Opinion ID: 1785565
Heading Depth: 2
Heading Rank: 2

Heading: Authority to Assign Right of Redemption

Text: Pavilion's appeal focuses exclusively on one issue: whether the trial court erred in finding that Richard A. Tracey had no authority to assign [Gallop's] [s]tatutory [r]ight of [r]edemption, to [Lary]. Although Pavilion makes various arguments concerning this issue, its fundamental position can be summarized as follows: Summary judgment for JBJ was improper because Traceythe sole officer, managing agent, director, and sole shareholder of Gallop on March 13, 1997had the authority on that date to transfer Gallop's statutory right of redemption to Lary (Pavilion's predecessor in interest). JBJ does not question the statement that, following a foreclosure, the holder of the statutory right of redemption can assign that right to a third person. Estes v. Johnson, 234 Ala. 191, 192, 174 So. 632, 633 (1937) (person holding the right to redeem mortgaged lands may transfer that right to a stranger to the title who otherwise has no other interest in those lands); [11] see also Dominex, Inc. v. Key, 456 So.2d 1047, 1053-54 (Ala.1984) (reaffirming the principle that the statutory privilege of redemption can be assigned if there is an express intent to do so). Instead, JBJ argues that the assignment here was void because, it argues, Tracey did not have authority over Gallop on March 13, 1997, to assign Gallop's right of redemption. According to JBJ, by the time of the assignment, Tracey had pledged all the Gallop stock to Pace under the stock-pledge agreement that secured the $47,500 loan, had appointed Pace as his attorney-in-fact concerning that stock pursuant to the provisions of the stock power, and, with Gallop, had not performed obligations owed to Pace under the settlement documents (including the duty to repay the $47,500 loan). Given these circumstances, JBJ argues that, because of the collective operation of the settlement documents, summary judgment was appropriate because, it argues, Tracey could not assign the right of redemption to Lary without Pace's consent. [12] JBJ contends that Tracey lost his authority to transact business for Gallop or to sell its assets without Pace's consent in April 1995, after he signed the settlement documents, or, at the latest, when he received the December 18, 1995, notice that he was in default of the obligations owed Pace under the restructure. The facts relevant to the authority-to-assign issue are largely undisputed. Tracey purchased all the shares of Gallop stock from his wife in 1995; the proceeds of the $47,500 loan were paid to her as consideration for that purchase. Thereafter, Tracey was elected as the president of Gallop and served as its sole officer, director, and shareholder and as managing agent at all pertinent times. Moreover, by March 13, 1997, counsel for Pace had sent two notices notifying Gallop and Tracey that they were in default under the settlement documents. The first notice was dated December 18, 1995, and was addressed to Mr. Richard Tracey, Gallop Enterprises, Inc. [13] The second was the McKee letter to Tracey dated March 11, 1997. [14] Ten days after that second notice, Pace undertook to foreclose upon and sell the Gallop stock. Pavilion did not rebut by substantial evidence the showing that Gallop and Tracey breached the obligations referenced in these two default notices. Below, we analyze each of the settlement documents to determine whether, in light of those defaults, those documents collectively terminated or otherwise affected Tracey's authority to make the assignment to Lary on March 13, 1997.
Tracey executed a stock-pledge agreement in favor of Pace in which he pledged 100% of his Gallop stock to secure payment of the promissory note evidencing the $47,500 loan. The stock-pledge agreement provided: 2. The pledged stock shall remain registered in the name of [Tracey] upon the books and records of [Gallop]. Provided [Tracey] is not in default under its promissory note or this agreement, [Tracey] shall retain all dividends and voting rights with respect to such stock. 3. Upon [a] default that has not been cured after seven (7) days' notice, [Pace] within a reasonable time shall be entitled to sell the stock in an arm's length transaction and apply the net proceeds to the payment of the note. That Tracey breached his obligations to repay that note is not disputed. Thus, considering these provisions of the stock-pledge agreement, the following events were conditions precedent under this agreementand should have occurred by March 13, 1997before Pace could have acquired control over the operation and business affairs of Gallop: 1. Tracey or Gallop should have defaulted on their respective obligations under the $47,500 note or the stock-pledge agreement; 2. A defaulting party should have received notice of that default and had an opportunity to cure the default but failed to timely cure that default; and 3. Pace should have foreclosed on its secured interest in the Gallop stock. [15] Additionally, in order to remove Tracey from his positions as president, director, and managing agent, the party with the controlling interest in Gallop following the foreclosure would have been required to follow usual corporate governance procedures to terminate Tracey's authority to act for Gallop that he possessed through his appointment to those positions. [16] Because only one of these required stepsthe notice of default in the McKee letterhad transpired by March 13, 1997, the stock-pledge agreement did not operate to divest Tracey of his authority to complete the assignment. Further, there is no provision in the stock-pledge agreement indicating that as a result of its execution and the subsequent default Tracey would automatically relinquish his authority to transact business for Gallop on the date of default.
In the stock power, Tracey appointed Pace as his lawful attorney-in-fact . . . to sell, assign, transfer and make over all or any part of [Gallop stock pledged by Tracey] . . . in the event of a default by [Tracey] or Gallop, Inc. in the performance of the terms and conditions of the Settlement Agreement or the Promissory Note [evidencing the $47,500 loan] or [the] Stock Pledge Agreement. On its face, this instrument authorized Pace to take necessary administerial acts attendant to transferring the Gallop stock pledged by Tracey if Pace acquired that stock as the result of a default by Gallop or Tracey in their obligations in other settlement documents. However, we have not located, nor have we been directed to, any record maintained by Pace documenting that by March 13, 1997, Pace had actually exercised its rights under the stock power to transfer control of the Gallop stock from Tracey to itself or to a third party. Further, there was no provision in the stock power that, on the face of that instrument alone, granted Pace any extraordinary right to divest Tracey's authority to act on behalf of Gallop in the event of a default by Gallop or Tracey. Indeed, as noted above, the only evidence of Pace's intent to exercise control over the Gallop stock was its attempt to purchase that stock at its March 21, 1997, foreclosure salean event that purportedly occurred eight days after the March 13, 1997, assignment.
Articles 7 (Events of Default) and 8 (Remedies) of the settlement agreement addressed potential defaults by Gallop and Tracey of their respective obligations resulting from the restructure. Section 8.01 provided Pace multiple remedies if Gallop or Tracey defaulted under this Agreement, or under any note or mortgage held by Pace [and that default] remain[ed] uncured for a period of ten (10) days from the date on which notice of [that default] is sent [to the defaulting party]. . . . Those remedies included the right to foreclose on the development tract without notice, to sell the development tract to the highest bidder, and to take possession of the development tract. However, the settlement agreement does not provide that the occurrence of the defaults discussed in the December 18, 1995, notice and the McKee letter divested Tracey of his authority to transact business for Gallop. As discussed above, the only evidence of Pace's intent to gain control over the Gallop stock that transpired before March 13, 1997the date of the assignmentwas the McKee letter. That letter initiated a process that could have culminated with Tracey's ouster from his managerial positions with Gallop and the termination of his authority, but that process was not perfected by March 13, 1997.
The final settlement document pertinent to JBJ's argument is the promissory note evidencing the $47,500 loan. That note contained the following default provision: If default be made [by Tracey or Gallop] in the payment of any installment [due hereunder], or in the performance of any of the covenants or agreements contained in that certain Stock Pledge Agreement or Settlement Agreement of even date herewith given to secure the payment hereof, then, at the option of [Pace] and without notice to any one, the entire unpaid principal of this note with interest thereon shall become due and payable and may be collected in the same manner as if the full time provided in this note had expired. . . .  As with the other settlement documents, there is no provision on the face of this note divesting Tracey of his authority to transact business or to sell the assets of Gallop upon the mere occurrence of a default by him or Gallop on their obligations under the restructure.
In summary, we disagree with JBJ's contention that the cumulative operation of the settlement documents was to remove or limit Tracey's authority to sell the assets of Gallop on March 13, 1997, the day of the assignment. JBJ argues, but fails to explain how, the settlement documents collectively had that effect. We have not located, nor have we been directed to, any provision in those documents that sprung into effect and so divested Tracey of his authority. Instead, the settlement documents contemplate that, after a default by Gallop or Tracey, Pace was to provide the defaulting party both notice of that default and an opportunity to cure. Absent that cure by the defaulting party, cross-default provisions in the settlement documents could trigger a multitude of remedies for Pace. When the settlement documents are read together, it is clear that Pace had the right, after an uncured default, to foreclose on the Gallop stock Tracey had pledged, to sell that stock, to document a change of its ownership from Tracey to the purchaser under the stock power, to elect a new board of directors for Gallop, to oust Tracey from his management positions, and to install new officers. Other than its default notices, however, by March 13, 1997, Pace had not completed any of these actions, which were required to terminate Tracey's authority to bind Gallop by that date. JBJ also made this collective operation argument to the trial court. To the extent that the trial court relied on that argument in entering the summary judgment for JBJ, it erred because Pavilion presented substantial evidence indicating that a disputed issue of fact existed as to whether Tracey had the authority to transfer the statutory right of redemption to Lary on March 13, 1997.
Alternatively, JBJ argues that Tracey's execution of the stock-pledge agreement in 1995 granted Pace an equitable interest in Gallop. According to JBJ, the pledge of all the stock of a corporation creates in effect an equitable mortgage on the corporate property and imposes liens [thereon]. (JBJ's brief, p. 23.) Because Pacethe pledgee of the Gallop stock held that equitable interest, JBJ contends that Pace had priority over subsequent purchasers of corporate property and that, as a matter of law, Tracey did not have the right on March 13, 1997, to sell any Gallop property (including its statutory right of redemption) without Pace's consent. JBJ cites two decisions Boyett v. Hahn, 197 Ala. 439, 73 So. 79 (1916), and Selma Bridge Co. v. Harris, 132 Ala. 179, 31 So. 508 (1902)as authority for this argument. In Boyett, Hahn, who owned a one-half undivided interest in the stock of a corporation, pledged that interest to secure a loan to that corporation. The pledge instrument did not provide a method to enforce that security interest. The dispute arose after the corporation defaulted on its repayment obligation; at that point, Hahn and Clark, the owner of the other one-half interest in the corporation, prohibited the trustee who then held the pledged one-half interest from participating in its business affairs. Under those circumstances, the Boyett Court held that the remedy for the trustee to enforce its security interest was to foreclose on the pledged stock, not to dissolve the corporation and sell its assets. The Court reasoned that, if the trustee first purchased the pledged one-half interest at the foreclosure, then the trustee would have the right to participate in the business affairs of the corporation. However, neither the Boyett nor the Selma Bridge Co. Court considered the issue here: Whether the pledge of stock impacts the authority of corporate managers to conduct business. Accordingly, these authorities do not support JBJ's argument that Gallop should have obtained Pace's consent before making the assignment. [17] Indeed, Boyett supports our holding that, when corporate stock is pledged to secure the performance of an obligation, the authority of the corporation's managers to transact business is not restricted by the mere execution of a pledge instrument that, as here, does not grant the pledgee the right to approve, control, and manage its affairs. For the reasons stated above, the trial court erred when it entered a summary judgment for JBJ based on its conclusion that Tracey lacked authority to bind Gallop at the time of the assignment of the right of redemption. Moreover, JBJ did not present substantial evidence to rebut Pavilion's position that Tracey at the time of the assignment was the sole shareholder, officer and director and managing agent of Gallop. [18] Additionally, we have not found in the record, nor have we been directed to, any corporate resolution or other governance instrument maintained by Gallop that limited Tracey's general authority to act on behalf of that corporation or that restricted his power to transfer Gallop's assets on March 13, 1997. Having considered JBJ's arguments and the uncontested facts on the authority-to-assign issue, we hold that, as a matter of law, Tracey had the authority to transfer Gallop's statutory right of redemption to Lary on March 13, 1997.