Opinion ID: 768610
Heading Depth: 2
Heading Rank: 3

Heading: The Good Faith Requirement of Section 628(b)

Text: 42 Turning to Carr's arguments concerning the good faith element found in Section 628(b), our analysis of the statute convinces us that in order to secure its protection from liability to the corporation for the unpaid portion of the share price, a shareholder must establish that she acted: (1) in good faith; and (2) without knowledge or notice that the full consideration . . . has not been paid. N.Y. Bus. Corp Law § 628(b). Because the statute speaks of the requirements in the conjunctive, Carr must satisfy both requirements. 43 New York courts have not construed the good faith requirement of Section 628(b), and we therefore look for guidance in how New York courts have interpreted the good faith requirement under Article 8 of the UCC, which governs transfers of securities. Under New York law, a party does not act in good faith if she acts with knowledge and disregard of suspicious circumstances. See Savings Bank Trust Co. v. Federal Reserve Bank of N.Y., 738 F.2d 573, 574 (2d Cir. 1984) (per curiam) (holding that good faith does not exist if party has knowledge and disregard of suspicious circumstances); In re Legel Braswell Gov't Secur. Corp., 695 F.2d 506, 512 (11th Cir. 1983) (construing New York law and holding that disregard for suspicious circumstances, of which [defendant] had actual knowledge, constituted a taking [of the disputed securities] in bad faith); Gutekunst v. Continental Ins. Co., 486 F.2d 192, 194-96 (2d Cir. 1973) (per curiam) (New York law is that only actual knowledge or disregard of suspicious circumstances may constitute evidence of bad faith.); Otten v. Marasco, 235 F. Supp. 794 (S.D.N.Y. 1964), aff'd, 353 F.2d 563 (2d Cir. 1965); Scarsdale Nat. Bank and Trust Co. v. Toronto Dominion Bank, 533 F. Supp. 378, 387 (S.D.N.Y. 1982) (party that acts with willful ignorance of adverse claim cannot be said to act in good faith); Fallon v. Wall St. Clearing Co., 182 A.D. 245, 250, 586 N.Y.S.2d 953, 956 (1992) (transferee of security is under obligation to investigate suspicious circumstances which might suggest the existence of an adverse claim); Manufacturers & Traders Trust Co. v. Sapowitch, 296 N.Y. 226, 230, 72 N.E.2d 166, 169 (1947) (purchaser of securities is not protected from liability from adverse claim if it clearly appear[s] that the inquiry suggested by the facts disclosed at the time of the purchase would if fairly pursued result in the discovery of the defect existing but hidden at the time) (citing Birdsall v. Russell, 29 N.Y. 220, 250 (1864)). Thus, we must consider whether, given the circumstances surrounding the issuance and transfer of the Walsh Shares, Carr was aware of facts such that her failure to inquire as to the legal status of the shares constituted willful ignorance on her part of any possible adverse claim evidencing bad faith. 44 In reviewing these circumstances, we conclude as a matter of law that if Carr was not actually aware of Marietta's adverse claim, it was only because she was willfully ignorant of this fact. In reaching this conclusion, we find several facts highly probative of Carr's mental state. First, Carr admitted that she read the restrictive legend appearing on the face of the share certificate and was aware that it constituted a restriction on the transferability of the shares. Second, Carr obtained the shares with full knowledge that the transfer agent 8 had refused to repurchase the shares from Sequoia on a prior occasion and that Marietta refused to repurchase the shares as well. Third, as someone involved in the banking industry, Carr was a sophisticated investor who was well aware of the laws and regulations governing securities. See Catizone v. Memry Corp., 897 F. Supp. 732, 738 (S.D.N.Y. 1995) (party's knowledge and experience with securities make it unlikely that party acted in good faith in the face of suspicious circumstances); Otten, 235 F. Supp. at 798 (party who was sophisticated in business transactions had duty to inquire once aware of suspicious circumstances). Fourth, Carr knew that Sequoia believed that Marietta refused to purchase the Walsh Shares because they had previously been pledged. Fifth, Carr was aware that Walsh signed a promissory note to Marietta on February 9, 1996 (the 1996 Note) for $121,500 and that her brother had other outstanding debts. Cf. Garner v. First Nat. City Bank, 465 F. Supp. 372, 383 n.15 (S.D.N.Y. 1979) (knowledge of transferor's troubled financial status relevant in determining whether transferee acted in good faith). 9 Sixth, Carr purchased both the Walsh Shares and Sequoia's judgments against Walsh in the amount of $132,633.62 for a purchase price of $27,500. Cf. Second Nat. Bank of Morgantown v. Weston, 172 N.Y. 250, 257, 64 N.E. 949, 951 (1902) (party's purchase of note at large discount supports inference that party acted in bad faith). Seventh, Carr maintains that she never spoke with her brother regarding any encumbrance on the shares, despite her admission that she speaks with him as a family member on a regular basis. Cf. Scarsdale Nat. Bank, 533 F. Supp. at 387 (concluding that transferee did not act in good faith supported by fact that transferee was good friend with transferor). 45 Given these facts, the only way that Carr could not have known that Walsh had failed to pay Marietta for the Walsh Shares, or that there was an adverse claim, was if she engaged in a purposeful effort to avoid knowing these facts. As a result, Carr did not act in good faith under the meaning of Section 628(b). The district court was correct to grant defendant's motion for summary judgment and dismiss the complaint since plaintiff is subject to the same offset as was her brother Thomas Walsh and accordingly can take nothing from this action. 46 Finally, we also reject Carr's argument that she is entitled to the good faith protections of the shelter rule found in the UCC. As we understand Carr's position, she argues both that the shelter rule found in the UCC trumps whatever liability Section 628 imposes and that Section 628 should be read to provide protection to those who obtain stock from pledgees of shares. We express some doubt as to whether Carr is correct in her interpretation of the shelter rule 10 found in the UCC, given authority to the contrary. See William M. Fletcher, 12 Fletcher Cyclopedia of the Law of Private Corporations, § 5478 (1996) (Whether a transferee takes from a bona fide purchaser or from a protected purchaser, the transferee who was involved in fraud or had notice of an adverse claim does not thereby improve its position.) (citing UCC § 8-302(c)(1994)). We need not address this question of UCC interpretation, however, since regardless of what the UCC provides, there is no indication of an analogous shelter rule in N.Y. Bus. Corp. Law § 628. 11 Thus, it would be improper to read the general provisions of the shelter rule as supplanting the specific provisions of Section 628, which pertain directly to the circumstances in this case. Cf. Crawford Fitting Co. v. J.T. Gibbons, Inc., 482 U.S. 437, 445 (1987) ( '[w]here there is no clear intention otherwise, a specific statute will not be controlled or nullified by a general one, regardless of the priority of enactment.' ) (quoting Radzanower v. Touche Ross & Co., 426 U.S. 148, 153 (1976)); Germain v. Germain, 25 A.D. 568, 569, 267 N.Y.S.2d 789, 791 (2d Dep't 1966) (When a particular statue conflicts with a general one, the particular statute will be deemed an exception where it is incompatible with the provisions of the general statute.) (citing McKinney's Consol. Laws of NY, Book 1, Statutes, § 238).