# FILED

December 4, 1997

Cecil Crowson, Jr . App ellate C ou rt Clerk IN THE COURT OF APPEALS OF TENNESSEE WESTERN SECTI ON AT JACKS ON

DAVID McALISTER, ) ) Plaintiff/Appellee, ) Shelby Equity No. 105879 ) vs. ) ) Appeal No. 02A01-9610-CH-00262 PEREGRINE ENTERPRISES, INC., ) former ly known as EMPIRE ) ENTERPRISES, INC., ) ) Defend ant/Appe

llant. )

APPEAL FROM THE CHANCERY COURT OF SHELBY COUNTY

AT MEMPHIS, TENNESSEE

THE HONORABLE D. J. ALISSANDRATOS, CHANCELLOR

For the Plaintiff/Appellee : For the Defendant/Appellant : David M. Dunlap Michael A. Robinson Memphis, Tennessee James S. Strickland, Jr. Memphis, Tennessee

REVERSED A ND REMAN DED

HOLLY KI

RBY LILLA

RD, J.

CONCUR:

W. FRANK CR

AWFORD, P. J., W.S. DAVID R. FARMER, J.OPINION

This suit involves an action for the redemption of preferre d stock. The trial court found that the stock could be redeemed even though the redemption would render the corporation unable to pay its debts in the normal course of business. We reverse and remand. In 1 992, i n an at tempt to in crease its ca pital izat ion De fendan t/Ap pella nt Pe regr in e Enterpr ises, Inc. (“Pereg

rine”), a Tennessee corporation, authorized the designation of two series of preferred stock and the private placement of 520,000 shares of common stock. Peregrine’s Restated Charter indicates that Series A Preferred Stock (“Series A stock”) is cumulative and convertible and has priority over all o th er eq ui ty s ecurities. At the time of this suit, Peregrine had 2000 shares of Series A stock outstanding with a par value of $100.00 per sha re. Shareholders of Series A stock, as well as Peregrine, retained redemption rights in the stock. To exercise this option, Series A Shareholders were required to provide notice within six months plus thirty day s from the final closing of the offer ing of the common stock. Plaintiff/Appellant David McAlister (“McAlister”) held 1000 shares of Series A stock. The offering of the common stock was appar ently unsuccessf

ul. McAlister timely gave notice of his inte

nt to exerc ise his right

of redemption. Peregrine refuse d this request on the grounds that: 1) the right of redemption was conditioned on the succe ssful offering of the common stock; and 2) redempt

ion would

make the corporation unable to pay its debts as they become due in the usual

course of business and, thus, is barred by Tennessee Code Annotated § 48-16-401 (1995). McAlister then filed this lawsuit, seeking damages for Per egrine’s refusal to redee

m the stock. McAlister

filed a motion for

summary judgme

nt, arguing that McAlister had an undisputed contractual right to demand redemption of the stock. Peregrine’s response included the affidavit of its Chief Executive Officer, Charles Beec h. Beech indicated that

Peregrine had sought to raise $1.3 million through the offering of common stock, but instead raised o nly

$275,000. Beech

stated tha t, if Pereg rine re deemed M cAlister ’s stock, Pereg rine wou ld be unab le to pay its debts in

the normal

course of business. Peregrine argue d that McAlister’s right of redemption was conditional upon a successful offerin g of the common sto ck, and th at, under Tennessee Code Annotated § 48-16- 401(c)( 1), rede

mption is not

permitte d if it ren ders the corpora tion unabl e to pay

its debts. The trial court found that Tennessee Code Annotated § 48-16-401(c ) did n ot pro hibit the redemption of McAlis ter’s sto ck. I t also rej ected Pe

regri ne’s ar

gument t h a t, under the Restated Ch a rter, the failure to fund the escrow account throug h the common stock offering prohibited2

redempt io n. Theref

ore, the trial cou rt gra nted McA lister’s motion for

summary judgmen t. From th is order, Peregrine now appe als. On appeal, Pereg

rine ass erts that redemption was contingent upon the successful placement of the common stock, and that Tennessee Code Annotated § 48-16-401 prevents such a redemption because it will jeop ardize the

interest of cred itors. A motion for

summary ju dgment shouldbe granted when the movant demonstrates that there

are no genuine issues of

materia l fact and that the

moving par

ty is entitled to a judgment as a matter of law. Tenn. R. Civ. P. 56.03. Summary judgment is only appropriate when the facts and the legal conclusions drawn from the facts reasonably permit only one conclusion. Carvell v . Bottoms , 900 S.W.2d 23, 26 (Tenn. 1995). Since only questions of law are involved, there is no presumption of correctness regarding a trial cour t's grant of summary judgment. Id. Therefore, our review of the trial cou rt’s gra nt of summa

ry judgme

nt is de novo on the record before this Court. Id. Peregrine first contends that McAlister’s redemption rights were c onditioned on the success of the common stock offering. I n support of this assertion, Peregrine cites the “understanding” of the parties, the fact tha

t the red emption period is determined by the f inal closing of the common stock offering, and the fact that the funds for the Series A stocks’ redemption were to come from an

escrow account consisting of p roceeds of the successful common stock offer ing. Peregrine maintains that Peregrine therefore ca nnot redeem the stock since the common stock placement was unsuccessful and, as a result, the escrow ac count was not funded. Peregrine also arg ues that a provision

in th e Re stated Charter indicates that redemption cannot be mandate d. This pro vision stat es: (c) Failure to Effec t Re demption . In th e event t hat the Cor

poration fails to tim

ely make any pay

ment in connection with aproperly re quested Mandatory

Redemption, dividends (and interest

thereon , if any

) shall co ntinue to b e pay able

on the Ser

ies A Preferred Stock as provided for in Section 3 above. Peregrine contendsthat this pr

ovisio n demonstra tes that Series A stockholders cannot force a redemption, but that they will continue to rec eive accrued interest and cumulative dividends. To determine this issue, we must review the “entire contrac t” according to its “plain terms.” Cocke County Bd. of

Highway Comm’r v

. Newport U

tilit ies Bd., 690 S.W.2d 231, 237 (Tenn. 1985). The language re

lied upon by Pereg

rine simply does not

prohibit McAlister from demanding the mandatory r

edemption of his stock. We affirm the trial court’s determination of this issue.3

Neverth eless, Peregrine argue s that Tennessee statutes prohibi t t he mandatory r edemption of McAliste r’s stock when the redempt ion would

render the corp oration u

nable to p ay

its debts in the normal course of business, citing Tennessee Code A nnotated § 48-16-401(c). Title48 of the T ennesse e Code g overns corporations and securities. Section 48-16-401 address es “distributions to shareholders.” Section 48-11-201(8) (1995) defines “distribution” as follows: “Distribution” means a direct or indirec t transfe

r of mone y or other pr operty (except it s own shar

es) or in currence of ind

ebtedne ss . . . by a corpor ation to or for the benefit of its shareholders in respect of any of its shares. A distribution may be in the form of a declaration or pay ment of a dividend; a purchase, redemption , or other acquisition of shares; a distribution of indebtedness . . . or otherwise. (emphasis added). Therefore, the te rm “distribution” includes the redemption of stock. McAlister

argues that Section 48-16-401(f) sanc tions the redemption. This provi sion state s: A corporation’s indebtedness to a shareho lder incurred by reason of a distribution made in accordance

with this section is at parity with the corpora tion’s inde

btedness to its ge neral, u nsecure d credit

ors excep t to the exte

nt subordi nated by

agree ment. Tenn. Code Ann. § 48-16-401(f). Thus, McAlister argues that once his request for redemption was delivered, he had the same status as a ge neral, unsecured creditor. Peregrine notes that this provision refers to a distribution “ m ade in ac cordanc e with this section.” Id. Tenness ee Code A nnotated § 48-16-4 01(c)( 1) states : (c) No d istributio n may

be made i f, afte

r giving it effect: (1) The corporation would not be able to pa y itsdebts as t

hey become due in the usual course of business; . . . For th e purpose o f determining whether the trial court cor rectly g ranted McAlister’s summary judgmen t, we accept

as true Peregrine’s assertion that Pere grine would not be able to pay

its ordinary debts to its cre ditors if itredeems McAlister’s shares. McAlis ter c ontends that this statute onl y contemplates voluntary distribut io ns a s op pos ed t o di st rib ut io ns m and ate d by c ont rac t. In interpreting statutes, the Tenn essee Sup reme Cour

t recen tly reaffirmed that “courts are restric ted to the ‘natural and

ordinary’ me aning of a

statute unless an ambiguity necessitates resorting elsewhere to ascertain legislative intent.” Westlan d West Community Assoc. v. Knox C ounty, 948 S.W.2d 281, 283 (Tenn. 1997). On their face, neither Sec tion 48-16-401 or Section 48-16-10 3(b) distinguish between voluntar

y di stribution s and distr

ibutions ma

ndated by contract. McAliste

r can point to nothing indicating suc h a legi slative in tent. I ndeed, th e purpose of this sta

tute appe ars to be

to4

protect creditors. McAlister has failedto articulate any sound basis for making a distinction which endangers creditors’ interests in the even t of c ontract ual rights veste d in holder s of equit y instruments. This interpretation would clearly work to the detriment of creditors. Other states ha ve conc luded tha

t a pref erred s h areh older may not enf orce a redemption contract if such redemption would render the corporation insolvent. In Rider v. John G. Delker & Sons Co., 140 S.W. 1011 (Ky . App. 191 1), the c ourt cons i dere d whether a preferred sha reholder could enforce a redemption contract when the corpora tion was insolvent. Refusing to enforce the contrac t, the cou rt s tated, “[i]t is only in cases where the c orporation is solvent and the rights of creditors wi ll no t b e i nj ur io us ly a ff ec te d t he re by that ag reements as to preferences a mong themselves may be enf

orced.” Id. at 1012. Kentucky considered this issue again in We sterfield- Bonte Co. v. Burnett , 195 S.W. 477 (Ky . App. 191 7). The c ourt rea soned as f ollows: [T]here does not appear any sufficient reason why

[a preferred shareholder

seeking to enforc e a rede

mption con

tract] sho uld not be t

reated as a creditor, where he has a demand against the corporation, which can only be e nforce d as a deb t. It i s only where the carry

ing out of an agreement made between the stockholders an d the corpora tion will inj uriously

affect the rights of the cre ditors of the corporationthat th e a gr ee me nt be co me s i n c on tr av en ti on of a s ou nd pu bl ic po li cy. Id. at 480. The court reiterated: A judgment should not be rendered, by which any of the

assets of a corporation are appropriated

to the payment

of any claim of a

stockholder growing out of a contra ct for a preference

among the stockholders, if such appropriation would endanger the collecti on of cor

porate d ebts. Id. at 481. The Kentucky

court concluded in Westerfi

eld-Bonte that the redempt ion contr act shoul d be enforced since the co r poration failed to demonstrate that the creditors’ interests would be endangered. Id. at 481-82. See also Gunther Grocery Co. v. Haze l, 201 S.W. 336 (Ky. App. 1918); In re Phoenix Hotel Co., 13 F.Supp. 229 (D. Ky. 1935)

. The Ninth Circuit reached the some conclusion in In re Culbertson’s , 54 F.2d 753 (9th Cir. 1932). Apply

ing Washi ngton la

w, the court found

that a preferred shareholder doe s not become a creditor simply due to a right of r edemption. Id. at 757. The court held that redemption could not be mandated since the corporation would become insolvent. Id. at 760. In a similar case Mary

land found that the corporation’s “obligation to redee m was at all times subject to the implied condition that it would not render the corporation insolvent in the sense that it would be unable to meet its debts as they mature in the usual course o f business.” Kraft v.5

Rochambeau Holding Company, Inc., 123 A.2d 287, 290 (Md. App . 1956). O ther stat es are i n accord. See, e.g., Browder v. Mutual Tool & Die, Inc., 263 N.E.2 d 785 (Ohi o App. 197 0); Hurley

v. Boston R. Holding Co., 54 N.E.2d 183 (Mass . 1944); Booth v. Union Fibre Co., 171 N.W. 307 (min n. 1919); Koeppler v. Crocker Chair Co., 288 N.W. 130 (Wis. 1929) ; See also Annotation, Rights of Creditors of Corporation with Respect to its Purchase or Acquisition of its own Stock , 47 A.L.R.2d 758, 792-795, § 16 (1956); 18A Am. Jur. 2d Corporations § 547 (1985); 11 Fle tcher’s Cyc lopedia Co

rporatio ns Stock and

Stockhol ders § 5310 (1995). In this case, we find that Tennessee Code Annotated § 48-16-401(c)(1) prohibits the redemption of McAlister’s stock if doing so would r

ender th e corpor ation una ble “to pa y itsdebts

as they become

due in t he usual course of business. . . .” Therefore, the tria l court’s grant of summary judgment in favor of McAlister must be reversed, a nd the m atter remanded for further procee dings. The decision of the trial court is rev ersed a nd rem anded for fur ther p roceed ings consistent withthis Opinio n. Costs on a ppeal ar e taxed to A

ppellee , for whic

h executio n may

is sue i f necessary .

HOLLY KIRBY LILLARD, J. CONCUR:

W. FRAN K CRAWF ORD, P. J., W.S.

DAVID R. FARMER, J.