Whatley, Matter of, 88-4474
| Decision Date | 07 June 1989 |
| Docket Number | No. 88-4474,88-4474 |
| Citation | 874 F.2d 997 |
| Parties | 9 UCC Rep.Serv.2d 1092 In the Matter of John W. WHATLEY and Ruby L. Whatley, Whatley Farms, Inc., Debtors. U.S. SMALL BUSINESS ADMINISTRATION, Plaintiff-Appellant, v. GUARANTY BANK & TRUST COMPANY, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Joyce A. Oblon, Office of Gen. Counsel, Small Business Admin., Washington, D.C., Patricia D. Rogers, Asst. U.S. Atty., Robert Q. Whitwell, U.S. Atty., Oxford, Miss., for plaintiff-appellant.
Gretchen Pumphrey, Pat Scanlon, Bobby L. Dallas, Jackson, Miss., John W. Garrard, Montgomery, Varnado, Garrard & Trotter, Belzoni, Miss., for defendant-appellee.
Appeal from the United States District Court for the Northern District of Mississippi.
Before GARZA, JOLLY, and JONES, Circuit Judges.
The facts are undisputed. On October 28, 1975, the Secretary of State of Mississippi issued a certificate of incorporation to the debtor, Whatley Farms, Inc. ("Whatley Farms"). John W. Whatley and his wife, Ruby G. Whatley were listed as the incorporators. 1 The certificate of incorporation and proof of publication were duly filed in the Office of the Chancery Clerk, Humphreys County.
The farming equipment used by the Whatleys in their agricultural operations was depreciated annually on the corporate tax return and considered by the corporation's accountant as a corporate asset from the inception of the corporation. No formal bill of sale ever transferred the equipment from the Whatleys to the corporation, however. Between 1976 and 1980, John Whatley purchased farming equipment in his personal name and financed such purchases with personal loans through Guaranty Bank. After its incorporation, Whatley Farms opened a corporate checking account with the Cleveland State Bank, Cleveland, Mississippi and used the account regularly in its business activities. The funds in this account were used for payment of obligations to Guaranty Bank on several occasions.
In 1981, the Whatleys relocated their farming business, including the farming equipment, from Humphreys County, in western Mississippi, across the state to Kemper County. On November 11, 1981, Whatley Farms borrowed $158,600.00 from the SBA and executed a security agreement and UCC-1 financing statement providing for a floating lien on all machinery and equipment excluding automotive, including, but not limited to, certain items of property described on a list appended to the UCC-1 financing statement. This statement was filed in Kemper County.
In April 1983 the Whatleys moved back to Humphreys County along with their farming equipment. On May 23, 1983 John Whatley obtained a personal loan from Guaranty Bank for which he granted the bank a security interest in much of the same farming equipment listed in the SBA's financing statement. 2 The bank's financing statement listed the farming equipment as belonging to John Whatley; it purported to cover "all equipment" of John Whatley's farming operations.
Significantly, at the time that these loans were made Mississippi did not require duplicate filings of the financing statements both in the county of residence and with the secretary of state. Filing in the county of residence was legally sufficient. The SBA's financing statement was thus properly filed under Mississippi law in Kemper County, but was never filed with the secretary of state. Likewise, the bank properly filed its financing statement only in Humphreys County. Both the bank and the SBA have acted in good faith.
On April 23, 1984, John W. Whatley and Ruby L. Whatley filed a voluntary Chapter 11 petition with the bankruptcy court. On June 5, 1984, Whatley Farms filed its voluntary Chapter 11 petition. A priority dispute arose between the SBA and Guaranty Bank. After the district court upheld the bankruptcy court's ruling in favor of Guaranty Bank, the bank sold the farming equipment for $48,176. Proceeds from the sale are in escrow pending the outcome of this case. From the adverse decisions of the bankruptcy and district courts, the SBA appeals.
The bankruptcy court's logic is simple. Whatley Farms was not legally organized under the laws of Mississippi because it did not comply with certain corporate formalities.
Not having a legal existence, Whatley Farms could not hold legal title to the equipment pledged to the SBA and never actually owned that equipment. The court therefore held that Whatley Farms could not grant a security interest in the equipment to the SBA because it was not a legal entity and did not own the equipment.
We disagree with each of these conclusions as follows: Whatley Farms, Inc. is a de facto corporation under Mississippi law. As such, it could own the farm equipment it continuously depreciated for tax purposes. But whether or not it owned the farming equipment, it had "rights in the collateral" sufficient to enable it to grant a security interest pursuant to Miss.Code Ann. Sec. 75-9-203. We will address Whatley Farms's corporate existence and then the validity of the SBA's security interest.
Mississippi law recognizes the concept of de facto corporations. 3 In Allen v. Thompson, 248 Miss. 544, 158 So.2d 503 (1963), the Mississippi Supreme Court established three necessary conditions for de facto corporate status: (1) a valid law under which the entity could be incorporated, (2) a bona fide attempt to organize a corporation under the law, and (3) an actual exercise of corporate powers. 4 Peculiarly, neither the bankruptcy court nor the district court applied Mississippi's test for de facto status to the facts of this case. The issue was not waived. Since the facts are undisputed, we may undertake the task ourselves in the interest of judicial economy. 5
Sections 79-3-101 through 79-3-113 of the Mississippi Code, Miss.Code Ann. (1972), satisfy the first requirement, 6 that there be a law enabling the company to incorporate. At the time of Whatley Farms's incorporation, section 79-3-109 provided that:
Upon the issuance of the certificate of incorporation, the corporate existence shall begin, and such certificate of incorporation shall be conclusive evidence that all conditions precedent required to be performed by the incorporators have been complied with and that the corporation has been incorporated under this chapter, except as against this state in a proceeding to cancel or revoke the certificate of incorporation or for involuntary dissolution of the corporation.
The record also reflects a bona fide attempt to organize the corporation. No simple or talismanic test exists to determine whether a corporation has satisfied this condition. See 8 Fletcher, supra n. 3, Sec. 3796; 18A Am.Jur. 2D Corporations, Secs. 243-48. Rather, we must examine all of the pertinent facts. The test is neither complete performance nor even substantial compliance; however, there must be evidence of at least a colorable attempt to comply with the statutory requirements by The bank argues that the following undisputed facts preclude a finding of de facto corporate status: (1) the failure to pay $1,000.00 into the corporation as initial paid-in capital and the related failure to issue any stock, as required by Miss.Code Ann. Sec. 79-3-111, (2) the failure to hold an initial organizational meeting of the board of directors, as required by Miss.Code Ann. Sec. 79-3-113, (3) the failure to adopt bylaws, and (4) the failure to hold annual shareholders' meetings. To this list may be added the absence of corporate bylaws or of signed minutes for any directors or shareholders' meetings.
taking some of the statutory steps toward incorporation. See 18A Am.Jur. 2D Corporations Sec. 244.
On the other hand, Whatley Farms had corporate officers. John W. Whatley was president, Ruby Whatley held the dual positions of secretary and treasurer, and the Whatleys' son John served as vice-president. Whatley Farms also filed a certificate of incorporation with the proper authority, the Office of the Chancery Clerk for Humphreys County. Section 79-3-109, quoted above, indicates the critical significance of this fact. Under Mississippi law, such a filing is conclusive evidence that the necessary conditions precedent have been complied with, except as against a challenge brought by the state in a direct proceeding. 7
Although there appears to be no Mississippi case precisely on point, we are confident that Mississippi would find a bona fide attempt to organize Whatley Farms, Inc. The facts relied upon by the bank, taken individually or collectively, do not refute our conclusion. First, the Mississippi statutes do not require that a corporation adopt bylaws. Section 79-3-51 states:
The initial bylaws of a corporation shall be adopted by its board of directors. The power to alter, amend or repeal the bylaws or adopt new bylaws shall be vested in the board of directors unless reserved for the shareholders by the articles of incorporation. The bylaws may contain any provisions for the regulation and management of the affairs of the corporation not inconsistent with law or the articles of incorporation.
Thus, section 79-3-51 authorizes the board of directors to adopt the initial...
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