Coy Hardaway v. William Burnett ( 1997 )

IN THE COURT OF APPEALS OF TENNESSEE
WESTERN SECTION AT JACKSON
COY N. HARAWAY and )
REDWING TECHNICAL SYSTEMS, )
INC., )
)
FILED
Plaintiffs/Appellants, ) Shelby Chancery No. 101852-3 R.D.
) September 08, 1997
VS. ) Appeal No. 02A01-9508-CH-00179
) Cecil Crowson, Jr.
Appellate C ourt Clerk
WILLIAM C. BURNETT, )
)
Defendant/Appellee. )
APPEAL FROM THE CHANCERY COURT OF SHELBY COUNTY
AT MEMPHIS, TENNESSEE
THE HONORABLE D. J. ALISSANDRATOS, CHANCELLOR
RICHARD L. WINCHESTER
Memphis, Tennessee
Attorney for Appellants
FELIX H. BEAN, III
Memphis, Tennessee
Attorney for Appellee
AFFIRMED IN PART, REVERSED IN PART
AND REMANDED
ALAN E. HIGHERS, J.
CONCUR:
DAVID R. FARMER, J.
WILLIAM H. INMAN, Sr. J.
Plaintiffs Coy N. Haraway and Redwing Technical Systems, Inc., appeal the trial
court’s final judgment which determined that Haraway was required to pay $72,636.30 to
redeem collateral in the possession of Defendant William C. Burnett and which dismissed
Redwing from this litigation. For the reasons hereinafter stated, we modify in part, affirm
in part, and reverse in part the trial court’s judgment, and we remand for further
proceedings.
I. FACTUAL BACKGROUND
In December 1989, Haraway and Burnett entered into a purchase/security
agreement whereby Haraway agreed to purchase from Burnett 1,000 shares of stock in
Redwing Technical Systems, Inc., plus certain patents, for a total purchase price of
$35,000. The 1,000 shares of Redwing stock represented 100% of the stock issued by
Redwing. Haraway agreed to pay Burnett the $35,000 purchase price according to the
following schedule:
(a) Haraway shall pay Burnett 50% of the first
$40,000.00 of net sales collected by Redwing (after dealer
discount and sales commissions) until such time as Burnett
has been paid the total sum of $20,000.00.
(b) Thereafter, Haraway shall pay Burnett 25% of the
next $60,000.00 of net sales collected by Redwing (after
dealer discount and sales commissions) until such time as
Burnett shall have been paid the balance of $15,000.00 due
him.
(c) Payment of the above sums shall be made by
Haraway to Burnett by the tenth of the month following receipt
by Redwing.
(d) Haraway shall have the option, but not the
obligation, to pay Burnett the balance of the $35,000 due him
at any time.
In addition to the $35,000 purchase price, Haraway agreed to pay Burnett royalties on
Redwing’s sales of dust control nozzles in the amount of ten percent (10%) of Redwing’s
net sales. The agreement provided that Haraway’s obligation to pay royalties would cease
upon the payment of the entire $35,000 purchase price.
To secure the payment of the $35,000 purchase price, Haraway granted to Burnett
a security interest in the stock and patents. In the event of Haraway’s default, the
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agreement afforded Burnett all of the rights and remedies of a secured party under
Tennessee’s version of the Uniform Commercial Code (UCC). In connection with the
purchase/security agreement, Haraway executed an irrevocable stock power which, in the
event of Haraway’s default under the agreement, assigned all of Haraway’s interest in the
stock to Burnett and authorized Burnett to sell, assign, or transfer the stock to a third party.
After executing the agreement, Haraway became Redwing’s president and sole
shareholder.
In the years following execution of the purchase/security agreement, Haraway failed
to remit timely payments to Burnett as required by the agreement. On July 16, 1992,
therefore, Burnett notified Haraway by certified mail that Haraway was in default under the
agreement and that, unless Haraway made payment of all amounts due and owing under
the agreement, plus interest, within ten days, Burnett would exercise his right pursuant to
the UCC to take immediate possession of the collateral.
A dispute arose between Haraway and Burnett as to the correct amount due under
the purchase/security agreement. Haraway offered to pay Burnett $48,273 to redeem the
collateral, but Burnett refused this amount as being unacceptable. By letter dated
August 3, 1992, Burnett informed Haraway that he was repudiating the purchase/security
agreement and that he was reasserting his ownership of the collateral, the stock and
patents. The stock certificate already was in Burnett’s possession. In addition to
exercising his ownership rights with regard to the stock, Burnett, through his agent,
Douglas Reeves, proceeded to seize control and possession of the patent documents and
Redwing’s other assets, including its shop equipment and inventory. Burnett then caused
the assets to be removed to Montana.
II. PROCEDURAL HISTORY
On August 24, 1992, Haraway and Redwing filed this action against Burnett seeking
injunctive and other relief. Specifically, the complaint sought an injunction (1) restraining
Burnett from interfering with Redwing’s business operations; (2) ordering Burnett to return
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Redwing’s shop equipment and inventory; (3) and ordering Burnett to return all stock
certificates and patent documents. The complaint also sought damages for Burnett’s
repudiation of the purchase/security agreement and his interference with Redwing’s
business activities. Asserting that he remained ready, willing, and able to fully perform his
obligations pursuant to the agreement, Haraway deposited the sum of $48,273 with the trial
court. Haraway obtained these funds from Redwing.
In September 1992, Burnett, a Montana resident, filed a notice of removal in the
United States District Court for the Western District of Tennessee. The federal district
court remanded the case to the trial court in December 1992 because the amount in
controversy was “insufficient to meet the $50,000 jurisdictional minimum for removal of an
action based upon diversity of citizenship.” The federal court’s order of remand was not
filed in the trial court until June 1993.
Meanwhile, in December 1992, Burnett filed a bankruptcy petition in Montana.
Burnett then filed an adversary proceeding against Haraway in the bankruptcy court based
on Haraway’s breach of the purchase/security agreement. Haraway responded by filing
a motion for mandatory abstention. The United States District Court for the District of
Montana granted Haraway’s motion and transferred the adversary proceeding to the trial
court in April 1993.
After the case was remanded to the trial court, Burnett answered the Plaintiffs’
complaint and asserted counterclaims against Haraway for breach of contract, fraudulent
misrepresentation, and lack of good faith and fair dealing. Burnett’s counter complaint
also demanded an audited accounting of Redwing’s financial records.
In July 1993, the trial court entered an order which (1) enjoined Burnett from
interfering with Redwing’s business operations; (2) ordered Burnett to return all inventory,
equipment, and other assets or property seized from Redwing; and (3) ordered Burnett to
account for an account receivable collected by Burnett on behalf of Redwing.
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In March 1994, the trial court referred this cause to a special master to determine
the following issues: (1) the total amount owed to Burnett under the purchase/security
agreement; and (2) the total amount of damages, if any, due Redwing and/or Haraway for
business torts allegedly committed by Burnett and/or his agents.
After conducting a hearing on March 24, 1994, the master issued a report
determining that Haraway owed Burnett the sum of $34,361 under the purchase/security
agreement. This amount included the $35,000 purchase price plus $15,649 in royalties
due under the agreement, less a $2,000 payment previously made by Haraway and
$14,288 for the Redwing account receivable intercepted by Burnett. Later in his report, the
master reduced the total amount owed to $29,861 based on Burnett’s failure to return a
nozzle worth $4,500 to Redwing. As for the Plaintiffs’ claim for damages for Burnett’s
alleged business torts, the master determined that the Plaintiffs were not entitled to lost
profits based on the master’s findings that Haraway’s prior tender was insufficient to cure
the default and that “Burnett acted properly pursuant to [Tennessee Code Annotated
sections 47-9-501 and 47-9-503].” In making these findings, the master apparently
approved of the procedure whereby Burnett exercised “the Irrevocable Stock Power thus
becoming owner of the stock of Redwing, Inc., and as sole shareholder took possession
of the assets of the corporation and removed them to Montana.” In light of this
determination, the master made no finding as to the amount of Redwing’s lost profits. At
the hearing, however, the Plaintiffs presented a statement of income showing that, in the
year preceding Burnett’s seizure and possession of Redwing’s assets, Redwing averaged
a monthly net income of $3,069.67. During the ten months following Burnett’s seizure of
the assets, Redwing averaged a net loss of $601.60 per month. Thus, the Plaintiffs sought
to prove that Redwing lost profits of $36,712.70 for the ten-month period in which
Redwing’s assets remained in Burnett’s possession.
The trial court subsequently entered an order adopting and modifying the master’s
report. In its order, the trial court found that Haraway materially defaulted under the
purchase/security agreement and that Burnett properly exercised the irrevocable stock
5
power, thereby effectively becoming the owner of Redwing. The trial court modified the
master’s report by determining that Haraway owed Burnett $48,659 under the
purchase/security agreement rather than $29,861 as found by the master. The trial court
reasoned that, inasmuch as the parties agreed that the $4,500 nozzle and the $14,288
account receivable were assets of Redwing, these amounts were not properly subject to
set-off by Haraway. By “further implication,” the trial court then dismissed Redwing as a
party plaintiff from this action. The trial court’s dismissal of Redwing apparently was based
on the court’s finding that Burnett, and not Haraway, was the owner of Redwing.
Following motions by the parties, the trial court entered an additional order ruling
that the collateral pledged by Haraway was the property of Burnett, but granting Haraway’s
motion to redeem the collateral. The trial court then referred the case back to the master
to determine the following issues: (1) the nature of the collateral pledged to Burnett by
Haraway; (2) the expenses reasonably incurred by Burnett in retaking, holding, and
preparing the collateral for disposition; and (3) the amount required for Haraway to redeem
the collateral. Burnett filed a written objection to Haraway’s redemption of the collateral on
the ground that the collateral previously had been transferred to Burnett pursuant to the
irrevocable stock power.
After conducting a second hearing on January 25, 1995, the master issued a report
determining that, per the parties’ stipulation, the collateral pledged was 1,000 shares of
Redwing stock and six patents. The master determined that Burnett incurred expenses of
$11,569.30 in retaking, holding, and preparing the collateral for disposition. This total
included the $8,209.50 cost of moving Redwing’s assets from Memphis to Montana and
back, the $2,950 cost of storing the assets while in Montana, and the $483 cost of certain
utilities and rent which Burnett initially was required to pay in order to obtain access to the
assets. At the hearing, Burnett also sought reimbursement for $57,734 in travel expenses
incurred by Burnett and for $122,608.20 in fees charged by Douglas Reeves. The master
found that Burnett had not met his burden of proof in delineating these expenses because
Burnett’s travel expenses “were not expenses actually incurred but were based on IRS
6
allowances” and because “the contract with Reeves was initially to run the business and
included monthly charges for doing so.” As found by the master, the purpose of the
contract between Reeves and Burnett was for Reeves to assist Burnett “in the lawsuit and
to be in charge of the operation of Redwing’s business on an . . . as needed basis to
formulate policies and [to administer] said matters in all respects.” Finally, the master
determined the cost of redemption to be $53,838.30. This amount included the $29,861
balance due on the debt as previously found by the master, the $11,569.30 in expenses
as found by the master at the second hearing, and an additional $12,408 in unpaid
royalties.
Based on the master’s second report, the trial court entered a final judgment
awarding Burnett the sum of $53,838.30. The judgment directed Burnett, upon receipt of
this sum, to return the Redwing stock certificate to Haraway and to file a UCC-3 release
evidencing Burnett’s receipt of the payment and his release of any security interest held
in the patents. The judgment additionally directed Haraway to pay $300 to Burnett as civil
contempt damages. As for Burnett’s counter complaint, the trial court denied recovery
based on the court’s finding that Burnett had “failed to demonstrate any actionable
damages.”
The master later filed an amended report in which he determined the cost of
redemption to be $72,636.30. This amendment was necessary because the master’s
second report failed to reflect that the trial court previously modified the master’s initial
report to provide that the balance due on the debt was $48,659 and not $29,861. The
amended redemption amount, therefore, included the $48,659 balance due on the debt,
$11,569.30 in expenses, and $12,408 in royalties. The trial court entered an order
modifying its final judgment in accordance with the master’s amended report. As modified,
the trial court’s final judgment also ordered Haraway to reimburse Burnett $99.75 for one-
half the cost of transcribing the master’s second hearing. The trial court subsequently
denied the Plaintiffs’ motion to alter or amend the final judgment, as well as other motions,
and this appeal followed.
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On appeal, the Plaintiffs raise the following issues for this court’s review:
1. Did the Special Master and the Trial Court err in
calculating the amount which Plaintiff Haraway was required to
pay Defendant to redeem his collateral?
2. Did the Special Master and the Trial Court err in
failing to apply T.C.A. § 47-9-506 to calculate this sum?
3. Did the Trial Court err in dismissing Plaintiff,
Redwing Technical Systems, Inc. from this litigation?
4. Did the Special Master and the Trial Court err in
failing to award Plaintiff Redwing Technical Systems, Inc. a
judgment against Defendant Burnett for the amount of the
Redwing receivable intercepted by Burnett ($14,288.00) and
the value of the grain nozzle taken and not returned
($4,500.00)?
5. Did the Special Master and the Trial Court err in
determining that Defendant Burnett “acted [properly]” when he
confiscated property of Redwing Technical Systems, Inc. which
was not part of the collateral pledged to secure Mr. Haraway’s
debt to Mr. Burnett?
6. Did the Special Master and the Trial Court err in
not awarding Redwing Technical Systems, Inc. its [lost] profits
for the period of time that it was out of business as a result of
the confiscation of its equipment and inventory?
On cross appeal, Burnett also has raised several issues:
1. Do the Plaintiff’s Complaint, subsequent
pleadings and weight of the evidence support the proposition
that he is entitled to seek redemption of the collateral?
2. Were the interpled funds ($48,273.00), which
were deposited into the court simultaneously with the filing of
this cause, the property of Plaintiff Haraway and, is he properly
and lawfully entitled to apply these funds to the amount
required to redeem the collateral?
3. Do the Special Master’s calculations take into
account all sums to which Defendant Burnett is entitled . . . ?
4. Has Defendant Burnett been fully and adequately
compensated for the egregious conduct of Plaintiff Haraway in
connection with the prosecution of this cause?
III. HARAWAY’S RIGHT TO REDEEM THE COLLATERAL
As an initial matter, we find it necessary to address Burnett’s contention that
Haraway was not entitled to redeem the collateral. Section 9-506 of the UCC governs
Haraway’s right of redemption:
8
47-9-506. Debtor’s right to redeem collateral. -- At
any time before the secured party has disposed of collateral or
entered into a contract for its disposition under § 47-9-504 or
before the obligation has been discharged under § 47-9-505(2)
the debtor or any other secured party may unless otherwise
agreed in writing after default redeem the collateral by
tendering fulfillment of all obligations secured by the collateral
as well as the expenses reasonably incurred by the secured
party in retaking, holding and preparing the collateral for
disposition, in arranging for the sale, and to the extent provided
in the agreement and not prohibited by law, his reasonable
attorneys’ fees and legal expenses.
T.C.A. § 47-9-506 (1992). Provided he made a valid tender under this section, therefore,
Haraway was entitled to redeem the collateral unless (1) Burnett had disposed of the
collateral or entered into a contract for disposition of the collateral under section 9-504, or
(2) Burnett had retained the collateral in satisfaction of Haraway’s obligation pursuant to
section 9-505(2).
On cross appeal, Burnett contends that Haraway was precluded from redeeming the
collateral because Haraway’s pleadings did not request redemption and because Burnett
already had disposed of the collateral before Haraway made a valid tender pursuant to
section 9-506. We conclude that both of these contentions are without merit and that the
trial court properly allowed Haraway to redeem the collateral.
We first reject Burnett’s contention that the trial court improperly granted redemption
based on Haraway’s failure to request this remedy in his pleadings. The Tennessee Rules
of Civil Procedure direct the courts of this state to liberally construe the parties’ pleadings
so as to do substantial justice. See T.R.C.P. 8.06. Haraway’s complaint requested return
of the collateral and, in connection therewith, Haraway deposited $48,273 with the trial
court, an amount that he contended fulfilled his obligations under the purchase/security
agreement. Based on the pleadings, therefore, the trial court acted properly in granting
Haraway the remedy of redemption. See Lamons v. Chamberlain, 909 S.W.2d 795, 800
(Tenn. App. 1993) (holding that rescission was not precluded as possible remedy where
plaintiff’s complaint averred that she had lost her entire investment and prayed for return
of down payment).
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We also reject Burnett’s contention that Haraway was precluded from redeeming
the collateral on the ground that Burnett already had disposed of the collateral by assigning
the stock to himself pursuant to the irrevocable stock power executed by Haraway. Upon
the debtor’s default, the UCC gives the secured creditor three options:
First, [the secured creditor] may reduce the claim to judgment,
foreclose or otherwise enforce the security interest by judicial
procedures pursuant to T.C.A. § 47-9-501(1), (2), (3), (4), (5).
Second, [the secured creditor] may repossess and sell the
collateral in satisfaction of the obligation. T.C.A.
§ 47-9-504(3), . . . . Finally, the creditor may propose to retain
the collateral in satisfaction of the obligation. T.C.A.
§ 47-9-505(2).
American City Bank v. Western Auto Supply Co., 631 S.W.2d 410, 419-20 (Tenn. App.
1981) (footnotes omitted).
Regarding the second option, section 9-504 of the UCC provides, in part:
47-9-504. Secured party’s right to dispose of
collateral after default -- Effect of disposition. -- (1) A
secured party after default may sell, lease or otherwise
dispose of any or all of the collateral in its then condition or
following any commercially reasonable preparation or
processing. . . .
....
(3) Disposition of the collateral may be by public or
private proceedings and may be made by way of one (1) or
more contracts. . . .
(4) When collateral is disposed of by a secured party
after default, the disposition transfers to a purchaser for value
all of the debtor’s rights therein, discharges the security
interest under which it is made and any security interest or lien
subordinate thereto. . . .
T.C.A. § 47-9-504 (1992).1
1
Re gard ing the sale o r othe r disposition of the collateral, section 9 -504 furthe r provides that:
Sa le or other disposition may be as a unit or in parcels and at any time and
place and on any term s but every as pect o f the disposition including the
method, manner, time, place and terms m ust be comm ercially reasonable.
Unless collateral is perishable or threatens to decline speedily in value or is
of a type custo m arily sold on a recognized market, reasonable notification
of the tim e and place of a ny public sale or reasonable notification of the tim e
after which an y private sale or o the r intended disposition is to be m ade shall
be sent by the secured party to the debto r, if he has not signed after de fault
a statement renouncing or modifying his right to notification of sa le. In the
case of consumer goo ds n o other no tification n eed be sent. In other cases
notification shall be sent to any other secured party from whom the secured
party has rece ived . . . written notice of a claim of an interest in the
collateral. The secured party may buy at any public sale and if the collateral
is of a type customarily sold in a recognized market or is of a type which is
10
Authorities generally agree that a secured creditor’s transfer of collateral, such as
stock, to the creditor’s own name does not constitute a disposition under section 9-504 of
the UCC. See Fletcher v. Cobuzzi, 499 F. Supp. 694, 698-99 (W.D. Pa. 1980); Sports
Courts of Omaha, Ltd. v. Brower, 534 N.W.2d 317, 322 (Neb. 1995); see also IFG Leasing
Co. v. Gordon, 776 P.2d 607, 613 (Utah 1989); Ronald A. Anderson, Anderson on the
Uniform Commercial Code § 9-504:47, at 425 (3d ed. 1994 & Supp. 1996). Within the
context of the UCC, the term “disposition” connotes some transfer for value of the creditor’s
rights to the collateral and does not contemplate a creditor’s transfer of title to himself.
Fletcher v. Cobuzzi, 499 F. Supp. at 698; T.C.A. § 47-9-504(4) (1992). In accordance with
these authorities, we conclude that Burnett did not effect a disposition of the Redwing stock
within the meaning of section 9-504 when he transferred title of the stock to himself and,
thus, that Haraway was not precluded from redeeming the stock pursuant to section 9-506.
Burnett cites Comer v. Green Tree Acceptance, Inc., 858 P.2d 560 (Wyo. 1993), for
the proposition that, by transferring the collateral into his own name, Burnett disposed of
the collateral within the meaning of section 9-506. In Comer, however, the court concluded
that the debtor was precluded from redeeming the collateral because the secured creditor
had retained the collateral in satisfaction of the debt pursuant to section 9-505(2) of the
UCC, not because the creditor had disposed of the collateral within the meaning of section
9-504. Comer v. Green Tree Acceptance, 858 P.2d at 563-64. We conclude that Comer
has no application to this case because here Burnett claims to be proceeding pursuant to
section 9-504 of the UCC, not section 9-505(2).
We note that, after transferring title to himself, Burnett could have chosen the third
available option by electing to retain the collateral in satisfaction of Haraway’s obligation
pursuant to section 9-505(2). See American City Bank v. Western Auto Supply, 631
the subject of widely distributed standard price quotations he may buy at
private sale.
T.C.A. § 47-9 -504(3) (1992).
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S.W.2d at 419; T.C.A. § 47-9-505(2) (1992);2 see also Fletcher v. Cobuzzi, 499 F. Supp.
at 699; IFG Leasing Co. v. Gordon, 776 P.2d at 612; In re Szelega, 469 N.Y.S.2d 271,
272-73 (App. Div. 1983). In proceeding pursuant to section 9-505(2), however, a secured
creditor must give the debtor written notice of his intent to retain the collateral in
satisfaction of the debt and must forfeit his right to a deficiency judgment. See T.C.A.
§ 47-9-505(2) (1992); see also Comer v. Green Tree Acceptance, 858 P.2d at 565;
Anderson on the UCC §§ 9-505:4, 9-505:30, at 656, 671. In the present case, Burnett
never has contended that he was proceeding pursuant to section 9-505(2),3 nor has he
provided Haraway with written notice of his intent to retain the collateral in satisfaction of
Haraway’s obligation under the purchase/security agreement. Accordingly, we need not
address the potential application of section 9-505(2) to this case.
IV. HARAWAY’S COST OF REDEMPTION
Having determined that Haraway was not precluded from redeeming the collateral
by virtue of Burnett’s disposition of the collateral, we next address the issue of the
appropriate redemption amount. The final redemption amount, as calculated by the trial
court, was $72,636.30, which included the $48,659 debt as determined by the trial court
when it modified and adopted the master’s initial report, $11,569.30 in expenses, and
$12,408 in additional royalties. We agree with the Plaintiffs’ contention that the $11,569.30
in expenses was improperly included in the cost of redemption because these expenses
are not authorized by the UCC.
2
That section provides that
In any other case involving consumer goods or any other collateral
a secured party in possession may, after default, propose to retain the
collateral in satisfaction of the obligation. W ritten notice of such proposal
shall be sent to the debto r if he has n ot sign ed a fter default a statement
renouncing or m odifying his rights under this subsection. In the case of
consumer goo ds n o other no tice ne ed b e given. In othe r cases notice shall
be sent to any other secured party from whom the secured party has
received . . . written notice of a cla im of an interest in the collateral. If the
secured party receives objection in writing from a person e ntitled to receive
notification within twenty-one (21) days after the notice was sent, the
secured party must dispose of the collateral under § 47-9-504. In the
absence of such written objection the secured party may retain the collateral
in satisfaction of the debtor’s obligation.
T.C.A. § 47-9 -505(2) (1992).
3
Ne ither Burne tt’s app ellate brief no r his coun ter co m plaint cite sec tion 9-5 05(2 ).
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In order to redeem the collateral, Haraway was required to pay, in addition to the
underlying obligation secured by the collateral, “the expenses reasonably incurred by the
secured party [Burnett] in retaking, holding and preparing the collateral for disposition” and
in arranging for its sale. T.C.A. § 47-9-506 (1992). The expenses claimed by Burnett and
awarded by the trial court, however, were incurred by Burnett when he seized the corporate
assets of Redwing, including its equipment and inventory. These corporate assets did not
constitute a part of the purchase/security agreement’s collateral and, thus, section 9-506
did not authorize Burnett to recover expenses associated with taking or holding this
property. In fact, at the January 1995 hearing before the master, Burnett acknowledged
that he incurred no expenses in retaking the collateral because the stock certificate already
was in his possession prior to Haraway’s default and because Burnett had perfected his
security interest in the patents by filing a UCC-1 financing statement. Accordingly, we
modify the trial court’s final judgment to reflect that Haraway’s cost of redemption is
$61,067 and not $72,636.30.
In making this modification, we reject Burnett’s contention on cross appeal that the
trial court erred in failing to award him additional expenses for retaking, holding, and
preparing the collateral for disposition. Regarding Burnett’s claimed travel expenses, the
master found that Burnett did not prove his actual expenses but instead based the amount
of his claim on the maximum deductions allowed by the IRS. In light of this finding, we
affirm the trial court’s decision to deny Burnett’s claim for $57,734 in travel expenses. We
also affirm the trial court’s decision to deny Burnett’s claim for $122,608.20 in fees
allegedly owed to Douglas Reeves. As found by the master, the purpose of the agreement
between Burnett and Reeves was for Reeves to assist Burnett in this lawsuit and to be in
charge of the operation of Redwing’s business on an as-needed basis. The record fails
to indicate, however, how Reeves’ services related to “retaking, holding and preparing the
collateral for disposition.” T.C.A. § 47-9-506 (1992). Although Reeves apparently assisted
in seizing the corporate assets of Redwing, as we previously have held, these assets did
not constitute a part of the purchase/security agreement’s collateral. We also note that
most of Reeves’ invoices cover the period after July 1993, when the trial court entered its
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order enjoining Burnett from interfering with Redwing’s business operations and ordering
Burnett to return Redwing’s assets.
We likewise reject Burnett’s contention that the master’s initial report understated
the amounts owed to Burnett pursuant to the purchase/security agreement. An appellant
waives an issue for purposes of appellate review when he fails to make the appropriate
objection at the trial court level. Barnhill v. Barnhill, 826 S.W.2d 443, 458 (Tenn. App.
1991). In this regard, the appellant has the duty “to prepare a record which conveys a fair,
accurate and complete account of what transpired in the trial court with respect to the
issues which form the basis of the appeal.” State v. Boling, 840 S.W.2d 944, 951 (Tenn.
Crim. App. 1992); T.R.A.P. 24(b). Absent a transcript of the March 1994 hearing at which
the master’s alleged error occurred, we are unable to determine whether Burnett raised this
issue below. Moreover, we note that the record fails to reflect whether Burnett formally
objected to the master’s initial report as permitted by the Tennessee Rules of Civil
Procedure. See T.R.C.P. 53.04(2).4 Under these circumstances, Burnett has waived this
issue for appellate review.
V. BURNETT’S REPOSSESSION OF REDWING’S EQUIPMENT AND INVENTORY
On appeal, the Plaintiffs additionally contend that the trial court erred in determining
that Burnett acted properly under the UCC when Burnett confiscated Redwing’s equipment
and inventory. The Plaintiffs argue that, contrary to the trial court’s finding, Burnett was not
authorized to repossess Redwing’s equipment and inventory because this property was not
part of the collateral covered by the purchase/security agreement.
We agree. Under the UCC, upon the debtor’s default, the secured creditor’s right
to take possession of the debtor’s property extends only to the collateral. T.C.A.
4
As pertine nt, rule 5 3.04 (2) provide s that:
W ithin ten (10) days after being served with notice of the filing of the
[master’s] report, any party may serve written objections thereto upon the
othe r parties. Application to the court for action upon the report and upon
objections thereto shall be by m otio n and upon notice as pre scribed in
Rule 6.04.
T.R.C .P. 53.04(2).
14
§ 47-9-503 (1992). A secured creditor wrongfully repossesses property when the creditor
takes possession of property that is not subject to the security interest. Anderson on the
UCC § 9-503:64, at 327. In addition to asserting his rights to the collateral in this case, the
stock and patents, Burnett proceeded to repossess Redwing’s equipment and inventory.
Burnett was not authorized to repossess this property because Redwing’s equipment and
inventory was not the subject of Burnett’s security interest. We conclude, therefore, that
the trial court erred in ruling that Burnett acted properly in repossessing Redwing’s
property.
At the second hearing before the master, Burnett asserted that he was authorized
to repossess Redwing’s equipment and inventory pursuant to section 9-501 of the UCC.
As pertinent, that section provides that:
When a debtor is in default under a security agreement,
a secured party has the rights and remedies provided in this
part and except as limited by subsection (3) those provided in
the security agreement. He may reduce his claim to judgment,
foreclose or otherwise enforce the security interest by any
available judicial procedure. If the collateral is documents the
secured party may proceed either as to the documents or as
to the goods covered thereby. . . .
T.C.A. § 47-9-501(1) (1992). Thus, this section authorizes the secured party, in the event
the collateral is a document, to proceed either as to the document or as to the goods
covered thereby. In citing this UCC section at the hearing below, Burnett apparently was
taking the position that the Redwing stock certificate was a document and that Redwing’s
equipment and inventory were the goods covered by such document.
This argument is without merit. Under Article 9 (Chapter 9) of the UCC, the term
“document” refers to a document of title as defined in the UCC’s section of general
definitions. T.C.A. § 47-9-105 (1992). The UCC generally defines a document of title to
include a
bill of lading, dock warrant, dock receipt, warehouse receipt or
order for the delivery of goods, and also any other document
which in the regular course of business or financing is treated
as adequately evidencing that the person in possession of it is
entitled to receive, hold and dispose of the document and the
goods it covers. To be a document of title a document must
purport to be issued by or addressed to a bailee and purport to
15
cover goods in the bailee’s possession which are either
identified or are fungible portions of an identified mass.
T.C.A. § 47-1-201(15) (1992). The stock certificate held by Burnett as collateral in this
case does not fall within the foregoing definition. A stock certificate is not a document
which in the regular course of business evidences the possessor’s entitlement to
identifiable goods; rather, a stock certificate is an instrument which represents a share,
participation, or other interest in the issuer’s property or enterprise. See T.C.A.
§§ 47-8-102(1), 47-9-105(1)(i) (1992); see also FDIC v. Caliendo, 802 F. Supp. 575, 578
(D.N.H. 1992). See generally Anderson on the UCC §§ 1-201:231 to :244, at 633-37
(discussing what is and is not a document of title); see also Hinton v. Carney, 250 S.W.2d
364, 365 (Tenn. 1952) (noting that ownership of all capital stock of corporation does not
make shareholder owner of corporation’s property); accord Vella v. National Pizza Co.,
No. 02A01-9311-CV-00254, 1994 WL 618606, at *3 (Tenn. App. Nov. 9, 1994).
On cross appeal, Burnett also asserts that he was entitled to repossess Redwing’s
equipment and inventory because he became the owner of Redwing pursuant to the
irrevocable stock power executed by Haraway in connection with the purchase/security
agreement. In executing the stock power, Haraway agreed that, in the event of his default
under the purchase/security agreement, all of his interest in the stock would be transferred
to Burnett.
Again, we find Burnett’s argument to be without merit. In matters concerning the
parties’ rights, obligations, and remedies, the provisions of Article 9 apply whether title to
the collateral is in the secured creditor or in the debtor. T.C.A. § 47-9-202 (1992). Thus,
even if title to the Redwing stock was transferred to Burnett’s name after default, this
transfer did not affect the parties’ rights, obligations, and remedies under Article 9. Further,
to the extent that the provisions of Article 9 grant certain rights to the debtor and impose
certain duties on the secured creditor in the event of default, these provisions may not be
waived or varied by the parties. T.C.A. § 47-9-501(3) (1992). These provisions include the
UCC sections dealing with the secured creditor’s disposition of the collateral (T.C.A.
§§ 47-9-504(3), 47-9-505(1)), the secured creditor’s retention of the collateral in
16
satisfaction of the debtor’s obligation (T.C.A. § 47-9-505(2)), the debtor’s redemption of the
collateral (T.C.A. § 47-9-506), and the secured creditor’s liability for failure to comply with
Article 9's default provisions (T.C.A. § 47-9-507(1)).
In applying these principles, this court previously has held that a stock pledge
agreement which purports to vest the stock in the secured creditor upon the debtor’s
default is invalid; such an agreement neither waives the debtor’s rights under Article 9 nor
terminates the debtor’s rights of ownership in the stock. Trimble v. Sonitrol of Memphis,
Inc., 723 S.W.2d 633, 638-39 (Tenn. App. 1986); accord Data Sec., Inc. v. Plessman, 510
N.W.2d 361, 365-66 (Neb. Ct. App. 1993); 18 C.J.S. Corporations § 264 (1990). In
Trimble, the language of the stock pledge agreement clearly provided that, upon default,
the stock would vest in the secured creditor. Trimble v. Sonitrol, 723 S.W.2d at 638. The
pledge specifically included all “voting and other shareholder rights.” Id.
In commenting on the effect of such an agreement, one authority explained:
The mere fact that the debtor defaults does not
terminate the debtor’s ownership in the collateral. The concept
of strict foreclosure that was followed by the law centuries ago
does not apply, with the consequence that default does not in
itself extinguish the debtor’s rights but merely satisfies a
condition precedent to the creditor’s right to invoke certain
remedies, one of which is a right to sell the collateral which will
effect the termination of the debtor’s ownership. Thus, on the
default of the debtor the creditor has the right to repossess and
dispose of the collateral but does not acquire title
automatically.
A provision in an agreement covering the pledge of
stock that upon default “voting and other shareholder’s rights”
were to vest in the pledgee is invalid and does not deprive the
pledgor of standing to attack the commercial reasonableness
of the disposition of the collateral.
Anderson on the UCC § 9-501:42, at 234 (citing Trimble v. Sonitrol of Memphis, Inc., 723
S.W.2d 633 (Tenn. App. 1986)) (footnotes omitted); see also T.C.A. § 48-16-203(d) (1988)
(providing that, for purposes of assigning liability, pledgor, and not pledgee, remains holder
of shares in corporation pledged as collateral security).
17
Another authority has succinctly described the effect of the UCC’s default provisions
on title to the collateral:
The default provisions in the UCC do not automatically transfer
title to the secured party upon default. . . . The provisions
found in the UCC grant broad rights to the secured party to
repossess the security in order to sell or otherwise dispose of
that property upon default. When the creditor repossesses the
secured property, however, it obtains only the right of
possession, not title. . . . Under the UCC, default does not
divest a debtor of all right and interest in the secured property,
nor is the secured party, the creditor, vested with the unlimited
power to deal with the property as it wishes.
Comer v. Green Tree Acceptance, Inc., 858 P.2d 560, 563 (Wyo. 1993) (citations omitted).
In accordance with the foregoing authorities, we hold that the irrevocable stock
power executed by Haraway in this case was ineffective to automatically transfer title of the
Redwing stock to Burnett in the event of default and, thus, did not vest Burnett with
unlimited power to deal with Redwing’s property as he wished. The stock power neither
waived Haraway’s rights under Article 9 nor divested him of ownership rights in the stock.
Accordingly, contrary to Burnett’s argument on cross appeal, the stock power did not
authorize Burnett to assume control of Redwing and to repossess its equipment and
inventory.
A creditor who wrongfully takes possession of property may be held liable for
conversion damages and for general damages, such as lost profits. See Davenport v.
Chrysler Credit Corp., 818 S.W.2d 23, 30-32 (Tenn. App. 1991); Walker v. Associates
Commercial Corp., 673 S.W.2d 517, 521 (Tenn. App. 1983); Harris Truck & Trailer Sales v.
Foote, 436 S.W.2d 460, 464 (Tenn. App. 1968); Anderson on the UCC §§ 9-503:64,
9-503:74, at 327, 339; see also Lance Prods., Inc. v. Commerce Union Bank, 764 S.W.2d
207, 213 (Tenn. App. 1988). At the initial hearing before the master in this case, the
Plaintiffs sought to prove that Redwing lost profits as a result of Burnett’s wrongful
repossession of Redwing’s assets. The master denied the Plaintiffs’ claim for lost profits
based, not on evidentiary grounds, but on the master’s finding that Burnett acted properly
under the UCC, and the trial court adopted this portion of the master’s report. Inasmuch
as neither the master nor the trial court made any findings with regard to the evidence of
18
lost profits presented by the Plaintiffs, we remand for the trial court to reconsider Redwing’s
claim for lost profits. 5
VI. THE TRIAL COURT’S DISMISSAL OF REDWING
Having determined that Redwing may be entitled to lost profits for Burnett’s
conversion of its equipment and inventory, we next address the issue of the trial court’s
dismissal of Redwing from this lawsuit. In this regard, inasmuch as we have held that
Burnett did not become the owner of Redwing pursuant to the irrevocable stock power, we
also must reverse the trial court’s order dismissing Redwing. The trial court apparently
dismissed Redwing based on the court’s conclusion that Burnett was the owner of Redwing
and, thus, that Haraway had no authority to maintain this action on behalf of Redwing.
Because Haraway’s ownership interest in Redwing was not terminated by Burnett’s actions
taken pursuant to the irrevocable stock power, we hold that Haraway was not precluded
from maintaining this action on behalf of Redwing on this basis. Other than his alleged
ownership of Redwing pursuant to the irrevocable stock power, Burnett has advanced no
other basis to challenge Haraway’s authority, as Redwing’s president and sole shareholder,
to bring this lawsuit on behalf of Redwing. See Lewis ex rel. Citizens Sav. Bank & Trust
Co. v. Boyd, 838 S.W.2d 215, 220 (Tenn. App. 1992) (noting that responsibility for
determining whether corporation should pursue judicial remedies for its injuries falls on its
officers and directors).6
In his initial report, the master found that Burnett owed Redwing $14,288 for an
account receivable that he intercepted and $4,500 for a nozzle that he failed to return. In
accordance with these findings, we conclude that a judgment in the amount of $18,788
should be entered in favor of Redwing.
5
As pres ente d, the Plaintiffs ’ claim for lost profits belon gs to Redwing, not H araw ay. See Hadd en v.
City of Gatlinburg, 746 S.W .2d 687, 689 (Tenn. 1988) (holding that sole shareholder of corporation may not
bring suit individually to right wrong do ne to corporation; action m ust be brough t by corporation).
6
In any event, we note that Redwing m ay have been a n ecess ary party to this ac tion. See Citizens
Real Estate & Loan Co. v. Mountain States Dev. Corp., 633 S.W .2d 763, 766 (Tenn. App. 1981) (concluding
that all parties claiming title to subject property were nec essary parties to laws uit); T.R .C.P . 19.01; see also
Japan Petroleum C o. v. Ashland Oil, Inc., 456 F. Supp. 831, 836 n.8 (D.C. Del. 1978) (noting that corporation
generally is indispensable party in any action affecting its rights and liabilities).
19
VII. REMAINING ISSUES ON APPEAL
In light of the foregoing analyses, we also hold that the trial court properly permitted
Haraway to redeem the collateral using $48,273 in funds obtained from Redwing. As we
have held, Haraway’s ownership interest in Redwing was not extinguished by Burnett’s
exercise of the irrevocable stock power. Moreover, we note that the purchase/security
agreement itself contemplated that Haraway would use Redwing’s revenues to pay the
purchase price for Redwing.
Finally, we reject Burnett’s argument on cross appeal that he is entitled to additional
damages for Haraway’s “egregious conduct.” The trial court found that Burnett had “failed
to demonstrate any actionable damages” on his counterclaims, and we conclude that the
evidence does not preponderate against this finding.
VIII. CONCLUSION
The trial court’s judgment is hereby modified to reflect that Haraway’s cost of
redemption is $61,067 instead of $72,636.30. We reverse that portion of the trial court’s
judgment dismissing Redwing from this lawsuit and enter a judgment in favor of Redwing
in the amount of $18,788. We also reverse that portion of the trial court’s judgment
denying Redwing’s claim for damages resulting from Burnett’s conversion of Redwing’s
equipment and inventory. In connection therewith, this cause is remanded for the trial
court to reconsider Redwing’s claim for lost profits, and for any further proceedings
consistent with this opinion. In all other respects, the trial court’s judgment is affirmed.
Costs on appeal are taxed to Burnett, for which execution may issue if necessary.
HIGHERS, J.
CONCUR:
FARMER, J.
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INMAN, Sr. J.
21