Title: Hughes Developers, Inc. v. Montgomery
Citation: 903 So. 2d 94
Docket Number: 1030841
State: Alabama
Issuer: Alabama Supreme Court
Date: October 1, 2004

903 So. 2d 94 (2004)
HUGHES DEVELOPERS, INC.
v.
Mays E. MONTGOMERY.
1030841.

Supreme Court of Alabama.
October 1, 2004.
Rehearing Denied December 17, 2004.
*95 Robert V. Rodgers of Wilmer &amp; Lee, P.A., Huntsville, for appellant.
*96 J. Robert Miller, Huntsville, for appellee.
LYONS, Justice.
The defendant, Hughes Developers, Inc., appeals from a judgment of the Madison Circuit Court awarding the plaintiff, Mays E. Montgomery, $178,875. The judgment represents the total amount of a loan, plus interest, made by Montgomery to Morris W. Frank, the former president of Hughes Developers. We reverse and remand.
This is the second time this case has come before this Court. In the first opinion, Montgomery v. Hughes Developers, Inc., 873 So. 2d 1109 (Ala.2003) ("Montgomery I"), we reversed the trial court's judgment insofar as it held that, because the stock he held as collateral was void, Montgomery was not entitled to any remedy against Hughes. In Montgomery I, we set forth the facts as follows:
"Following the hearing, Montgomery also presented written arguments to the trial court in which he argued that even if the trial court found that the 50 shares represented an overissue of Hughes's stock, the overissue provision of Article 8 of Alabama's Uniform Commercial Code justified the recovery requested in count I of his complaint.
"After an ore tenus hearing the trial court found as follows: `The stock Certificate Number 8 purportedly issued by the defendant corporation to Morris W. Frank, in which the plaintiff claims a security interest, was an overissue of stock unauthorized by the corporation.' The trial court concluded:
873 So. 2d  at 1110-12 (footnote omitted).
In July 2003, Hughes offered to purchase 50 shares of outstanding stock from its bona fide shareholders and tender those shares to Montgomery in satisfaction of his claim. Montgomery refused, preferring money damages. On remand, Hughes moved for an evidentiary hearing. The trial court denied the motion and entered a judgment against Hughes in the amount of $178,875, representing the amount of the loan plus interest. Hughes filed a postjudgment motion; in that motion, Hughes argued that Montgomery's sole remedy was to accept the shares of stock Hughes had offered to him. The trial court denied the motion, and Hughes appealed.
The trial court's findings of fact are presumed correct and its judgment based on those findings will not be disturbed absent plain error. Questions of law and the application of the law are to be reviewed de novo. Allstate Ins. Co. v. Skelton, 675 So. 2d 377, 379 (Ala.1996).
Section 7-8-202, Ala.Code 1975, validates an otherwise invalid security in certain situations. See § 7-8-202(b)(1), Ala.Code 1975 (validating an invalid security in the hands of a purchaser for value without notice).[1] Whether the provisions of § 7-8-202 are applicable in the instant case depends upon the definition in Alabama's version of the Uniform Commercial Code ("the UCC") of "security" and "purchaser for value."
"Security," for purposes of Article 8, is defined in § 7-8-102(a)(15) as
(Emphasis added.)
Shares of stock of a closely held corporation are "securities" for purposes of Article 8. While such stock may not actually be "dealt in or traded on [a] securities exchange[] or securities market[]," the phrase "of a type" includes closely held stock in the definition of "securities." See In re Sandefer, 47 B.R. 133, 137 (Bankr.N.D.Ala.1985) (interpreting § 7-8-102); Thompson v. Kohl, 216 Ga.App. 148, 453 S.E.2d 485, 487 (1994) (applying Georgia's version of § 7-8-102, which is similar to Alabama's); Baker v. Gotz, 387 F. Supp. 1381, 1389-90 (D.Del.1975) (applying a provision of the Delaware Code similar to § 7-8-102).
Further, § 7-8-103(a), Ala.Code 1975, which, according to its Official Comment, "contains rules that supplement the definition[] of . . . `security' in Section 8-102," provides that "[a] share or similar equity interest issued by a corporation, business trust, joint stock company, or similar entity is a security." The Official Comment to § 7-8-103 states, in relevant part, that "shares of closely held corporations are Article 8 securities." Therefore, under either § 7-8-102 or § 7-8-103, the stock of a closely held corporation satisfies the definition of "security" for purposes of Article 8.
"Purchaser" means "a person who takes by purchase." § 7-1-201(33). "Purchase" includes "taking by sale, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue, gift, or any other voluntary transaction creating an interest in property." § 7-1-201(32), Ala. *100 Code 1975. This definition easily embraces taking an interest in the stock of a corporation as collateral for a loan.
A person gives "value" for rights if he or she acquires those rights in return for the extension of credit, as security for a preexisting claim, or for any consideration sufficient to support a contract. § 7-1-201(44), Ala.Code 1975. Under the foregoing definitions in § 7-1-201, Montgomery is considered a purchaser for value under Alabama's version of the UCC. Hughes does not argue that Title 7, Article 8, is inapplicable because Montgomery had notice of any defect in the issuance of the stock. As a purchaser for value without notice, he is entitled to the protection afforded by § 7-8-202 from defenses asserting invalidity.
An overissue of stock occurs when the securities issued exceed the amount the corporation has the power to issue. § 7-8-210(a), Ala.Code 1975. When the corporation's articles do not authorize the further issuance of stock, as in the current situation, any stock issued in excess of the amount authorized is void. See Crawford v. Twin City Oil Co., 216 Ala. 216, 218, 113 So. 61, 63 (1927) ("It is a well-established principle that any issue of stock by a corporation in excess of the amount prescribed or limited by its charter is ultra vires, and the stock so issued is void, even in the hands of a bona fide purchaser for value.").
Section 7-8-210(b) limits the relief available under other provisions of Title 7, Article 8, such as § 7-8-202, when validation of a security would result in an overissue of stock. Subsections (c) and (d) of § 7-8-210 provide a remedy in such a circumstance. Subsection (c) states:
Subsection (d) states:
In this case, an identical security was "reasonably available for purchase" because Hughes was able to purchase outstanding stock, which it offered to do and to make available to Montgomery in satisfaction of his claim. As previously noted, Montgomery rejected Hughes's offer.
Does the availability of identical stock preclude Montgomery from the remedy of money damages under § 7-8-210(d)? In other words, can a person entitled to validation refuse to accept replacement stock and instead seek to recover the "price the person or the last purchaser for value paid for [the invalid security] ... ?" We think not.[2]
While our research has not revealed significant analysis of this issue, we think a fair reading of § 7-8-210(d) requires the absence of identical stock before money damages may be recovered. The first clause of subsection (d), setting forth a remedy in money damages, reads, "[i]f a security is not reasonably available for purchase...." (emphasis added), thereby creating a condition precedent to the availability of the remedy provided by the remainder *101 of the subsection. See Barter v. Diodoardo, 771 A.2d 835, 844 (Pa.Super.Ct.2001) (construing similar language in Pennsylvania's version of § 7-8-210 and describing the lack of "reasonably available" stock as a prerequisite to recovery of monetary relief). See also Farmers State Bank &amp; Trust Co. v. City of Yates Ctr., 229 Kan. 330, 337, 624 P.2d 971, 978 (1981) ("The City contends that the invalidity of the notes relieves it of contractual liability. However, K.S.A. 84-8-104 spells out the remedies of the holders of the overissue notes. There are two possible remediesthe City may issue an identical note which does not constitute an overissue, or the holder may recover from the City the purchase price of the notes plus interest from date of demand. Since the first alternative was not availablethe City had no identical securities not constituting overissuesthe trial court awarded judgment on the basis of the second alternative, purchase price plus interest on demand. This, we hold, was proper under the statute; although the notes constituted an overissue and were thus not valid securities, the purchasers were not left without a remedy.") (emphasis added).
Section 7-8-404, Ala.Code 1975, which sets forth remedies for the wrongful registration of transfer of a security to a person not entitled to such security, while not directly applicable here, does provide further support for the foregoing reading of § 7-8-210. Section 7-8-404(b) states that an issuer must provide the injured party with a substitute security unless an overissue would result, in which case the remedy is to be determined by § 7-8-210. The Official Comment to § 7-8-404 acknowledges the existence of pre-Code cases that "allowed the registered owner to elect between an equitable action to compel issue of a new security and an action for damages." But the Comment goes on to state that "Article 8 does not allow such election. The true owner of a certificated security is required to take a new security except where an overissue would result and a similar security is not reasonably available for purchase." (Emphasis added.) This Comment indicates that the absence of a similar security is a prerequisite to the collection of money damages when the overissue provisions of § 7-8-210 are applied.[3]
We believe this to be the most reasonable reading of the statute in that it leaves the creditor with exactly what he bargained for: stock as collateral for a loan. Montgomery took shares of Hughes Development, Inc., to secure a loan. Had the shares been valid, upon default by Frank, Montgomery would have been entitled to ownership of the stock and nothing more. Our reading of § 7-8-210 achieves the same result and puts Montgomery in the same position as if the shares had been valid.
*102 Montgomery argues that § 7-8-210 is not the sole remedy available to him and that he has a common-law right to recover money damages. We disagree. The purposes of the UCC include the simplification, clarification, and modernization of the law governing commercial transactions. § 7-1-102, Ala.Code 1975. While it is true that, under § 7-1-103, application of the UCC is to be supplemented with the principles of law and equity, we conclude that the drafters of § 7-8-210 intended it to be the sole remedy in the case of an overissue. The latest Official Comments to § 7-1-103, Ala.Code 1975, state:
A surviving common-law right to sue for damages in the instant case, distinct from the remedy offered under § 7-8-210 when applicable, would conflict with the policies of simplification and clarification as embodied by the UCC. See also American Liberty Ins. Co. v. AmSouth Bank, 825 So. 2d 786, 795 (Ala.2002) ("Under 7-1-103, when a statute provides a cause of action relating to a specific factual situation in a specific manner, then any common-law cause of action based upon a factual situation so materially identical that it is clearly within the specific scope of the provision must be said to have been `displaced'...."). In Montgomery I, the existence of common-law remedies was recognized in dicta dealing with the circumstance that might be presented if the original stock issue violated a constitutional provision. Because in Montgomery I this Court concluded that there was no constitutional defect and because we have not been asked to revisit that determination, we pretermit further discussion of the availability of common-law remedies under such circumstance.
Montgomery is a "purchaser for value" under § 7-8-202, Ala.Code 1975. Because Hughes does not contend that Montgomery had notice of the invalidity of the stock, Montgomery is entitled to relief under § 7-8-210. The sole remedy for an aggrieved purchaser for value of a security resulting in an overissue is set forth in § 7-8-210. Because a security not constituting an overissue is reasonably available for purchase, Montgomery is entitled under § 7-8-210(c) to 50 shares of stock in Hughes. Because the absence of a reasonably available identical security is a prerequisite to money damages under § 7-8-210(d), Montgomery is not entitled to money damages. We reverse the trial court's judgment and remand this case for further proceedings consistent with this opinion.
REVERSED AND REMANDED.
NABERS, C.J., and JOHNSTONE and WOODALL, JJ., concur.
HOUSTON, J., concurs specially.
HOUSTON, Justice (concurring specially).
As the author of the opinion in Montgomery I, I apologize for the confusion that opinion caused the trial court and the parties.
This Court held that the trial court could not find that the issuance of the 50 shares of stock in Hughes pledged to *103 Montgomery was constitutionally void and that, therefore, Montgomery could proceed under Ala.Code 1975, § 7-8-210(c) or (d). The confusion is caused by the dicta concerning what Montgomery could do in the event he could not proceed under § 7-8-210 because the issuance of the stock was void by reason of a constitutional provision. To compound dicta, I believe that if he could have proceeded under § 7-1-103 Montgomery would have been limited in damages to the value that the last purchaser for value paid for each share of Hughes's stock, times the number of shares Montgomery had (50). If Hughes could not have complied with § 7-8-210(c), Montgomery's damages would have been the same under § 7-8-210(d), or under "the principles of law and equity," Ala.Code 1975, § 7-1-103.
[1]  While § 7-8-202 excepts from validation a security with a defect involving a violation of a constitutional provision, we do not deal with that circumstance in this proceeding. In Montgomery I this Court found no constitutional defect; we have not been asked on this appeal to revisit that finding.
[2]  Because of our holding, we make no determination as to the propriety of a monetary award commensurate with the amount of the note, plus interest, under the circumstances of this case.
[3]  Montgomery does not contend that he has been damaged by a decline in the value of the securities because Hughes failed seasonably to offer valid securities. See Tuggle v. American Fin. Sys., Inc. (Del. Ch., Civ. A. No. 450, June 22, 1978) (unpublished opinion) ("If defendant had promptly tendered to plaintiff like securities, after the plaintiff's demands on October 24, 1973 and December 19, 1973, defendant would be relieved of paying the value of the stock as of the demand date. But defendant elected not to do this. It would violate all the concepts that this Court in doing equity should make an aggrieved party whole, for me to require plaintiff, after demanding the return of her securities in 1973 and then unjustly being denied her securities for almost five years, to accept a like security of greatly diminished value."). See Stone v. Mellon Mortgage Co., 771 So. 2d 451, 456 n. 1 (Ala.2000) ("[A case's] unpublished status ... does not preclude us from using it in our analysis. No opinion from another state court is binding on the courts of Alabama, but we often cite such an opinion as persuasive authority.").