Opinion ID: 1060672
Heading Depth: 2
Heading Rank: 2

Heading: The Blasingame Decision

Text: In this Court, the defendant’s primary contention is that the Court of Appeals’ reliance on the Blasingame case is misplaced. The defendant asserts that to the extent that Blasingame holds that stock in a closely-held corporation is not a “security” under the UCC, the case was statutorily overruled in 1986, when the Tennessee General Assembly adopted the 1977 version of the UCC. We agree with the defendant’s contention. The plaintiff in Blasingame claimed that the defendant, American Materials, Inc., orally promised him, in addition to other incentives, an option to purchase one-fourth of its stock in exchange for the plaintiff’s employment with the corporation. Although the plaintiff assented to the terms of the offer and worked for the company for seven years, he was continually denied an opportunity to purchase the stock. The plaintiff finally filed suit, seeking the value of the promised shares. At trial the plaintiff attempted to introduce a letter from one of the shareholders acknowledging the agreement concerning the stock purchase 7 option. The defendant corporation insisted that the letter was barred by the statute of frauds governing the sale of securities, found at Tenn. Code Ann. § 47- 8-319 (1979 Repl.), and sought to amend its answer to raise that defense. This Court assented to hearing the case in order to decide whether the stock in a close corporation is a security under Chapter 8 of the UCC, and consequently, whether the statute of frauds governing that chapter applied to the alleged option agreement. This Court determined that the defendant corporation’s stock did not meet the definition of a “security” under the 1962 version of the Uniform Commercial Code, adopted by the Tennessee General Assembly in 1963,2 because it was not “of a type commonly dealt in upon securities exchanges or markets or commonly recognized in any area in which it is issued or dealt in as a medium for investment.” Tenn. Code Ann. § 47-8-102(1)(a)(ii) (1979 Repl.). The Court focused on the fact that there had been only one sale of stock in the corporation’s history and that it was clear that “there was no market available for this stock.” Blasingame, 654 S.W.2d at 664. This Court concluded that whether the stock in a closely-held corporation was dealt with or recognized in accordance with the definition found at Tenn. Code Ann. § 47-8-102(1)(a)(ii) (1979 Repl.) and could be considered a security under the UCC is a question of fact. C. Changes in the UCC since the Blasingame Decision In 1986 the Tennessee General Assembly adopted the 1977 version of the UCC,3 which is the version that governs the transactions in this case. The 1977 version departed from its predecessor by creating two categories of securities - 2 See Act of March 8, 1963, ch. 81, 1963 Tenn. Pub. Acts 243. 3 See Act of April 15, 1986, ch. 737, 1986 Tenn. Pub. Acts 571. 8 certificated4 and uncertificated5. The definition of a “certificated security” remained identical to the previous version; the definition of an “uncertificated security” deleted the language mandating that the interest be “commonly recognized in any area in which it is issued or dealt in as a medium for investment.” Tenn. Code Ann. § 47-8-102(1)(b)(ii) (Supp. 1986). 6 The defendant insists that the revised definition of a security clearly encompassed stock in closely-held corporations, and that the General Assembly’s adoption of the 1977 UCC overruled the holding in Blasingame. As support for this contention, the defendant points to the Official Comments accompanying the text, in which the drafters of the 1977 UCC specifically address the effect of the definition changes on the stock of closelyheld corporations. The comments instruct that [i]nterests such as the stock of closely-held corporations, although they are not actually traded upon securities exchanges, are intended to be included within the definitions of both certificated and uncertificated securities by the inclusion of interests ‘of a type’ commonly traded in those markets. 7 The defendant insists that the General Assembly’s adoption of this version of the Uniform Commercial Code signals its disapproval of the holding in Blasingame that closely held stock is not a security under the UCC unless certain factual inquiries were satisfied. At least one author agrees. In an article urging Tennessee courts to expressly overrule Blasingame and hold that the stock of closely-held corporations 4 See Tenn. Code A nn. § 47-8-102(1)(a)(ii) (Supp. 1986). 5 See Tenn. Code A nn. § 47-8-102(1)(b)(ii) (Supp. 1986). 6 The O fficial Com men ts following th e section explain tha t the purpo se of this o miss ion was to exclude certain interests, such as checking and savings accounts, that “would [otherwise] be classified as securities under the umbrella of the om itted phrase.” See U.C.C . § 8-102 , Com men ts to Official Text, n.2. (1977). 7 See U.C.C. § 8-102, Com ments to Official Text, n.2 (1977). 9 should be considered a security for UCC purposes, one author has emphasized that “[t]he drafters [of the UCC], recognizing that certain courts followed the Blasingame rationale, inserted the Comments to clarify their position. The language ‘of a type’ is the part of the definition that allows closely held stock to fall within its parameters.”8 While not controlling authority, the Official Comments to the UCC provide guidance in construing statutory language and offer assistance in discerning the intent of the legislature in adopting the statutory scheme. See Smith v. First Union Nat’l Bank of Tennessee, 958 S.W.2d 113, 116 (Tenn. Ct. App. 1997). This Court has looked to the Official Comments when interpreting the meaning of certain UCC provisions. See Lane v. Doe, 767 S.W.2d 138, 140 (Tenn. 1989); Continental Bankers Life Ins. Co. of the South v. Bank of Alamo, 578 S.W.2d 625, 630 (Tenn. 1979); International Harvester Company v. Carr, 466 S.W.2d 207, 209 (Tenn. 1971). Moreover, Tenn. Code Ann. § 47-1-102(1) (1996 Repl.) directs that “[i]n any dispute as to the proper construction of one or more sections [of the UCC], the Official Comments . . . shall constitute evidence of the purposes and policies underlying such sections . . . .” Accordingly, we will refer to the Official Comments in this case as persuasive authority in discerning legislative intent.9 Interestingly, when the General Assembly adopted the 1977 version of the 8 See Tracy A . Powell, Stock in a Closely Held Corporation: Is It a Security for Uniform Com me rcial Code Purposes?, 42 Vand. L. Rev. 579, 602 (1989). 9 Oth er co urts h ave lo oke d to th e Of ficial C om me nts to conc lude t hat s tock in clos ely-he ld corpor ations m eets the d efinition foun d in the UC C. See In re Hryniewicz, 222 B.R. 14, 18 (Bankr. D. Con n. 1998) ; Allen v. Coates, 661 So .2d 879, 8 82 (Fla. D ist. Ct. App. 1 995); Haug ht v. Lante Corp., No. 9-C -02342 , 1991 W L 1481 98, at -3 (N.D. Ill. July 26, 1 991); Med esc o, Inc . v. LN S Int’l, Inc., 762 F. S upp. 920 , 923 n.4 (D . Utah 19 91); In re Domestic Fuel, 70 B.R. 455, 462 (Bankr. S.D.N .Y. 1987); Katz v. Abrams , 549 F.S upp. 668 , 671(E.D . Penn. 19 82); Dion isi v. D eCa mp li, No. 9424, 19 91 W L 1181 85, at  (D el. Ch. July 2, 1 991), amended by Dion isi v. D eCa mp li,, No. 9425, 1996 W L 39680 (Del. Ch . Jan. 23, 1 996); Thompson v. Kohl, 453 S.E.2d 485, 487 (Ga. Ct. App. 1994); Unite d Ind ep. In s. Ag enc ies, In c. v. B ank of Ho nolulu , 718 P.2d 1097, 1102 (Haw. Ct. App. 1986); Bahre v. Pearl, 595 A.2d 1027, 10 35 (Me . 1991); Kenney v. Porter, 604 S.W.2d 297, 301 (Tex. C t. App. 198 0); Wam ser v. Bamberger, 305 N.W .2d 158, 162 (W is. Ct. App. 1981). 10 UCC in 1986, the official Annotated Code10 did not include the drafters’ comments quoted above.11 The Official Comments did not appear in the official statutory compilation until the 1992 Replacement volume, representing the Code that governs the transactions that are the subject of this suit. When asked, the Tennessee Code Commission could not provide an explanation as to why the comments were omitted from the 1986 compilation,12 and we do not view their omission as being indicative of legislative intent. At least one court has held that a legislature’s failure to adopt the Official Comments to the UCC does not render the comments insignificant in interpreting the Code. See In re Appeal of Copeland, 531 F.2d 1195, 1203 n.4 (3d Cir. 1976). The General Assembly’s intent concerning closely-held stock was clarified later, in 1995, when it amended the definitions of both certificated securities and uncertificated securities to include language that encompassed the stock of closely-held corporations.13 Although the 1995 amendments are not applicable to the facts in the instant case, we attach significance to the comments surrounding the changes because they provide guidance as to the intent of the legislature in adopting the 1977 version of the Code. In enacting the 1995 amendments, the General Assembly stated that 10 Tenn. Code A nn. § 47-8-102 (Supp. 1986 ). 11 See Powell, supra note 8, at 599 n. 159. 12 Id. 13 Tenn. Code A nn. § 47-8-102(1)(a)(ii) was amen ded to provide that certificated securities were “[e]ither stoc k of a co rporation (regard less of w hether p ublicly traded a nd withou t regard to sha reho lders ’ agre em ents , bylaw prov isions , trans fer re strict ions or oth er su ch m atter s app licable there to) or any ot her s hare , partic ipatio n or o ther in teres t or ob ligatio n of a type c om mo nly dea lt in on securities exchanges or markets or commonly recognized in any area in which it is issued or dealt in as a med ium fo r investm ent . . . .” Tenn. Code A nn. § 47-8-102(1)(b)(ii) was amen ded to provide that uncertificated securities were “[e]ither stoc k of a co rporation (regard less of w hether p ublicly traded a nd withou t regard to sha reho lders ’ agre em ents , bylaw prov isions , trans fer re strict ions or oth er su ch m atter s app licable there to) or any ot her s hare , partic ipatio n or o ther in teres t or ob ligatio n of a type c om mo nly dea lt in on sec urities exc hange s or m arkets . . . .” 11 [t]he provisions of this act are intended to be a clarification of existing law with respect to the definition of a ‘security’ under Article 8 of the Tennessee Uniform Commercial Code, particularly in the context of perfection of a security interest in stock or other investment instruments by possession of the instrument. The intent is to remove any uncertainty created by language of the Tennessee Supreme Court in the case, Blasingame v. American Materials, Inc., 654 S.W.2d 659 (Tenn. 1983).14 The General Assembly apparently sought to put an end to the “uncertainty” created by the Blasingame decision by expressly including the stock of closelyheld corporations in the definition of a security. Because the 1995 amendments were “intended to be a clarification of existing law,”15 it is clear that the previous version of the UCC - the version that governs this case - was also intended to encompass closely-held stock. 16 It follows that the holding in Blasingame cannot be reconciled with either the 1977 version of the Uniform Commercial Code nor with the subsequent versions, including the one currently in effect.17 Although the current version of the UCC is not controlling in this case, we find it significant to note that in 1997 the General Assembly, acting to delineate rules for determining whether an interest is a security or merely a financial asset, streamlined the definition of “security” found at Tenn. Code Ann. § 47-8-102 (15) (Supp. 1998) and enacted Tenn. Code Ann. § 47-8-103 (Supp. 1998), which provides that “[a] share or similar equity interest issued by a corporation, business 14 See Act of April 6, 1995, ch. 86, § 3, 1995 Tenn. Pub. Acts, 120; Tenn. Code Ann. § 47-8-101, Comp iler’s Notes (1996 Repl.). 15 See id. (emphasis added). 16 The Court of Appeals observed that the Blasingame decision “apparently gave birth to the 1995 amendm ent to T.C.A. § 47-8-102,” and that even if Blasingame had been statutorily overruled by the 1 995 am end me nt to th e UC C, “it c ann ot be applie d retr osp ective ly.” Th e Co urt of App eals evidently considered the 1995 amendments to be the first indication that the legislature intended the Cod e to inc lude c lose ly-held stoc k as a sec urity un der th e UC C. As we ha ve sta ted, c lose ly-held stock came within the ambit of UCC securities in Tennessee in 1986, when the legislature adopted the 1977 version of the UCC. The 1995 amendments merely clarified that position. Therefore the law that closely-held stock is a UCC security controls the facts in this case. 17 The Gen eral Assemb ly’s most recent revisions to the definition of a security in Chapter 8 appea r at Ten n. Code Ann. § 47 -8-102( 15) (199 8 Supp .) and we re adop ted in 199 7. See Act of April 14, 19 97, ch. 79 , 1997 T enn. Pu b. Acts 1 09. 12 trust, joint stock company, or similar entity is a security.”18 In the Comments to the Official Text, the drafters explain that the provision “establishes an unconditional rule that ordinary corporate stock is a security. That is so whether or not the particular issue is dealt in or traded or securities exchanges or in securities exchanges [sic] or in securities markets. Thus, shares of closely held [sic] are Article 8 securities.”19 We believe that by adopting the 1977 version of the UCC the General Assembly signaled its intent that the stock in closely-held corporations meet the definition of “security” under the UCC. This intent was clarified by the legislature’s amendments to the Code in 1995 and 1997 and by the accompanying comments. Accordingly, we hold that the stock of closely-held corporations is a security within the meaning of Tenn. Code Ann. § 47-8-102 (Supp. 1998). Because this conclusion cannot be reconciled with our holding in Blasingame, that case is overruled to the extent that it stands for the proposition that closely-held stock is not a security within the meaning of the UCC.20 D. Other Jurisdictions Our holding brings Tennessee within the majority of states that have addressed this issue and have concluded that the stock of a closely-held 18 Tenn. Code A nn. § 47-8-103(a) (Supp. 1998 ). 19 Tenn. Code Ann. § 47-8-103, Comments to Official Text, n.2 (Supp. 1998) (emphasis added). 20 Also important to note is that two decisions relied on by the Blasingame court have been overruled . Zamore v. Whitten, 395 A.2d 435 ( Me. 1978 ) was over turne d by Bahre v. Pearl, 595 A.2d at 1035 and Kenney v. Porter, 557 S.W.2d 589 (Tex. Ct. App. 1977) was overturned by Kenney v. Porter, 604 S.W.2d at 301-02. 13 corporation is a “security” under the UCC.21 See Giuffre Org., Ltd. v. Euromotorsport Racing, Inc., 141 F.3d 1216, 1218 (7th Cir. 1998); In re Hryniewicz, 222 B.R. at 18; In re Turley, 213 B.R. 857, 861 (Bankr. C.D. Cal. 1997) (holding that closely-held stock is a security under Chapter 8 of California’s UCC) (rev’d on other grounds, 172 F.3d 671, 675 (9th Cir. 1999)(reversing on other grounds but also finding that closely-held stock is a security for UCC purposes); Haught v. Lante Corp., 1991 WL 148198, at -3; Medesco, Inc. v. LNS Int’l, Inc., 762 F. Supp. at 923; In re Domestic Fuel Corp., 70 B.R. at 462; In re Sandefer, 47 B.R. 133, 138 (Bankr. N.D. Ala. 1985); Data Consultants, Inc. v. Traywick, 593 F.Supp. 447, 457 (D. Md. 1983); Katz v. Abrams, 549 F.Supp. at 671; Dionisi v. DeCampli, 1991 WL 1181850, at , amended by Dionisi v. DeCampli,1996 WL 39680; Allen v. Coates, 661 So.2d at 882; Thompson v. Kohl, 453 S.E.2d at 487; United Indep. Ins. Agencies, Inc. v. Bank of Honolulu, 718 P.2d at 1102; Cambron v. Moyer, 519 N.W.2d 381, 383 (Iowa 1994); Smith v. Baker, 715 S.W.2d 890, 892 (Ky. Ct. App. 1986); Bahre v. Pearl, 595 A.2d at 1035; Schultz v. Schultz, No. 40681, 1981 WL 137977, at n. 7 (Mo. Ct. App. May 26,1981),rev’d on other grounds, Schultz v. Schultz, 637 S.W.2d 1, 7 (Mo. 1982); Stancil v. Stancil, 392 S.E.2d 373, 376 (N.C. 1990); Gross v. Vogel, 81 A.D.2d 576, 577 (N.Y. App. Div. 1981); Domo v. Boulder Bluff Corp., No. 920T065, 1993 WL 527911, at  (Ohio Ct. App. Dec. 17, 1993); Jennison v. Jennison, 499 A.2d 302, 304 (Pa. Super. Ct. 1985); Kenney v. Porter, 604 S.W.2d at 302; Wamser v. Bamberger, 305 N.W.2d at 162. Other courts have indirectly espoused the majority view by finding that Chapter 8 of the UCC applies to transfers of stock in closely-held corporations. See Baker v. Gotz, 387 F. Supp. 1381, 1389-90 (D. Del. 1975) (finding that 21 In his con curren ce to the C ourt of Ap peals’ op inion, Judg e Susa no ass erted tha t he felt bound by the Blasingame decision , but urged the Sup rem e Cou rt to “revisit Blas ingam e” because he felt that “the cases espousing the majority view are arguably the better-reasoned cases on the subjec t at hand.” 14 negotiable instruments were investment securities under Chapter 8 the UCC because they were “of a type commonly dealt in upon securities exchanges or markets,” irrespective of the fact that the notes in question were never publicly traded) aff’d mem., 523 F.2d 1050 (3d Cir. 1975); J.M. Prod., Inc. v. Arkansas Capital Corp., 910 S.W.2d 702, 708 (Ark. Ct. App. 1995) (without specifically addressing the issue, finding that closely-held stock was a security under Chapter 8 of Arkansas’s UCC); Kiely v. St. Germain, 670 P.2d 764, 769 (Colo. 1983) (holding that Chapter 8 of Colorado’s UCC applied to the sale of shares in a corporation whose entire stock was held by one individual); Midfelt v. Lair, 561 P.2d 805, 812 (Kan. 1977) (holding that the statute of frauds of Chapter 8 of Kansas’s UCC applies to the sale of 50% of bank’s stock); Morris v. People’s Bank & Trust Co., 580 So.2d 1037, 1040-41 (La. Ct. App. 1991) (finding that Chapter 8 of Louisiana’s UCC applies to an option contract between former bank president and majority stockholder of bank to repurchase a “maximum number of shares” of stock in connection with a contract of employment and that such stock is a security within the meaning of Chapter 8); Thomas v. Prewitt, 355 So.2d 657, 659-60 (Miss. 1978) (holding that the statute of frauds found in Chapter 8 of Mississippi’s UCC applies to the sale of shares of stock in a corporation comprised of only twelve shareholders); Young v. Young, 393 S.E.2d 398, 401 (Va. 1990) (analyzing the transfer of closely-held stock as a transfer of securities within the meaning of Chapter 8 of Virginia’s UCC but determining that common law rules for gifts also governed the transaction and were controlling in that instance); Yost v. Haun, 512 S.E.2d 228, 231 (W. Va. 1998) (determining that stock pledged by James C. Haun in Haun Holdings, Inc. to his father was a security under Chapter 8 of West Virginia’s UCC). Only Rhode Island currently embraces the minority view that stock of closely-held corporations is not a security for UCC purposes. This view is based on the belief that closely-held stock is not “of a type commonly dealt in upon 15 securities exchanges” and that there is no ready market for the shares. See Kottis v. Cerilli, 612 A.2d 661, 667 (R.I. 1992); Rhode Island Hosp. V. Collin, 368 A.2d 1225, 1227 (R.I. 1977). 22 Our formal adoption of the majority rule not only clarifies an area of commercial law that had been marked by some confusion in Tennessee, but it also promulgates the policies and goals underlying the UCC. One of the UCC’s main purposes is “to make uniform the law among the various jurisdictions.” See Tenn. Code Ann. § 47-1-102(2)(c) (1996 Repl.). Because Chapter 8 of the UCC has been adopted by all fifty states, 23 it is important that Tennessee construe its provisions in accordance with the growing number of states addressing this issue. This uniformity among jurisdictions will facilitate predictability and ease in interstate transactions. E. Application of the Statute of Frauds Having determined that Chapter 8 of the UCC governs this case, we now address the defendant’s contention that the alleged agreement between the parties does not satisfy the applicable statute of frauds, found at Tenn. Code Ann. § 47-8-319 (1992 Repl. & 1996 Repl.), 24 because no signed writing memorializes its existence. The plaintiff argues that Tenn. Code Ann. § 47-8-319 (1992 Repl. & 1996 Repl.) does not render the alleged agreement unenforceable because the 22 It is no t nec ess ary fo r us to addr ess the p olicy de bate conc ernin g wh ethe r clos ely-he ld sto ck is commonly dealt in on securities exchanges or markets or is commonly recognized as a medium for investment becaus e the Official Comm ents accom panying our current version of the UCC have specified that close ly-held stock is to be con sidered a secu rity under the U CC. See Tenn. Code Ann. § 47-8-103, Com ments to Official Text, n.2 (Supp. 1998 ). 23 See Unif. Comm ercial Code, 1A U.L.A. 1 (Supp. 1999). 24 The allege d agr eem ent in this c ase is gov erne d by T enn . Cod e An n. § 4 7-8- 319 as it ex isted in the 1992 Replacement volume. However the statute has not been amended since appearing in that volume, and our analysis also applies to the current version of the statute, found in the 1996 Replac eme nt volum e. 16 agreement’s terms were reduced to a signed writing and, alternatively, one of the statutory exceptions applies to prove the existence of the agreement. We disagree with both contentions. The statute of frauds governing Chapter 8 transactions provides, in relevant part: A contract for the sale of securities is not enforceable by way of action or defense unless: (a) there is some writing signed by the party against whom enforcement is sought or by his authorized agent or broker sufficient to indicate that a contract has been made for sale of a stated quantity of described securities at a defined or stated price . . . Tenn. Code Ann. § 47-8-319 (1992 Repl. & 1996 Repl.). The plaintiff insists that ample proof exists, in a variety of forms, to show that an agreement existed whereby he was to receive, as compensation for the financial consulting services he had rendered, eighty percent of the stock in MacTenn and eighty percent of that in MSI. As examples of this proof, the plaintiff recalls comments by the defendant acknowledging such an agreement and asserts that he has seen documents signed by the defendant evidencing an agreement. However, throughout this litigation the plaintiff has failed to produce a single writing, signed by the defendant, contemplating or effectuating the transfer of the stock in question. Without such a writing, the requirements of Tenn. Code Ann. § 47-8-319 (1992 Repl. & 1996 Repl.) are simply not satisfied. In compliance with the plaintiff’s and attorney Gertz’s instructions to prepare a series of documents that would facilitate the creation of the new corporations, the defendant did draft a number of documents, including proposed agreements transferring 80,000 shares of MSI stock and 80,000 of MacTenn stock from the defendant to the plaintiff. However the defendant, apparently wary 17 of the plaintiff’s motivations concerning the transaction, and under the belief that the documents were part of a mere contingency plan, did not sign the contracts, but turned them over to the plaintiff without his signature. In the same manner, when the plaintiff and Mr. Gertz requested stock certificates representing certain shares of MSI and MacTenn, the defendant provided only copies of the certificates and hid the originals. The evidence in the record reveals that the dealings between the parties were unusual, tinged with distrust and perhaps unethical motivations. An example of this suspicion surrounds the “contingency plan,” complete with documents back-dated six months. While we do not endorse the manner in which these parties chose to transact their affairs, the fact remains that the record contains no writing, signed by the defendant, that evidences an agreement for the transfer of stocks, as required by Tenn. Code Ann. § 47-8-310 (1992 Repl. & 1996 Repl.). The plaintiff next argues that even if no signed writing satisfies the statute of frauds found in Chapter 8, the alleged agreement to transfer stock is enforceable nonetheless because one of the statute’s exceptions to the writing requirement applies in this case. The plaintiff directs us to the following exception: A contract for the sale of securities is not enforceable by way of action or defense unless: