights were transferred from Macawber Engineering to the defendant, in his personal capacity; others were transferred directly to the new corporations. The defendant asserts that the plaintiff and Mr. Gertz advised him to backdate the documents six months "in order to establish some kind of period that was necessary to preserve the authenticity of the agreements."

Although the defendant contends that he was confused about the legal implications of preparing agreements in this manner, he drafted the documents in accordance with the plaintiffs' and Mr. Gertz's instructions. However the defendant, under the belief that the agreements were mere "contingency documents," did not execute any of the forms but merely presented them to the plaintiff without having signed the documents. The defendant asserts that during this period he had grown distrustful of the plaintiff and had begun to question the motivation behind the request for the documents he had prepared. As a result, when the plaintiff and Mr. Gertz requested stock certificates representing certain stock in MSI and MacTenn, the defendant provided only copies of the original certificates and hid the originals.

The parties engaged in an ongoing dispute in 1992 regarding the plaintiff's compensation for his financial consulting services. A series of letters were exchanged in which the plaintiff expressed his understanding that he was to receive $250,000 as payment for past services. The defendant maintained that any payments to the plaintiff were conditioned upon the successful sale or refinancing of certain company stock to investors, a contingency which did not occur. The plaintiff disputed this, asserting that his fee was fixed. The parties agree that no written, mutual agreement resulted from these letters. After this exchange, relations between the parties deteriorated.

The parties also disagree about the existence of an oral agreement whereby the plaintiff was to be compensated through a percentage of each new corporation's stock. The plaintiff contends that in compensation for the financial consulting he had already provided, and in order to entice him to continue seeking capital for the companies, the parties agreed that he would receive eighty percent of MSI's stock and eighty percent of MacTenn's stock. The defendant denies that such an oral agreement was reached. Frustrated by the ongoing disputes and a perceived lack of adequate compensation, the plaintiff severed the parties' relations in the summer of 1992.

On May 28, 1993, the plaintiff filed suit against Michael Crawley, MacTenn and MSI in the Chancery Court for Blount County, asserting that he was the owner of eighty percent of each new corporation's stock and seeking an order to enforce the delivery of the stock certificates. The defendant responded by denying that the plaintiff possessed any ownership in the two corporations and asserting certain defenses, including the statute of frauds under Tenn. Code Ann. 47-8-319 (Repl. 1992). Following a bench trial, the trial court, applying the rule of practical construction, determined that the parties' conduct indicated the existence of an oral agreement that the plaintiff was entitled to receive the certificates in question. The court deemed the statute of frauds to be inapplicable to these facts.

The Court of Appeals affirmed the judgment in favor of the plaintiff, declaring that clear and convincing evidence supported the trial court's finding that an oral agreement existed between the parties. The intermediate court then addressed the applicability of the statute of frauds governing contracts for the sale of securities, found at Tenn. Code Ann. 47-8-319 (Repl. 1992). Relying on Blasingame v. American Materials, Inc., 654 S.W.2d at 659, the Court of Appeals determined that the stock at issue was not a "security" within the meaning of Chapter 8 of the UCC because it was closely-held stock, and that the statute of frauds in the chapter did not apply. After concluding that the oral agreement was not rendered unenforceable for any other reason, the intermediate court affirmed the judgment in favor of the plaintiff.

We granted the defendant's application for permission to appeal in order to determine whether the stock of a closely-held corporation is a "security" under Tenn. Code Ann. 47-8-102 (1992 Repl. & Supp. 1998). Because we have determined that the Official Comments of the 1977 version of the Uniform Commercial Code, adopted by the Tennessee General Assembly in 1986, as well as the 1995 and 1997 amendments to the Code, overrule the reasoning in Blasingame v. American Materials, Inc., 654 S.W.2d at 664, we hold that closely-held stock is a security within the meaning of Chapter 8 of the UCC. Accordingly, we conclude that the statute of frauds found at Tenn. Code Ann. 47-8-319 (Repl. 1992) applies to the transactions in this case. Because the plaintiff cannot produce a signed writing that comports with the statute, nor can he satisfy one of the statutory exemptions, we reverse the judgments of the trial court and Court of Appeals and find in favor of the defendant.

ANALYSIS

A. Standard of Review

We begin by articulating the applicable standard of review....