Opinion ID: 1669650
Heading Depth: 1
Heading Rank: 3

Heading: Applicability of Article 8 of Alabama's Commercial Code

Text: 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 an obligation of an issuer or a share, participation, or other interest in an issuer or in property or an enterprise of an issuer: (i) which is represented by a security certificate in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer; (ii) which is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations; and (iii) which: (A) is, or is of a type, dealt in or traded on securities exchanges or securities markets; or (B) is a medium for investment and by its terms expressly provides that it is a security governed by this article. (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. 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: If an identical security not constituting an overissue is reasonably available for purchase, a person entitled to issue or validation may compel the issuer to purchase the security and deliver it.... Subsection (d) states: If a security is not reasonably available for purchase, a person entitled to issue or validation may recover from the issuer the price the person or the last purchaser for value paid for it with interest from the date of the person's demand. 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 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 & 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 remediesthe 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 availablethe City had no identical securities not constituting overissuesthe 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. 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: [The UCC] is the primary source of commercial law rules in areas that it governs, and its rules represent choices made by its drafters and the enacting legislatures about the appropriate policies to be furthered in the transactions it covers. Therefore, while principles of common law and equity may supplement provisions of the [UCC], they may not be used to supplant its provisions, or the purposes and policies those provisions reflect.... [The UCC] preempts principles of common law and equity that are inconsistent with either its provisions or its purposes and policies. 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.