Court Opinion

ID: 9698325
Source: CourtListenerOpinion
Date Created: 2023-08-25 19:47:44.105861+00
Date Added: 2024-06-11T18:20:40.153980
License: Public Domain

ON MOTION FOR RECONSIDERATION, REHEARING OR NEW TRIAL
The plaintiff, Sam J. McAllester, III, Trustee, has filed a motion objecting to the memorandum and judgment entered by the court on September 4, 1981, and requesting that the court reconsider its decision or grant a rehearing or new trial.
As noted in the September 4th memorandum, the controlling issue in this adversary proceeding involves a determination of the extent to which the interest of a shareholder in a professional corporation is alienable or leviable under applicable state law. Pursuant to the Bankruptcy Act of 1898, as amended, the trustee is “vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this Act . . . to property, including rights of action, which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him....” Former 11 U.S.C. § 110(a)(5) (1976). Both the Tennessee Professional Corporation Act, §§ 48 — 2001 et seq., of the Tennessee Code, and the by-laws of the defendant professional corporation (hereinafter “Ob-Gyn”) adopted pursuant thereto placed severe restrictions on the right of the bankrupt to alienate any of his interest as a shareholder of Ob-Gyn. In the case cited in the original memorandum the Florida Supreme Court held that although such shareholder interests might not be alienable, they were nevertheless subject to levy by a judgment creditor. That court reached that conclusion on the public policy ground that the Florida legislature did not intend to insulate a professional’s investment in such a corporation from the claims of creditors. In applying the rationale of that opinion this court concluded that the trustee became vested with title to the bankrupt’s entire shareholder interest in Ob-Gyn as of the date of the filing of the petition. Since the trustee was not qualified to practice the profession for which Ob-Gyn was organized, his acquisition of the bankrupt’s shareholder interest triggered the redemption provi*360sion in the Ob-Gyn by-laws which is applicable in the event that a professional shareholder becomes disqualified. This by-law provision for redemption under such circumstances is mandated by § 48-2005(3) of the Tennessee Code. As noted in the original memorandum, this result is one which generally is desired by trustees since it insulates them from corporate action taken subsequent to filing which might diminish the redemption value of the shares. In this proceeding, however, the trustee desires to utilize a later redemption date since it would result in a larger sum being paid to redeem his shares. The trustee apparently would like to have the option of utilizing either date, depending upon which is more beneficial to the estate.
This position of the trustee — which would provide him with a continuing shareholder interest in Ob-Gyn — is untenable under the Tennessee Professional Corporation Act which prohibits anyone who is not licensed to practice the profession for which the corporation is organized having such a shareholder interest. Tenn.Code Ann. § 48-2005. The public policy implicit in this restriction on share ownership is the prohibition against fees for professional services being paid to persons who are not appropriately-qualified professionals. Although the trustee does not seek payment of any dividends, the increase in share value apparently resulted from fees retained by the corporation which otherwise would have been dividended to shareholders. The Tennessee statutes prohibit these fees being paid to the trustee in the form of dividends or in the form of increased redemption values.
In the original memorandum the court had considered the possibility that Ob-Gyn might be estopped from insisting upon the lower redemption value in light of the fact that the retained earnings may have been generated in part by the bankrupt. Assuming that estoppel would be applicable despite the public policy against anyone other than an appropriately-qualified professional receiving income from such a corporation, the court found no basis for estoppel in any event in light of the fact that neither the trustee nor the bankrupt advised Ob-Gyn of the filing of the bankruptcy petition and the transfer of share ownership to the trustee and in light of the fact that the bankrupt continued to work for Ob-Gyn pursuant to an employment contract and not as a shareholder.
Public policy considerations provide the trustee with the redemption right. Public policy considerations restrict the exercise of that right.
For the foregoing reasons, the court is of the opinion that the plaintiff’s motion should be DENIED.
It is SO ORDERED.