Opinion ID: 597120
Heading Depth: 2
Heading Rank: 2

Heading: Louisiana Law Issues

Text: 27 This case comprises two clear issues of Louisiana law. One, which turns on the meaning of hypothecate as used in the charter of Lucullus, Inc., questions the applicability of the restriction provision of Article VIII to pledge. The other, which turns on provisions of the Louisiana Business Corporation Law, questions the legal effects produced by the actions or inactions of Hill, the Bank, the corporation and the remaining stockholders--and their remedies, if any--if the provisions of Article VIII of the charter of Lucullus, Inc. do apply to pledges of stock in that corporation. We consider these two issues of Louisiana law in inverse order. 28
29 The jurisprudence of Louisiana reflects over a century of use of restrictions on the alienation of corporate stock. 5 Nevertheless, the efficacy of such restrictions was not expressly recognized by the courts of the state until 1964. 6 Coincidentally, the restriction approbated in that case was, like the one now before us, a right of first refusal. 30 This type of restriction has long been recognized as serving valid purposes in closely-held corporations, principal among which are 1) controlling the makeup of the shareholder group, and 2) preventing the stock from falling into the hands of undesirable corporate partners. 7 Even though, as correctly found by the bankruptcy court in the instant case, the courts of Louisiana at least give lip service to the maxim that restrictions on alienation of corporate stock are to be construed narrowly because they impinge on free transferability of corporate ownership, 8 such a position is not universally applauded. It was roundly criticized, for example, by Professor Tom Andre, Jr. of the Tulane University School of Law in his definitive work on the subject 9 as lacking any valid public policy foundation either in the Louisiana Civil Code or other legislation. Professor Andre makes a flawless argument for liberal construction of such restrictions, illustrated with numerous valid business and tax purposes for their use and evenhanded enforcement. Nevertheless, for purposes of the instant case, we follow the dictates of constant Louisiana jurisprudence as it currently stands, and strictly construe Article VIII of the charter of Lucullus, Inc. 31 Before parsing that charter provision, however, we are constrained to make several observations. First, assuming he can prevail on the issue of the restriction's applicability to the transaction here under litigation, Adler contends that the purported pledge to the Bank by Hill in violation of the restriction is void, i.e., absolutely null. He contends in the alternative, however, that even if the transaction is not absolutely null it is at least voidable, i.e., relatively null. Although we assume without determining that a transfer or encumbrance in violation of such a stock restriction is not an absolute nullity and at least is valid between the parties--after all, it may be waived or ratified by the corporation or the other shareholders--it is sufficient for our purposes that if the restriction applies to pledge and if Hill's purported pledge to the Bank violates the restriction, relative nullity is all that is required to support Adler's attack on the transaction. Unlike the corporation and the other shareholders, who might have waived, acquiesced in, ratified or otherwise acted (or failed to act) in such a manner as to abrogate their right to attack the purported pledge transaction, the trustee in bankruptcy has standing and acted timely to annul the subject transaction. 32 Second, we find no support for the secondary holding of the bankruptcy court that, even though the restriction of Article VIII is inapplicable to pledge, the Bank as pledgee is bound to offer the stock to the other shareholders (presumably for book value as specified in Article VIII) before foreclosing on the pledge by selling the stock. By its own terms the stock restriction applies only to a shareholder, and the bankruptcy court has already determined, correctly, that pledge does not transfer title. Thus, even if Hill's pledge to the Bank is neither void nor voidable under the transfer restriction, the pledgee Bank is still not a shareholder. Consequently, if we were to conclude that the restrictions of Article VIII do not prohibit pledge, thereby validating Hill's pledge to the Bank, the first refusal provisions of Article VIII would be equally inapplicable and would, therefore, impose no duty on the Bank, as a non-shareholder pledgee, to offer the stock to the corporation or the other shareholders. In short, either all features of the charter restriction apply or none does. 33 Third, we disagree with the bankruptcy court's contention that hypothecate is the only type of transaction among those proscribed by Article VIII that is not a title-transferring act. Specifically, the word hypothecate is followed by the word assign. Assign in current legal parlance may signify either a title transferring act or a pignorative act, depending on the context in which that term is used. For example, when a legal document refers to a lessee's assignment of a lease--particularly a mineral lease--the statement usually connotes transfer of title (although it is not unheard of for a mineral lessee to assign leasehold interests, particularly future royalties or runs, to a lending institution or other creditor by way of collateral). Similarly, a lessor may assign rents or royalties, whether to a third party purchaser or to a creditor. On the other hand, an assignment under the Louisiana Assignment of Accounts Receivable Law, 10 from the creditor/owner of the receivables to his lender or creditor, is clearly a pignorative transaction with title remaining in the assignor until or unless the underlying obligation secured by such assignment becomes delinquent. In each instance, then, the context must be considered before making a determination whether the parties intend for the assignor of the lease to transfer title or merely to encumber his or her lease or leasehold interest. 34 The point we make is not that Hill might be found to have assigned his stock to the Bank in some sort of secured transaction; clearly, the transaction attempted was pledge if it was anything. Rather, the point we make is that assign, as used in the Lucullus charter restriction, does not necessarily refer exclusively to a title-transferring transaction--if it refers to such a transaction at all. Like hypothecate, one of the meanings of assign in Article VIII could well be that of collateral assignment. As such, the use of hypothecate, assign in the proscription sentence of Article VIII could support an interpretation, under the doctrine of ejusdem generis, that would encompass any recognized method of encumbering corporate stock--pledge being preeminent among such encumbrances known to the law of Louisiana. 35 But, as explained more fully below, we need not explore such an interpretative process. At this juncture, it suffices that Adler as trustee in bankruptcy would be entitled to a judgment nullifying Hill's purported pledge of his Lucullus stock to the Bank if, in the context employed in Article VIII of the corporate charter, hypothecate is found to be synonymous with pledge. And if that should turn out to be the case, the uncontested facts confirm beyond peradventure that Hill made no effort to comply with the prerequisite for encumbering his stock--offering that stock to his fellow shareholders at book value for a period of thirty days--and that the Bank did not require such compliance despite its conceded knowledge of the legend and restriction. We turn, therefore, to the meaning of hypothecate. 36
37 We have already noted, as did the bankruptcy court, that the leading law dictionary defines to hypothecate as to pledge. 11 Strong support for that definition is found in the leading dictionary of the English language 12 as well. But the bankruptcy court did not stop with dictionary definitions, and neither do we. A brief review of the centuries long history of the term reveals that, when used as a verb, hypothecate is sometimes expansive, denoting both pledge and mortgage, while at other times it is narrow, denoting only mortgage. 13 We look next to the history of the term. 38
39 Hypothecate stems from the Latin hypothecare. The Greek verb hypotithemi, from which the Latin, French and English words derive, means to lend money on pledge. 14 Under Roman law the hypotheca developed as a form of pignus which, like pledge, included delivery of possession of the thing to the mortgagee or creditor. Unlike pignus, however, hypotheca did not require delivery of the thing to the creditor. 40 The Roman law authority W.W. Buckland found that [b]etween hypothec and pignus there was in strictness no legal difference, but there was the physical fact that in the former the thing was left in the hands of the debtor.... But it was equally possible to create hypothecs on a thing already held by a pledgee.... 15 Buckland also referred to the findings of Erman, who seems to show that hypotheca is in origin merely a Greek name for pignus.... Later jurists use it more freely and as synonymous with pignus. 16 Finally, Buckland maintained that the actio hypothecaria is a distinct action ... for the enforcement of the possessory right, and applies equally to pignus. 17 41 Another Roman law authority, H.F. Jolowicz, thought that the last form of pledge to develop was that known ... as hypotheca, i.e., the pledging of a thing by mere agreement, without the transfer of either ownership or possession. 18 Extending the caution that the classical use of the word is disputed, Jolowicz also emphasized the flexibility of the term: 42 Pignus and hypotheca are treated throughout [the Corpus Juris] as one and the same thing; in some cases possession is transferred at once, in others it is not, but that is all. The word pignus is freely used for both cases and indeed occurs in the formula of the very action which made pledge without possession possible. It is clear too that the particular case from which hypotheca arose was one which was but a slight extension of the original principle. 19 43
44 The French commentator Troplong regarded pledge and mortgage as different, particularly in that hypotheque left to the debtor the possession of the property that pignus or pledge took from him. 20 Troplong did, however, describe hypotheque as a variant of pignus. 21 45 The French not only retained a later Roman distinction between pledge and mortgage in adapting Roman law governing security rights, but added another by restricting the hypotheque to immovable property. 22 The French Civil Code of 1804 (hereafter, the Code Napoleon) codified these differences. 23 Pothier, however, had drawn those distinctions earlier in his Traite de l'Hypotheque. The hypotheque, Pothier said, was the right of a creditor in the property of another, consisting of the power to cause the sale of the property for satisfaction of the debt. Pothier posited two forms of hypotheques: 1) Nantissement [pledge] or pignus, contracted by delivery of the securing property to the creditor; and 2) hypotheque [mortgage] properly so called, contracted without delivery. 24 Pothier noted that although under the Romans all things in commerce--movable or immovable, corporeal or incorporeal--had been susceptible of hypothecation, under the French only immovables were subject to the true hypotheque. According to Pothier, the customs of Paris and Orleans permitted no hypothecation of movables whatsoever. Where, as in Normandy, local customary law regarded movables as subject to hypothecation, this merely produced an imperfect form of security right, lasting only as long as the debtor retained possession of the movable. The security right on immovables, however, followed the property into whatever hands it passed, constituting, Pothier said, a true hypotheque. 25 46 Here, the Code Napoleon consolidated customary law with written law, conclusively eliminating those customary laws by which some regions had regarded movables as subject to hypothecation. 26 While the hypotheque was defined as the real right itself, the Code Napoleon defined pledge (nantissement ) as the contract by which a debtor remitted a thing to his creditor as security for a debt. 27 A hypotheque applied only to immovable property, yet it remained possible to pledge a movable under gage [pawn], and an immovable under the contract denominated antichrese. 28 47
48 The classifications of the Code Napoleon (or, more accurately, of its projet) were adopted by the redactors of the Louisiana Digest of Civil Laws in 1808. Thereafter, Louisiana had no general hypotheca in regard to movables ... until 1912, when the first chattel mortgage act was passed, applying only to corporeal movables. 29 49 The translation from French to English in the Louisiana Civil Code of 1825 renders d'hypothequer or to hypothecate as to mortgage. An example, found in article 3116, under Title 19 governing Pledge, read: where the power of attorney contains a general authority to mortgage the property [pouvoir general d'hypothequer les biens] of the principal, this power includes that of giving it in pledge [de les donner en nantissement ]. 30 This language survives as article 3149 of the Revised Civil Code of 1870. The hypothecary action for enforcement of the real security right obtained through mortgage survives in the Louisiana Civil Code 31 and in the Louisiana Code of Civil Procedure as well. 32 50
51 Hypothecate and its variations occurs as well in particular provisions of the Louisiana Revised Statutes of 1950. For example, the statutory title governing banks and banking accords an institution the power [t]o borrow money and to mortgage, pledge, hypothecate, or grant a security interest in any of its assets to secure such borrowings. 33 The conjunction or here would not seem to indicate that hypothecate stands separate in meaning and function from either pledge or mortgage, or even from granting a security interest for that matter. 52 The most expansive statutory use of the term is in the Louisiana Business Corporation Law, which gives a corporation or association the power [t]o make contracts and guarantees ... to incur liabilities, to borrow money, to issue notes, bonds and other obligations, and to secure any of its obligations by hypothecation of any kind of property. 34 Hypothecation here clearly denotes any recognized method of creating a security interest in any form or type of property. 53
54 Despite such limited Code and statutory uses of hypothecate or its derivatives, referring only to mortgage, and the treatment of pledge under a separate title of the Civil Code, opinions of the Louisiana courts have used the terms hypothecate and hypothecation much less precisely and much less restrictively, usually as a result of language drawn from the specific contracts or security agreements under scrutiny at the time. Several examples demonstrate the importance of context in determining the intended meaning of the term. When hypothecate occurs in combination with terms such as pledge or mortgage, the conjunction and may or may not indicate that the additional term has a separate meaning, and or may or may not introduce a separate idea with a meaning exclusive of the other words in the same series. There seems to be no pattern to distinguish the use of hypothecate as a synonym from its use as a discrete transaction. For example, in Succession of Onorato, 35 opponents of a succession argued that a writing by the decedent acknowledging 1) himself as their debtor, and 2) that insurance proceeds should pay the debt constitute[d] a pledge or hypothecation of such life insurance policies[.] 55 This phraseology found use earlier in Fasterling v. Kahn. 36 Justice O'Neill, affirming the trial court's finding of fraudulent misrepresentation by which plaintiff had been relieved of valuable stocks, stated that the defendants were not the owners of the stock ... and had no right to pledge or hypothecate it. This eminent Louisiana jurist was clearly using hypothecate as a synonym of pledge, not as an additional mode of encumbering stock distinct from pledge. 56 First Guaranty Bank v. Alford, 37 addressed a wife's liability, under a pledge agreement executed as part of a collateral mortgage, for debts subsequently contracted by her husband. The court's description of the instruments executed by the husband included mention of two pledge agreements by which he pledged and hypothecated other instruments as security for the later obligations. Here again, hypothecated clearly is used as a synonym for pledge. 57 In Baton Rouge Wood Products, Inc. v. Ezell, 38 the language of a pledge agreement stipulated that the party executing it did pledge and hypothecate securities. Similarly, in Webster v. Harman, 39 the cited language came from a contract by which the plaintiff agreed to pledge and hypothecate into and in favor of [defendant] forty (40) shares of ... capital stock. This contract was later referred to by Justice Provosty in the same opinion as the pledge which [defendants] held of plaintiff's 40 shares of stock. 40 The opinion in that case also refers to a power of attorney that grants the power to sell, pledge, mortgage, hypothecate or otherwise incumber any and all shares of stock held by [plaintiff]. 41 As both pledge and mortgage are expressly listed, the scrivener's use of hypothecate must be as a synonym for either or both, much as is incumber there. 58 Additional examples are found in two Louisiana circuit opinions. In General Motors Acceptance Corp. v. Crain Chevrolet-Olds-Pontiac, Inc., 42 the court made note of the collateral mortgage provisions by which the dealer agreed that he mortgages, affects, and hypothecates his inventory, the merchandise, to remain so mortgaged and hypothecated until payment in full of the Note and any obligations secured by the pledge thereof. And in Plumbing Supply House, Inc. v. Century National Bank, 43 the court described an hypothecation agreement authorizing [plaintiff corporation] to pledge [a] ne varietur note as security. 59
60 The point we so belaboredly make is that neither the history, the sources, the terminology of the current codes and statutes, nor the jurisprudence conclusively and absolutely define the word hypothecate either to include or to exclude the concept of encumbering movables. Nor do we find that to hypothecate absolutely includes or excludes delivery of possession. The conclusion that does come through loud and clear, however, is that the drafters of statutes and legal instruments in current Louisiana practice appear to play rather fast and loose with the verb, to hypothecate. Part of such practice, we suppose, is the untidy but prevalent penchant of lawyers to invoke the mystique of the profession's glossary of archaic and anachronistic terms without bothering to identify the precise legal meaning of the terms thus employed. That tendency, coupled with an equal penchant for invoking solemnity by including several synonyms--usually the Biblical three--for the desired word when that one word alone would suffice, leads to controversies (such as the instant litigation) that could be avoided by a drafting technique that is more precise and less pretentious. Code provisions, Revised Statute provisions, and documents quoted or referred to in the jurisprudence illustrate just such imprecise, surplus usage of hypothecate when all that is required is the word pledge if that is what is intended, or mortgage if that is what is intended, or encumber if the broader, all inclusive concept is intended. 61 All of this leads to one inescapable conclusion: To ascertain what the parties intend in using the term hypothecate, the context in which that term is used must be examined, and that examination must be conducted according to Louisiana's rules for interpreting contracts. When we do that in the instant case, we are disabused of any doubt that, in confecting Article VIII, the drafter of the Articles of Incorporation of Lucullus, Inc., could only have been using hypothecate as a synonym--albeit an unnecessarily fancy, legalese one--for pledge. 62
63 Our finding is confirmed when the methodology used in making it is tested by the applicable Louisiana rules of interpretation. Even though the Articles of Incorporation of a Louisiana business corporation implicate public administration through the office of the Secretary of State, such instruments are contracts, first and foremost. As such, they are to be construed according to the rules found in Book III, Title IV, Chapter 13, Interpretation of Contracts, of the Louisiana Civil Code. 44 The bankruptcy court invoked only one among that baker's dozen of articles to support its restrictive interpretation of Article VIII's use of hypothecate, thereby excluding pledge from the meaning of hypothecate. 45 When we visit all thirteen articles of Chapter 13, however, we reach the opposite result. 64 Skimming quickly, we observe first that article 2045 defines interpretation of a contract as the determination of the common intent of the parties. Article 2046 eschews further interpretation when the words of the contract are clear and explicit and lead to no absurd consequences. 65 The reliance by the bankruptcy court on the next rule, article 2047, is questionable: Although we find the first sentence of article 2047 (The words of a general contract must be given their generally prevailing meaning.) significant to the instant inquiry, the second sentence (Words of art and technical terms must be given their technical meaning when the contract involves a technical matter.) may well be irrelevant here. The bankruptcy court relied on that second sentence as authority to use the technical legal meaning of hypothecate. 66 But it is axiomatic that legal terms are always given their legal meaning. As such, the phrase words of art and technical terms in art. 2047 refers to technical terms of art from other disciplines, such as the social sciences, the earth sciences, engineering, the construction industry, the oil and gas industry, and the like. 46 67 Article 2048, the one next following the article cited by the bankruptcy court, impresses us as being more to the point of the instant inquiry than is article 2047. Article 2048 instructs that [w]ords susceptible of differing meanings must be interpreted as having the meaning that best conforms to the object of the contract. We have already demonstrated that hypothecate can have any of several meanings: mortgage only; pledge only; or any encumbrance, including both mortgage and pledge. Here, corporate stock is the object of the Articles of Incorporation of Lucullus, the contract in question. As Louisiana corporate stock is not susceptible of mortgage, defining hypothecate, as in a restriction on alienation of corporate stock, to cover only mortgage, relegates that verb to meaningless surplusage. On the other hand, interpreting the restriction's use of hypothecate to mean pledge conforms precisely to the object of the contract and gives that verb a sensible meaning in the phrase. Thus article 2048 augurs for an interpretation of hypothecate that at a minimum includes pledge, and more properly includes any encumbrance applicable to corporate stock, while at the same time eschewing mortgage because corporate stock is not susceptible of mortgage. 68 This conclusion draws further support from the next Code article in the series. Article 2049 moves from consideration of single words to consideration of entire provisions, stating that [a] provision susceptible of different meanings must be interpreted with the meaning that renders it effective and not one that renders it ineffective. 47 As corporate stock cannot be mortgaged, the bankruptcy court's interpretation of hypothecate in the Lucullus stock restriction provision to mean mortgage rendered it nugatory. Giving hypothecate its extensively used, broader meaning of pledge in particular or encumber generally renders it effective in the context of restrictions on alienation of corporate stock as mandated by article 2049. 48 69 At the time of Hill's transaction, pledge was the only nominate security device applicable to corporate stock under Louisiana law. 49 By definition the conventional mortgage and the archaic antichresis apply only to immovable property. So, in the context of restricting alienation of corporate stock, hypothecate could not have referred to mortgage even if that were the limited technical meaning of that verb in late Roman law, in French law, and in the Louisiana Civil Code. Likewise, hypothecate could not refer to chattel mortgage because in Louisiana chattel mortgage is available to encumber corporeal movables only, and corporate stock is classified as an incorporeal movable (even though for purposes of official transfer such stock is sometimes deemed to be corporealized into the certificate that represents it). Conceivably, the use of hypothecate in Article VIII of the Lucullus charter could have referred to the innominate security transaction of assignment in its pignorative connotation rather than its title-transferring connotation. But in this case such use would be redundant, given that assign is the word next following hypothecate in Article VIII. Clearly, then, in the context of a restriction on alienation of Lucullus stock, hypothecate is synonymous with pledge. 70 Any lingering doubt is removed by reading Article VIII in pari materia with the legend that appears on the stock certificate. Given the almost universal practice among Louisiana lawyers who incorporate closely-held businesses of preparing a comprehensive package of documents at the time of incorporation--not merely Articles of Incorporation but such ancillary instruments as Bylaws, Minutes, Shareholders' Agreements, and stock certificates for original issues of shares--we speculate that the same scrivener who prepared the Articles of Incorporation for Lucullus, Inc. prepared the stock certificates issued to the founders (including Hill) on September 25, 1984. The Articles of Incorporation are dated September 13, 1984; they were filed and recorded in the office of the Louisiana Secretary of State on September 17, 1984. Dunne was named as the sole incorporator of Lucullus, but the corporation's Initial Report, executed and filed contemporaneously with the Articles, lists Hill as 1) the registered agent, 2) one of the three initial Directors of the corporation, and 3) its Vice President. The legend on the reverse side of the stock certificate--referring as it does to restrictions set forth in the by-laws (or Articles as the case may be)--is obviously standard boilerplate verbiage employed by the drafter here and in his general corporate practice. The legend makes no mention of pledge, hypothecation, sale or any other particular transactions. It does, however, refer generically both to transferred and encumbered when describing the types of transactions that are conditioned on compliance with the provisions of the restriction. 71 Reference to encumbrance in the legend is strong evidence that the provisions of Article VIII are not intended to cover title-transferring transactions only; and, indeed, the bankruptcy court recognized that at a minimum hypothecate referred to mortgage, itself a pignorative contract not translative of title. Again, irrespective of the context of its use, hypothecate can only have one of its possible meanings: mortgage of immovable property only; encumbrance of either movable property or immovable property; or both. As Article VIII applies to no property other than corporate stock, which is an incorporeal movable, and as the legend on the certificate refers to transfer and encumbrance, the legend supports Adler's contention that hypothecate here has to mean pledge--or mean nothing at all. But, as expressed in Article 2049 of the Civil Code, the law abhors an interpretation that results in the language of a contract having no meaning at all.