Opinion ID: 852970
Heading Depth: 2
Heading Rank: 3

Heading: Restrictions as Applied to Involuntary Transfers

Text: The Court of Appeals held that the restrictions on Linda's shares did not apply by their terms to the sheriff's sale and, as a result, did not bar the sheriff's sale to Moore. We agree that Moore acquired the shares at the sheriff's sale, but not because the restrictions were inapplicable by their terms. The Court of Appeals relied on cases stating that involuntary transfers fall within the terms of a restriction only if the language of the restrictions specifically identifies them. F.B.I. Farms, 769 N.E.2d at 692. This doctrine has been developed largely in cases involving intestate transfers by a decedent, Stern v. Stern, 146 F.2d 870, 870 (D.C.Cir.1945), and in marriage dissolution proceedings where a transfer is made to a spouse. Castonguay v. Castonguay, 306 N.W.2d 143, 146 (Minn. 1981). The sheriff's sale where Moore purchased Linda's shares was an involuntary transfer. Transfers ordered incident to marriage dissolutions and transfers under intestate law may also be deemed involuntary. We think the governing principle is not the same for all forms of involuntary transfers. The language of the restrictions in this case does not specifically refer to involuntary transfers of any kind. Rather, it seems to contemplate restricting all transfers, voluntary and involuntary, by providing that no stock of the corporation should be transferred, assigned, exchanged, divided, or sold without complying with the restrictions. The intent of the parties is thus rather plain: to restrict ownership to the designated group, and to preclude transfer by any means. The question is whether that intent should be permitted to prevail in the face of countervailing policies. Transfer by intestacy is in some sense involuntary, but it may also be viewed as a voluntary act of the decedent who had the option to leave a will. If a transfer could not be made by gift during lifetime, for example, to an offspring regarded by other shareholders as an undesirable partner, we see no reason to permit it at death by the decedent's choice to die intestate. There are, however, forms of involuntary transfers that a private agreement may not prevent because the agreement would unreasonably interfere with the rights of third parties. In a dissolution, the interests of the spouse require permitting transfer over the stated intent of the parties. Similarly, creditors of the shareholder cannot be stymied by a private agreement that renders foreclosure of a lien impossible. For that reason, we agree with the trial court that the sheriff's sale transferred the shares to Moore despite the restrictions. Transfer restrictions cannot preclude transfer in a foreclosure sale and thereby leave creditors without recourse. This does not turn on a doctrine of construction. Rather we hold that requiring an explicit bar specifically naming transfer by intestacy or by testamentary disposition should not be necessary. If the language purports to bar all transfers, and by its terms would apply to intestacy, devise or any other means of transfer, it should be given effect unless the restriction violates some policy. Although we agree with Moore that he could purchase the shares at the sale, it is also the case that he purchased the shares with knowledge of the restrictions. We conclude that he could not acquire more property rights than were possessed by Linda as his seller. U.C.C. § 8-302 (1994) (the purchaser of an investment security acquires the rights in the security his transferor had or had actual authority to convey). The shares in Linda's hands were valued with restrictions in place, and therefore it is not unfair to her creditors that a purchaser at a foreclosure sale acquire the disputed shares subject to the same restrictions, and with whatever lessened value that produces. To be sure, the effect of such a restriction may be to make the shares unmarketable to any buyer. But the creditor retains the option to bid at the sale and, if successful, succeed to the shareholders' interest. The creditor then gets the assets the debtor used to secure the underlying obligation. If the creditor wants collateral free of restrictions, the creditor must negotiate for that at the outset of the arrangement.