Court Opinion

ID: 7851043
Source: CourtListenerOpinion
Date Created: 2022-09-08 17:27:37.567939+00
Date Added: 2024-06-11T16:29:08.800252
License: Public Domain

MIKVA, Circuit Judge,
concurring in part, dissenting in part.
I concur in the majority’s conclusion to remand this case to the district court. I would rest, however, on the fiduciary relationship analysis relegated to footnote 72 of the majority’s opinion. While that analysis has only the bare bones of the secondary basis for reversal for which it is offered, it does state good and sufficient reasons for remanding this case to the district court for further proceedings.
It is also possible to base a remand on the majority’s suggestion that the Class A voting stock, which is the nub of the controversy, in effect was “newly issued stock.” The unusual circumstances under which the original owners of this stock essentially rescinded their agreement to purchase the stock from the Bandeirante Corporation could well lead to a conclusion that this stock never became “treasury stock.” Under such an analysis, the entire discussion of whether treasury stock can be sold for promissory notes is obiter dictum and should be treated accordingly.
Unfortunately, the majority opinion chooses to elevate its discussion of treasury stock to the ratio decidendi of the remand. Because of its expansive and amendatory interpretation of District of Columbia law, I think the majority establishes a mischievous precedent for future application of those sections of the District of Columbia Code that address treasury stock. Accordingly, I dissent from that primary holding.
I believe that Congress intended for the promissory note restriction contained in section 29-317 of the District of Columbia Code to apply only to the issuance of new shares, and that, accordingly, promissory notes may be used to purchase treasury stock. That the opposite conclusion may be advantageous from a policy perspective or may be sympathetic with modern theories of corporate financing does not alter *133the language or the legislative history of the statute. Such policy arguments, as the Supreme Court recently admonished, are “more properly addressed to legislators or administrators, not to judges.” Chevron USA Inc. v. National Resources Defense Council, Inc., — U.S.-,-, 104 S.Ct. 2778, 2793, 81 L.Ed.2d 694 (1984).
As the majority aptly observes, this case turns on the purpose of section 29-317. If Congress only envisioned a provision to protect the stated capital account, then the prohibition on promissory notes is inapplicable to the sale of treasury shares since the consideration received for treasury shares does not affect the stated capital account. See Majority opinion, supra, at 1230. If, alternatively, Congress envisioned a broad anti-fraud provision, then the statute should not be limited to newly issued shares. I find no support in the statute or in its legislative history, however, for the broad reading that the majority embraces and the novel interpretation that it affixes to section 29-317.
I. Analysis
A. The Statute.
The starting point of a search for legislative intent is, of course, the statute itself. Section 29-317, the source of my disagreement with the majority, provides:
(a) The consideration for the issuance of shares may be paid, in whole or in part, in money, in other property, tangible or intangible, or in labor or services actually performed for the corporation. When payment of the consideration for which shares are to be issued, which, in the case of shares having a par value, shall not be less than the par value thereof, shall have been received by the corporation, such shares shall be deemed to be full paid and nonassessable.
(b) Neither promissory notes nor future services shall constitute payment or part payment for shares of a corporation.
(c) In the absence of fraud in the transaction, the judgment of the board or the shareholders, as the case may be, as to the value of the consideration received for shares shall be conclusive.
D.C.Code Ann. § 29-317 (1981).
This section, common to many of the corporation laws of the time, was designed to protect creditors and others from the formation of paper corporations: the stated capital of a newly-formed corporation was to provide a guaranteed contribution of real assets to the new business. This tie-in to stated capital is the main reason why section 29-317 cannot be used in its present form to treat treasury stock or any stock other than newly-issued.
Although paragraph (b) does not specifically limit the promissory note prohibition to the issuance of shares, paragraph (b) must be read in conjunction with paragraph (a) and in light of the concerns that gave rise to the prohibition. Paragraph (a) incorporates the term issuance and, more importantly, suggests that the intended focus of section 29-317 is on those matters that affect the issuance of corporate shares. As the majority concedes, the prohibition on promissory notes appears in a “provision otherwise devoted to issuance of stock.” Majority opinion, supra, at 1229. Thus, the placement of the promissory note prohibition within section 29-317 suggests that Congress intended for the promissory note proscription to be limited to the issuance of new shares.
This conclusion becomes still stronger when the statute is considered in its entirety. The format of the business corporations title of the District of Columbia Code firmly supports the conclusion that the promissory note prohibition extends only to the issuance of shares. Section 29-317 appears in a segment of the corporations title that primarily focuses on — and reveals apprehension about — a corporation’s stated capital account. The section immediately preceding section 29-317 principally addresses par value, the consideration for the issuance of non-par shares, and the impact of certain transactions on the stated capital account. Each of these subjects is closely associated with the integrity of the stated capital account. That section also address*134es treasury stock, but only to the extent of excluding treasury shares from par value restrictions. Additionally, the section that immediately follows section 29-317 directly addresses the composition of the stated capital account. For example, the statute provides, in part, that “[i]f the shares issued shall consist wholly of shares having a par value, then the stated capital represented by such shares shall not be less than the aggregate par value of the shares so issued.” D.C.Code Ann. § 29-318(a)(l) (1981). By establishing the relationship between the selling price of shares and the stated capital account, the Congress acted so as to ensure that the stated capital account would be more than a mere sham.
The promissory note prohibition thus is sandwiched between two provisions that focus on the stated capital account. Moreover, as indicated above, the general focus of section 29-317 is on the issuance of shares. Thus, it is but a small and logical step to deduce from this statutory framework that the promissory note prohibition must also incorporate a similar concern with the stated capital account. Yet, significantly, only the issuance of a corporation’s shares affects this account. Treasury shares, in contrast, have no impact whatsoever on the stated capital account and thus are irrelevant to this portion of the corporations title. Accordingly, it would be illogical to conclude that the promissory note prohibition contained in section 29-317 applies to treasury stock. Given the narrow focus of this segment of the corporations title on the stated capital account, the majority’s choice of a broad anti-fraud interpretation is especially curious.
B. The Legislative History.
Although somewhat sparse, the legislative history of the promissory note proscription leaves no room for any conclusion other than one in which the promissory note prohibition applies only to the issuance of new shares. Although the House Report makes no specific mention of the promissory note provision, the Report explicitly identifies the origins of the new District of Columbia corporations bill:
The bill in its present form is patterned after the model business corporation law prepared by the American Bar Association as revised in 1950. It is similar in most respects to the business corporation statutes of Delaware, Maryland, and Illinois.
H.R.Rep. No. 1552, 82nd Cong., 2nd Sess. 2 (1952). An examination of the sources referenced by the Congress convincingly demonstrates the limited reach of the promissory note proscription.
1. The model corporation laws.
The 1950 model business corporation law, to which Congress referred, contains a provision substantially identical to that enacted by Congress. American Law Institute, Model Business Corporation Act (Revised 1950) § 18 (1950) (“No promissory notes for future services shall constitute payment or part payment, for shares of a corporation.”). In a preface to the official publication of the 1950 Model Act, and in an article accompanying the publication of the 1950 Model Act in a bar journal, Ray Garrett, Chairman of the Division of Corporations of the American Bar Association and Chairman of the Committee on Corporate Laws, notes that the Model Act “prohibits the issuance of shares for promissory notes and future services.” (emphasis added). American Law Institute, Model Business Corporation Act (Revised 1950) iv, x (1950); Garrett, History, Purpose and Summary of the Model Business Corporation Act, 6 Bus.Law. 1, 7 (1950). Given that Mr. Garrett surely knew the technical meaning of the word issuance, and given that treasury shares are defined as already issued, it is clear beyond cavil that the drafters of the 1950 Model Act did not intend for the promissory note restriction to extend to treasury stock. Because the 1950 Model Act was cited by Congress as a source of the District of Columbia’s corporations title, the interpretation of the Model Act offered by its drafters — interpretations available at the time that Congress acted— must be given considerable weight. Mr. *135Garrett’s remarks thus lend substantial support to the proposition that the promissory note proscription applies only to new issuances.
The conclusion that the 1950 drafters intended to limit the promissory note proscription to newly issued stock is bolstered by subsequent events. In 1960, the American Bar Foundation published an annotated version of the Model Business Corporation Act. Significantly, no substantive changes were made to the text of that section which prohibits promissory note purchases. Model Business Corporation Act Annotated § 18 (1960). Moreover, the Chairman of the Special Committee on Model Corporations Acts was one of the drafters of the 1950 version, and many other drafters of the 1950 version, including Ray Garrett, were involved with the 1960 version. Id. at xxiii, xxv.
Against this background, the drafters’ commentary in the 1960 version deserves our attention. In “one such comment the drafters note: “Nor is the disposition of treasury shares subject to the provisions of section 18 [prohibiting payment in the form of promissory notes or future services] which relates only to consideration for shares on original issue.” Id., § 17 commentary at 318. Thus, the commentary indicates that promissory notes may be used to purchase treasury shares. This commentary is presented not as noting a substantive change but merely as incorporating an unremarkable description of the law. Nothing suggests that this commentary had any other objective than to reiterate Ray Garrett’s statement of ten years earlier that the promissory note prohibition applies only to newly issued stock.
In 1969, the drafters “codified” Ray Garrett’s original observation of 1950 regarding the scope of the promissory note prohibition. As amended, the section read:
Neither promissory notes nor future services shall constitute payment or part payment for the issuance of shares of a corporation.
Model Business Corporation Act § 19, at 435 (emphasis added) (2d ed. 1971). As the comments explain: “In 1969 the second paragraph was amended to make it clear that the prohibition was directed solely to the payment upon the original issue and not to subsequent sales of shares.” Id. (emphasis added). The amendment thus did not encompass a substantive change but rather served only as a clarification. Although no parallel amendment was adopted in the District of Columbia, this omission, as the majority admits, is of limited significance since the Model Act amendment was to clarify, not to change, the law. Majority opinion, supra at 128 n. 57.
In sum, we are left with a situation in which Congress adopted a model that continuously, albeit with increasing clarity, limited the promissory note proscription to newly issued shares. Accordingly, wherever the policy arguments might finally lie, it is clear that Congress intended for the prohibition on promissory notes to extend only to new issuances. Thus, stock already issued, including treasury stock, can be purchased with promissory notes. Against this background, I find troubling and totally without support the majority’s attempt to ignore the history of the model acts on the basis that. Ray Garrett’s original 1950 commentary was “ambiguous”, see Majority opinion, supra, at 124, and on the assertion, contrary to all existing evidence, that the model act’s drafters underwent some mysterious modification of policy orientation between 1950 and 1960.
2. Other jurisdictions.
The House Report also indicates that the District of Columbia’s corporations bill is “similar in most respects to the business corporation statutes of Delaware, Maryland, and Illinois.” See House Report, supra, at 2. Thus, an exploration of the law of these states is important to an analysis of the District of Columbia’s corporation statute. It is revealing that despite Congress’ unambiguous, explicit reference to these three states, the majority fails to cite a single case from Illinois, Maryland, or Delaware that supports its novel interpretation of the promissory note prohibition.
*136The reason for such omission is clear from the briefest of review of precedents in those states. Had the majority done so, it would have discovered strong support for the proposition that the promissory note prohibition is limited to stock issuances. In Delaware, for example, the promissory note proscription traces to a provision in the Delaware Constitution that specifically focuses on stock issuances and not stock resale. The Delaware Constitution of 1897 provides: “No corporation shall issue stock except for money paid, labor done, or personal property, or real estate or leases thereof actually acquired by such corporation.” Art. 9, § 3. The case law of that state suggests that the purpose of this prohibition is to avoid the issuance of worthless stock and to prevent the creation of fictitious capital accounts. For example, in Sohland v. Baker, 15 Del.Ch. 431, 448, 141 A. 277, 285 (1927), the court concluded that an unsecured promissory note was inappropriate consideration for the purchase of newly issued shares. In explaining its conclusion, the court observed that “[t]he capital stock of a corporation should represent something more than the mere obligations of its subscribers to pay for their stock.” Id. at 285 (quoting Washer v. Smyer, 109 Tex. 403, 211 S.W. 986 (1919)). See also Recent Cases, 77 U.Pa.L.Rev. 285, 286 (1928) (discussing Sohland and noting that the purpose of a promissory note prohibition is “to prevent, as a matter of public policy, the ‘fictitious’ issuing of corporate stock.”). Since the sale of treasury shares is irrelevant to a concern with the integrity of the stated capital account, it stands to reason that in Delaware, at least, the prohibition against promissory notes applies only to new issuances.
The majority places heavy reliance on the modern statutes of certain states. See, e.g., Majority opinion, supra, at 128, 129 nn. 61, 62. I would suggest that if modern statutes are to be considered in discerning legislative intent — an analytical approach with which I have great difficulties — Delaware’s “modern” approach should be given paramount importance since Congress specifically identified that state as a model. In Delaware, as the majority concedes, the corporations statute embraces the protection of the stated capital account as the sole policy underlying its ban on promissory notes. See Majority opinion, supra, at 127 n. 55 (citing Del. Code Ann. tit. 8, § 152 (1974 & Supp.1984)). Since the sale of treasury shares raises no “threats” to the integrity of the stated capital account, the promissory note prohibition logically should have no bearing on the sale of treasury shares.
Moreover, a look beyond the jurisdictions specifically mentioned in the House Report makes it increasingly obvious that promissory note prohibitions invariably are linked to concerns over stated capital accounts. For example, in Memphis v. Little Rock Ry. v. Dow, 120 U.S. 287, 7 S.Ct. 482, 30 L.Ed. 595 (1887) (Harlan, J.), the Supreme Court addressed a provision in the Arkansas Constitution prohibiting the issuance of stock except for money received or labor done. The Court noted that that provision “was intended to protect stock holders against spoliation, and to guard the public against securities that were absolutely worthless. One of the mischiefs sought to be remedied is the flooding of the market with stocks and bonds that do not represent anything whatever of substantial value.” Id. at 298, 7 S.Ct. at 487. This worthless stock issue clearly indicates a fear that .becomes acute only when stock is issued, not when treasury stock is sold.
In sum, the states to which Congress pointed yield no support for the majority’s position. To the contrary, I believe that evidence strongly suggests that the motivating concern of those who drafted the corporate laws was a desire to prevent the issuance of worthless stock. Thus, there is no basis to extend the promissory note proscription to treasury shares.
C. Judicial Interpretation.
Finally, the only prior decision that has examined the prohibition against promissory notes and future services contained in the District of Columbia Code is in conflict with the majority position. In Automated *137Datatron v. Woodcock, 84 F.R.D. 408 (D.D.C.1979), the court indicated, admittedly in dicta, that the prohibition applies only to the issuance of shares. In that case, the question was whether a transfer of shares in exchange for future services violated section 29-908(d), the predecessor to section 29-317. The court noted that the statutory proscription was not directed at stock already issued.
While read in isolation subsection (b) of section 29-908(d) is somewhat ambiguous in that it might appear' to prohibit all transfers of stock for future services, when considered in conjunction with subsection (a) and (c), which both speak of the issuance of shares by the corporation, as well as with the underlying purpose served by its prohibition — the avoidance of “watered stock,” ... — it is clear that the section should be applied only to corporate issuance.
84 F.R.D. at 411 n. 2 (emphasis added). Assuming, as we must, that the district court was using the term “issuance” in its technical sense, the court’s reasoning applies to the instant case as well: the prohibition extends only to the issuance of stock, and not to stock already issued.
D. The Majority Opinion.
To reach the opposite result, the majority focuses on modern corporation statutes that have abolished the concept of treasury shares and that have prohibited the sale of stock for unsecured promissory notes. See Majority opinion, supra, at 127-128. The majority places great store in its observation that “the survival of these provisions reminds that the stated capital was never a solitary — or sufficient — bulwark against the dilution of capital.” Id. at 128. The majority’s analysis falters on two points.
First, the majority’s analysis fails because it utilizes the “survival” of modern statutes to demonstrate what Congress intended thirty years ago. Had these statutes been present at the time that Congress enacted the District of Columbia’s business corporations bill, then these statutes might be some evidence of the theories of corporate law then present. But this is not the case. The two primary statutes upon which the majority relies— the Revised Model Act and the California statute — were both adopted within the past decade. It is beyond me how the “survival” of these provisions sheds any light whatsoever on Congress’ intent in 1954, especially given that the contemporaneous sources point in the opposite direction.
Second, and more important, the majority apparently feels that it can accomplish by judicial fiat what other jurisdictions have done only through legislative acts. To reach its conclusion, the majority emphasizes statutes that have abolished the distinction between treasury shares and newly issued shares. Yet, the District of Columbia’s corporations title explicitly maintains this distinction. Thus, the statutes so central to the majority’s analysis entail a format far different than the statutory structure existing in the District of Columbia. In essence, then, the majority has molded the District of Columbia’s code into the pattern of these other, statutes, statutes that reflect an approach to corporation law different than that embodied in the District of Columbia’s Code. It is the epitome of improper judicial activism for the majority to modernize the D.C. statute by judicial fiat. However preferable the “modern policy”, the change must be made legislatively, as it was in all the other jurisdictions.
II. Conclusion
For the reasons set forth above, I would affirm the district court’s holding that the sale of treasury shares in exchange for promissory notes is not precluded by the District of Columbia Code. This conclusion is required by the structure of the District of Columbia’s corporations title and by the legislative history. The majority’s approach reaches for a modernization of District of Columbia law by judicial amendment that is far beyond our authority.
While I agree that this case must be remanded, I part ways with the majority on the promissory note issue and therefore must respectfully

dissent.