Stephen A. Wakefield v. Michael F. Crawley, MacTenn Valve Company, a Tennessee Corp., and Macaweber Systems Inc., a Tennessee Corp.

IN THE SUPREME COURT OF TENNESSEE
AT KNOXVILLE
FILED
November 1, 1999
Cecil Crowson, Jr.
Appellate Court Clerk
STEVEN A. WAKEFIELD, ) FOR PUBLICATION
)
Plaintiff/Appellee, ) Filed: November 1, 1999
)
v. )
) Blount Chancery
MICHAEL F. CRAWLEY, MacTENN )
VALVE COMPANY, a Tennessee )
Corporation, and MACAWEBER ) Hon. Chester S. Rainwater,
SYSTEMS, INC., a Tennessee ) Chancellor.
Corporation, )
)
Defendants/Appellants. ) NO. 03S01-9903-CH-00029
For Plaintiff-Appellee: For Defendants-Appellants:
H. Allen Bray William S. Lockett, Jr.
Maryville, Tennessee Kennerly,Montgomery & Finley,PC
Knoxville, Tennessee
OPINION
TRIAL COURT AND COURT OF APPEALS REVERSED;
CAUSE DISMISSED DROWOTA,
J.
We granted this appeal to determine whether stock in a closely-held
corporation is a “security,” as defined by Tenn. Code Ann. § 47-8-102 (1992 Repl.
& Supp. 1998)1, so that Chapter 8 of the Uniform Commercial Code (UCC)
governs its sale or transfer. In Blasingame v. American Materials, Inc., 654
S.W.2d 659, 664 (Tenn. 1983), we concluded that closely-held stock was not a
security within the meaning of Chapter 8 of the UCC. Because we have
determined that the Official Comments of the 1977 version of the UCC, adopted
by the Tennessee General Assembly in 1986, as well as the 1995 and 1997
amendments to the Code, overrule the reasoning in Blasingame, we now hold that
closely-held stock is a security within the meaning of the UCC’s Chapter 8, and
that the closely-held stock at issue in this case is governed by Chapter 8.
Because the plaintiff cannot produce a signed writing that comports with the
statute of frauds found at Tenn. Code Ann. § 47-8-319 (1992 Repl. & 1996 Repl.),
nor can he satisfy one of the statutory exemptions, we reverse the judgments of
the lower courts and find in favor of the defendant.
FACTS AND PROCEDURAL HISTORY
The parties in this action became acquainted in 1986 when the defendant,
Michael Crawley, acting through Macawber Engineering, Inc., a corporation of
which he was the sole shareholder, became involved with a project involving the
development of technology to clean the accumulation of impure residue in coal
mines. Mr. Crawley approached the plaintiff, Steven Wakefield, an investment
banker, and solicited his help in obtaining financing for the project. While the
mining project never materialized, the defendant enlisted the plaintiff’s assistance
in financial consulting. Specifically, the defendant sought help in revamping
1
The transactions in this case are governed by Tenn. Code Ann. § 47-8-102 as it existed in the
1992 Replacement volume. Although the statute has been amended several times since appearing
in that volume, our holding also applies to the statute’s current version, found in the 1998
Supple men t.
2
Macawber Engineering’s failing financial situation. Without a formal employment
agreement between the parties, the plaintiff assented to assisting the defendant,
and began consulting with creditors in an attempt to obtain financing for various
company projects.
Between 1987 and 1992 the plaintiff continued to perform financial
consulting for Macawber Engineering. In compensation for his services, the
parties agreed in September 1990 that the plaintiff would be placed on the
corporation’s payroll and would receive $10,000 per month. That fee was later
reduced to $6,000 per month, and finally to $4,000 per month due to the
company’s strained financial situation.
By 1991 Macawber Engineering continued to struggle financially and was
on the brink of bankruptcy. The plaintiff maintained that in order to remedy the
corporation’s poor image and financial status and to protect its creditors it was
essential to create a “clean” company that would be more successful at obtaining
and performing contracts. The defendant agreed that the employees and
creditors of Macawber Engineering would best be protected if the company could
exist and transact business in a different form. To achieve this, the plaintiff
suggested that two new companies be formed. Accordingly, Macawber Systems,
Inc. (“MSI”) and MacTenn Valve Company (“MacTenn”) were incorporated during
1991 and 1992. The defendant was the sole shareholder in each new
corporation.
The defendant, an engineer, contends that he was ignorant about the
nuances of this transaction and that he was completely dependant upon the
plaintiff and Frederick Gertz, an attorney whose help the plaintiff had enlisted, in
implementing the necessary corporate changes. The defendant asserts that in
1991 and 1992 he was instructed by the plaintiff and Mr. Gertz to prepare a series
3
of documents that would facilitate the creation of the new corporations and would
transfer licenses and assets so that the businesses could continue to operate.
The plaintiff and Mr. Gertz provided the defendant with a list of documents to be
prepared, the compilation of which the defendant describes as a “bogus stock
transfer.” The documents represented several ongoing transfers that were made
over an extended period, including transfers of intellectual property, technology
licenses, patents and certain company rights. Some of these rights were
transferred from Macawber Engineering to the defendant, in his personal capacity;
others were transferred directly to the new corporations. The defendant asserts
that the plaintiff and Mr. Gertz advised him to backdate the documents six months
“in order to establish some kind of period that was necessary to preserve the
authenticity of the agreements.”
Although the defendant contends that he was confused about the legal
implications of preparing agreements in this manner, he drafted the documents in
accordance with the plaintiffs’ and Mr. Gertz’s instructions. However the
defendant, under the belief that the agreements were mere “contingency
documents,” did not execute any of the forms but merely presented them to the
plaintiff without having signed the documents. The defendant asserts that during
this period he had grown distrustful of the plaintiff and had begun to question the
motivation behind the request for the documents he had prepared. As a result,
when the plaintiff and Mr. Gertz requested stock certificates representing certain
stock in MSI and MacTenn, the defendant provided only copies of the original
certificates and hid the originals.
The parties engaged in an ongoing dispute in 1992 regarding the plaintiff’s
compensation for his financial consulting services. A series of letters were
exchanged in which the plaintiff expressed his understanding that he was to
receive $250,000 as payment for past services. The defendant maintained that
4
any payments to the plaintiff were conditioned upon the successful sale or
refinancing of certain company stock to investors, a contingency which did not
occur. The plaintiff disputed this, asserting that his fee was fixed. The parties
agree that no written, mutual agreement resulted from these letters. After this
exchange, relations between the parties deteriorated.
The parties also disagree about the existence of an oral agreement
whereby the plaintiff was to be compensated through a percentage of each new
corporation’s stock. The plaintiff contends that in compensation for the financial
consulting he had already provided, and in order to entice him to continue seeking
capital for the companies, the parties agreed that he would receive eighty percent
of MSI’s stock and eighty percent of MacTenn’s stock. The defendant denies
that such an oral agreement was reached. Frustrated by the ongoing disputes
and a perceived lack of adequate compensation, the plaintiff severed the parties’
relations in the summer of 1992.
On May 28, 1993, the plaintiff filed suit against Michael Crawley, MacTenn
and MSI in the Chancery Court for Blount County, asserting that he was the owner
of eighty percent of each new corporation’s stock and seeking an order to enforce
the delivery of the stock certificates. The defendant responded by denying that
the plaintiff possessed any ownership in the two corporations and asserting
certain defenses, including the statute of frauds under Tenn. Code Ann. § 47-8-
319 (Repl. 1992). Following a bench trial, the trial court, applying the rule of
practical construction, determined that the parties’ conduct indicated the existence
of an oral agreement that the plaintiff was entitled to receive the certificates in
question. The court deemed the statute of frauds to be inapplicable to these
facts.
The Court of Appeals affirmed the judgment in favor of the plaintiff,
5
declaring that clear and convincing evidence supported the trial court’s finding that
an oral agreement existed between the parties. The intermediate court then
addressed the applicability of the statute of frauds governing contracts for the sale
of securities, found at Tenn. Code Ann. § 47-8-319 (Repl. 1992). Relying on
Blasingame v. American Materials, Inc., 654 S.W.2d at 659, the Court of Appeals
determined that the stock at issue was not a “security” within the meaning of
Chapter 8 of the UCC because it was closely-held stock, and that the statute of
frauds in the chapter did not apply. After concluding that the oral agreement was
not rendered unenforceable for any other reason, the intermediate court affirmed
the judgment in favor of the plaintiff.
We granted the defendant’s application for permission to appeal in order to
determine whether the stock of a closely-held corporation is a “security” under
Tenn. Code Ann. § 47-8-102 (1992 Repl. & Supp. 1998). Because we have
determined that the Official Comments of the 1977 version of the Uniform
Commercial Code, adopted by the Tennessee General Assembly in 1986, as well
as the 1995 and 1997 amendments to the Code, overrule the reasoning in
Blasingame v. American Materials, Inc., 654 S.W .2d at 664, we hold that closely-
held stock is a security within the meaning of Chapter 8 of the UCC. Accordingly,
we conclude that the statute of frauds found at Tenn. Code Ann. § 47-8-319
(Repl. 1992) applies to the transactions in this case. Because the plaintiff cannot
produce a signed writing that comports with the statute, nor can he satisfy one of
the statutory exemptions, we reverse the judgments of the trial court and Court of
Appeals and find in favor of the defendant.
ANALYSIS
A. Standard of Review
6
We begin by articulating the applicable standard of review. Directed by
Tenn.R.App.P. 13(d), we must first make a de novo review of the trial court’s
findings of fact, accompanied by a presumption of correctness, unless the
preponderance of the evidence is otherwise. See Walker v. Saturn Corp., 986
S.W.2d 204, 207 (Tenn. 1998). In this case we are called upon to interpret a
statutory scheme. Issues of statutory construction are questions of law, see
Jordan v. Baptist Three Rivers Hosp., 984 S.W.2d 593, 599 (Tenn. 1999); Beare
Co. v. Tennessee Dep't of Revenue, 858 S.W.2d 906, 907 (Tenn.1993), and shall
be reviewed de novo without a presumption of correctness, see State v.
Levandowski, 955 S.W.2d 603, 604 (Tenn.1997); Ridings v. Ralph M. Parsons
Co., 914 S.W.2d 79, 80 (Tenn.1996).
B. The Blasingame Decision
In this Court, the defendant’s primary contention is that the Court of
Appeals’ reliance on the Blasingame case is misplaced. The defendant asserts
that to the extent that Blasingame holds that stock in a closely-held corporation is
not a “security” under the UCC, the case was statutorily overruled in 1986, when
the Tennessee General Assembly adopted the 1977 version of the UCC. We
agree with the defendant’s contention.
The plaintiff in Blasingame claimed that the defendant, American Materials,
Inc., orally promised him, in addition to other incentives, an option to purchase
one-fourth of its stock in exchange for the plaintiff’s employment with the
corporation. Although the plaintiff assented to the terms of the offer and worked
for the company for seven years, he was continually denied an opportunity to
purchase the stock. The plaintiff finally filed suit, seeking the value of the
promised shares. At trial the plaintiff attempted to introduce a letter from one of
the shareholders acknowledging the agreement concerning the stock purchase
7
option. The defendant corporation insisted that the letter was barred by the
statute of frauds governing the sale of securities, found at Tenn. Code Ann. § 47-
8-319 (1979 Repl.), and sought to amend its answer to raise that defense. This
Court assented to hearing the case in order to decide whether the stock in a close
corporation is a security under Chapter 8 of the UCC, and consequently, whether
the statute of frauds governing that chapter applied to the alleged option
agreement.
This Court determined that the defendant corporation’s stock did not meet
the definition of a “security” under the 1962 version of the Uniform Commercial
Code, adopted by the Tennessee General Assembly in 1963,2 because it was not
“of a type commonly dealt in upon securities exchanges or markets or commonly
recognized in any area in which it is issued or dealt in as a medium for
investment.” Tenn. Code Ann. § 47-8-102(1)(a)(ii) (1979 Repl.). The Court
focused on the fact that there had been only one sale of stock in the corporation’s
history and that it was clear that “there was no market available for this stock.”
Blasingame, 654 S.W.2d at 664. This Court concluded that whether the stock in
a closely-held corporation was dealt with or recognized in accordance with the
definition found at Tenn. Code Ann. § 47-8-102(1)(a)(ii) (1979 Repl.) and could be
considered a security under the UCC is a question of fact.
C. Changes in the UCC since the Blasingame Decision
In 1986 the Tennessee General Assembly adopted the 1977 version of the
UCC,3 which is the version that governs the transactions in this case. The 1977
version departed from its predecessor by creating two categories of securities -
2
See Act of March 8, 1963, ch. 81, 1963 Tenn. Pub. Acts 243.
3
See Act of April 15, 1986, ch. 737, 1986 Tenn. Pub. Acts 571.
8
certificated4 and uncertificated5. The definition of a “certificated security”
remained identical to the previous version; the definition of an “uncertificated
security” deleted the language mandating that the interest be “commonly
recognized in any area in which it is issued or dealt in as a medium for
investment.” Tenn. Code Ann. § 47-8-102(1)(b)(ii) (Supp. 1986). 6 The defendant
insists that the revised definition of a security clearly encompassed stock in
closely-held corporations, and that the General Assembly’s adoption of the 1977
UCC overruled the holding in Blasingame.
As support for this contention, the defendant points to the Official
Comments accompanying the text, in which the drafters of the 1977 UCC
specifically address the effect of the definition changes on the stock of closely-
held corporations. The comments instruct that
[i]nterests such as the stock of closely-held corporations, although
they are not actually traded upon securities exchanges, are intended
to be included within the definitions of both certificated and
uncertificated securities by the inclusion of interests ‘of a type’
commonly traded in those markets. 7
The defendant insists that the General Assembly’s adoption of this version of the
Uniform Commercial Code signals its disapproval of the holding in Blasingame
that closely held stock is not a security under the UCC unless certain factual
inquiries were satisfied.
At least one author agrees. In an article urging Tennessee courts to
expressly overrule Blasingame and hold that the stock of closely-held corporations
4
See Tenn. Code A nn. § 47-8-102(1)(a)(ii) (Supp. 1986).
5
See Tenn. Code A nn. § 47-8-102(1)(b)(ii) (Supp. 1986).
6
The O fficial Com men ts following th e section explain tha t the purpo se of this o miss ion was to
exclude certain interests, such as checking and savings accounts, that “would [otherwise] be
classified as securities under the umbrella of the om itted phrase.” See U.C.C . § 8-102 , Com men ts
to Official Text, n.2. (1977).
7
See U.C.C. § 8-102, Com ments to Official Text, n.2 (1977).
9
should be considered a security for UCC purposes, one author has emphasized
that “[t]he drafters [of the UCC], recognizing that certain courts followed the
Blasingame rationale, inserted the Comments to clarify their position. The
language ‘of a type’ is the part of the definition that allows closely held stock to fall
within its parameters.”8
While not controlling authority, the Official Comments to the UCC provide
guidance in construing statutory language and offer assistance in discerning the
intent of the legislature in adopting the statutory scheme. See Smith v. First Union
Nat’l Bank of Tennessee, 958 S.W.2d 113, 116 (Tenn. Ct. App. 1997). This
Court has looked to the Official Comments when interpreting the meaning of
certain UCC provisions. See Lane v. Doe, 767 S.W.2d 138, 140 (Tenn. 1989);
Continental Bankers Life Ins. Co. of the South v. Bank of Alamo, 578 S.W.2d 625,
630 (Tenn. 1979); International Harvester Company v. Carr, 466 S.W.2d 207, 209
(Tenn. 1971). Moreover, Tenn. Code Ann. § 47-1-102(1) (1996 Repl.) directs
that “[i]n any dispute as to the proper construction of one or more sections [of the
UCC], the Official Comments . . . shall constitute evidence of the purposes and
policies underlying such sections . . . .” Accordingly, we will refer to the Official
Comments in this case as persuasive authority in discerning legislative intent.9
Interestingly, when the General Assembly adopted the 1977 version of the
8
See Tracy A . Powell, Stock in a Closely Held Corporation: Is It a Security for Uniform
Com me rcial Code Purposes?, 42 Vand. L. Rev. 579, 602 (1989).
9
Oth er co urts h ave lo oke d to th e Of ficial C om me nts to conc lude t hat s tock in clos ely-he ld
corpor ations m eets the d efinition foun d in the UC C. See In re Hryniewicz, 222 B.R. 14, 18 (Bankr.
D. Con n. 1998) ; Allen v. Coates, 661 So .2d 879, 8 82 (Fla. D ist. Ct. App. 1 995); Haug ht v. Lante
Corp., No. 9-C -02342 , 1991 W L 1481 98, at *2-3 (N.D. Ill. July 26, 1 991); Med esc o, Inc . v. LN S Int’l,
Inc., 762 F. S upp. 920 , 923 n.4 (D . Utah 19 91); In re Domestic Fuel, 70 B.R. 455, 462 (Bankr.
S.D.N .Y. 1987); Katz v. Abrams , 549 F.S upp. 668 , 671(E.D . Penn. 19 82); Dion isi v. D eCa mp li, No.
9424, 19 91 W L 1181 85, at *3 (D el. Ch. July 2, 1 991), amended by Dion isi v. D eCa mp li,, No. 9425,
1996 W L 39680 (Del. Ch . Jan. 23, 1 996); Thompson v. Kohl, 453 S.E.2d 485, 487 (Ga. Ct. App.
1994); Unite d Ind ep. In s. Ag enc ies, In c. v. B ank of Ho nolulu , 718 P.2d 1097, 1102 (Haw. Ct. App.
1986); Bahre v. Pearl, 595 A.2d 1027, 10 35 (Me . 1991); Kenney v. Porter, 604 S.W.2d 297, 301
(Tex. C t. App. 198 0); Wam ser v. Bamberger, 305 N.W .2d 158, 162 (W is. Ct. App. 1981).
10
UCC in 1986, the official Annotated Code10 did not include the drafters’ comments
quoted above.11 The Official Comments did not appear in the official statutory
compilation until the 1992 Replacement volume, representing the Code that
governs the transactions that are the subject of this suit. When asked, the
Tennessee Code Commission could not provide an explanation as to why the
comments were omitted from the 1986 compilation,12 and we do not view their
omission as being indicative of legislative intent. At least one court has held that
a legislature’s failure to adopt the Official Comments to the UCC does not render
the comments insignificant in interpreting the Code. See In re Appeal of
Copeland, 531 F.2d 1195, 1203 n.4 (3d Cir. 1976).
The General Assembly’s intent concerning closely-held stock was clarified
later, in 1995, when it amended the definitions of both certificated securities and
uncertificated securities to include language that encompassed the stock of
closely-held corporations.13 Although the 1995 amendments are not applicable to
the facts in the instant case, we attach significance to the comments surrounding
the changes because they provide guidance as to the intent of the legislature in
adopting the 1977 version of the Code. In enacting the 1995 amendments, the
General Assembly stated that
10
Tenn. Code A nn. § 47-8-102 (Supp. 1986 ).
11
See Powell, supra note 8, at 599 n. 159.
12
Id.
13
Tenn. Code A nn. § 47-8-102(1)(a)(ii) was amen ded to provide that certificated securities were
“[e]ither stoc k of a co rporation (regard less of w hether p ublicly traded a nd withou t regard to
sha reho lders ’ agre em ents , bylaw prov isions , trans fer re strict ions or oth er su ch m atter s app licable
there to) or any ot her s hare , partic ipatio n or o ther in teres t or ob ligatio n of a type c om mo nly dea lt in
on securities exchanges or markets or commonly recognized in any area in which it is issued or
dealt in as a med ium fo r investm ent . . . .”
Tenn. Code A nn. § 47-8-102(1)(b)(ii) was amen ded to provide that uncertificated securities were
“[e]ither stoc k of a co rporation (regard less of w hether p ublicly traded a nd withou t regard to
sha reho lders ’ agre em ents , bylaw prov isions , trans fer re strict ions or oth er su ch m atter s app licable
there to) or any ot her s hare , partic ipatio n or o ther in teres t or ob ligatio n of a type c om mo nly dea lt in
on sec urities exc hange s or m arkets . . . .”
11
[t]he provisions of this act are intended to be a clarification of
existing law with respect to the definition of a ‘security’ under Article
8 of the Tennessee Uniform Commercial Code, particularly in the
context of perfection of a security interest in stock or other
investment instruments by possession of the instrument. The intent
is to remove any uncertainty created by language of the Tennessee
Supreme Court in the case, Blasingame v. American Materials, Inc.,
654 S.W.2d 659 (Tenn. 1983).14
The General Assembly apparently sought to put an end to the “uncertainty”
created by the Blasingame decision by expressly including the stock of closely-
held corporations in the definition of a security. Because the 1995 amendments
were “intended to be a clarification of existing law,”15 it is clear that the previous
version of the UCC - the version that governs this case - was also intended to
encompass closely-held stock. 16 It follows that the holding in Blasingame cannot
be reconciled with either the 1977 version of the Uniform Commercial Code nor
with the subsequent versions, including the one currently in effect.17
Although the current version of the UCC is not controlling in this case, we
find it significant to note that in 1997 the General Assembly, acting to delineate
rules for determining whether an interest is a security or merely a financial asset,
streamlined the definition of “security” found at Tenn. Code Ann. § 47-8-102 (15)
(Supp. 1998) and enacted Tenn. Code Ann. § 47-8-103 (Supp. 1998), which
provides that “[a] share or similar equity interest issued by a corporation, business
14
See Act of April 6, 1995, ch. 86, § 3, 1995 Tenn. Pub. Acts, 120; Tenn. Code Ann. § 47-8-101,
Comp iler’s Notes (1996 Repl.).
15
See id. (emphasis added).
16
The Court of Appeals observed that the Blasingame decision “apparently gave birth to the 1995
amendm ent to T.C.A. § 47-8-102,” and that even if Blasingame had been statutorily overruled by
the 1 995 am end me nt to th e UC C, “it c ann ot be applie d retr osp ective ly.” Th e Co urt of App eals
evidently considered the 1995 amendments to be the first indication that the legislature intended the
Cod e to inc lude c lose ly-held stoc k as a sec urity un der th e UC C. As we ha ve sta ted, c lose ly-held
stock came within the ambit of UCC securities in Tennessee in 1986, when the legislature adopted
the 1977 version of the UCC. The 1995 amendments merely clarified that position. Therefore the
law that closely-held stock is a UCC security controls the facts in this case.
17
The Gen eral Assemb ly’s most recent revisions to the definition of a security in Chapter 8
appea r at Ten n. Code Ann. § 47 -8-102( 15) (199 8 Supp .) and we re adop ted in 199 7. See Act of
April 14, 19 97, ch. 79 , 1997 T enn. Pu b. Acts 1 09.
12
trust, joint stock company, or similar entity is a security.”18 In the Comments to the
Official Text, the drafters explain that the provision “establishes an unconditional
rule that ordinary corporate stock is a security. That is so whether or not the
particular issue is dealt in or traded or securities exchanges or in securities
exchanges [sic] or in securities markets. Thus, shares of closely held [sic] are
Article 8 securities.”19
We believe that by adopting the 1977 version of the UCC the General
Assembly signaled its intent that the stock in closely-held corporations meet the
definition of “security” under the UCC. This intent was clarified by the legislature’s
amendments to the Code in 1995 and 1997 and by the accompanying comments.
Accordingly, we hold that the stock of closely-held corporations is a security within
the meaning of Tenn. Code Ann. § 47-8-102 (Supp. 1998). Because this
conclusion cannot be reconciled with our holding in Blasingame, that case is
overruled to the extent that it stands for the proposition that closely-held stock is
not a security within the meaning of the UCC.20
D. Other Jurisdictions
Our holding brings Tennessee within the majority of states that have
addressed this issue and have concluded that the stock of a closely-held
18
Tenn. Code A nn. § 47-8-103(a) (Supp. 1998 ).
19
Tenn. Code Ann. § 47-8-103, Comments to Official Text, n.2 (Supp. 1998) (emphasis
added).
20
Also important to note is that two decisions relied on by the Blasingame court have been
overruled . Zamore v. Whitten, 395 A.2d 435 ( Me. 1978 ) was over turne d by Bahre v. Pearl, 595
A.2d at 1035 and Kenney v. Porter, 557 S.W.2d 589 (Tex. Ct. App. 1977) was overturned by
Kenney v. Porter, 604 S.W.2d at 301-02.
13
corporation is a “security” under the UCC.21 See Giuffre Org., Ltd. v.
Euromotorsport Racing, Inc., 141 F.3d 1216, 1218 (7th Cir. 1998); In re
Hryniewicz, 222 B.R. at 18; In re Turley, 213 B.R. 857, 861 (Bankr. C.D. Cal.
1997) (holding that closely-held stock is a security under Chapter 8 of California’s
UCC) (rev’d on other grounds, 172 F.3d 671, 675 (9th Cir. 1999)(reversing on
other grounds but also finding that closely-held stock is a security for UCC
purposes); Haught v. Lante Corp., 1991 WL 148198, at *2-3; Medesco, Inc. v.
LNS Int’l, Inc., 762 F. Supp. at 923; In re Domestic Fuel Corp., 70 B.R. at 462; In
re Sandefer, 47 B.R. 133, 138 (Bankr. N.D. Ala. 1985); Data Consultants, Inc. v.
Traywick, 593 F. Supp. 447, 457 (D. Md. 1983); Katz v. Abrams, 549 F. Supp. at
671; Dionisi v. DeCampli, 1991 WL 1181850, at *3, amended by Dionisi v.
DeCampli,1996 WL 39680; Allen v. Coates, 661 So. 2d at 882; Thompson v. Kohl,
453 S.E.2d at 487; United Indep. Ins. Agencies, Inc. v. Bank of Honolulu, 718
P.2d at 1102; Cambron v. Moyer, 519 N.W.2d 381, 383 (Iowa 1994); Smith v.
Baker, 715 S.W.2d 890, 892 (Ky. Ct. App. 1986); Bahre v. Pearl, 595 A.2d at
1035; Schultz v. Schultz, No. 40681, 1981 WL 137977, at n. 7 (Mo. Ct. App. May
26,1981),rev’d on other grounds, Schultz v. Schultz, 637 S.W.2d 1, 7 (Mo. 1982);
Stancil v. Stancil, 392 S.E.2d 373, 376 (N.C. 1990); Gross v. Vogel, 81 A.D.2d
576, 577 (N.Y. App. Div. 1981); Domo v. Boulder Bluff Corp., No. 920T065, 1993
WL 527911, at *2 (Ohio Ct. App. Dec. 17, 1993); Jennison v. Jennison, 499 A.2d
302, 304 (Pa. Super. Ct. 1985); Kenney v. Porter, 604 S.W.2d at 302; Wamser v.
Bamberger, 305 N.W.2d at 162.
Other courts have indirectly espoused the majority view by finding that
Chapter 8 of the UCC applies to transfers of stock in closely-held corporations.
See Baker v. Gotz, 387 F. Supp. 1381, 1389-90 (D. Del. 1975) (finding that
21
In his con curren ce to the C ourt of Ap peals’ op inion, Judg e Susa no ass erted tha t he felt
bound by the Blasingame decision , but urged the Sup rem e Cou rt to “revisit Blas ingam e”
because he felt that “the cases espousing the majority view are arguably the better-reasoned
cases on the subjec t at hand.”
14
negotiable instruments were investment securities under Chapter 8 the UCC
because they were “of a type commonly dealt in upon securities exchanges or
markets,” irrespective of the fact that the notes in question were never publicly
traded) aff’d mem., 523 F.2d 1050 (3d Cir. 1975); J.M. Prod., Inc. v. Arkansas
Capital Corp., 910 S.W.2d 702, 708 (Ark. Ct. App. 1995) (without specifically
addressing the issue, finding that closely-held stock was a security under Chapter
8 of Arkansas’s UCC); Kiely v. St. Germain, 670 P.2d 764, 769 (Colo. 1983)
(holding that Chapter 8 of Colorado’s UCC applied to the sale of shares in a
corporation whose entire stock was held by one individual); Midfelt v. Lair, 561
P.2d 805, 812 (Kan. 1977) (holding that the statute of frauds of Chapter 8 of
Kansas’s UCC applies to the sale of 50% of bank’s stock); Morris v. People’s
Bank & Trust Co., 580 So. 2d 1037, 1040-41 (La. Ct. App. 1991) (finding that
Chapter 8 of Louisiana’s UCC applies to an option contract between former bank
president and majority stockholder of bank to repurchase a “maximum number of
shares” of stock in connection with a contract of employment and that such stock
is a security within the meaning of Chapter 8); Thomas v. Prewitt, 355 So. 2d 657,
659-60 (Miss. 1978) (holding that the statute of frauds found in Chapter 8 of
Mississippi’s UCC applies to the sale of shares of stock in a corporation
comprised of only twelve shareholders); Young v. Young, 393 S.E.2d 398, 401
(Va. 1990) (analyzing the transfer of closely-held stock as a transfer of securities
within the meaning of Chapter 8 of Virginia’s UCC but determining that common
law rules for gifts also governed the transaction and were controlling in that
instance); Yost v. Haun, 512 S.E.2d 228, 231 (W. Va. 1998) (determining that
stock pledged by James C. Haun in Haun Holdings, Inc. to his father was a
security under Chapter 8 of West Virginia’s UCC).
Only Rhode Island currently embraces the minority view that stock of
closely-held corporations is not a security for UCC purposes. This view is based
on the belief that closely-held stock is not “of a type commonly dealt in upon
15
securities exchanges” and that there is no ready market for the shares. See
Kottis v. Cerilli, 612 A.2d 661, 667 (R.I. 1992); Rhode Island Hosp. V. Collin, 368
A.2d 1225, 1227 (R.I. 1977). 22
Our formal adoption of the majority rule not only clarifies an area of
commercial law that had been marked by some confusion in Tennessee, but it
also promulgates the policies and goals underlying the UCC. One of the UCC’s
main purposes is “to make uniform the law among the various jurisdictions.” See
Tenn. Code Ann. § 47-1-102(2)(c) (1996 Repl.). Because Chapter 8 of the UCC
has been adopted by all fifty states, 23 it is important that Tennessee construe its
provisions in accordance with the growing number of states addressing this issue.
This uniformity among jurisdictions will facilitate predictability and ease in
interstate transactions.
E. Application of the Statute of Frauds
Having determined that Chapter 8 of the UCC governs this case, we now
address the defendant’s contention that the alleged agreement between the
parties does not satisfy the applicable statute of frauds, found at Tenn. Code Ann.
§ 47-8-319 (1992 Repl. & 1996 Repl.), 24 because no signed writing memorializes
its existence. The plaintiff argues that Tenn. Code Ann. § 47-8-319 (1992 Repl. &
1996 Repl.) does not render the alleged agreement unenforceable because the
22
It is no t nec ess ary fo r us to addr ess the p olicy de bate conc ernin g wh ethe r clos ely-he ld sto ck is
commonly dealt in on securities exchanges or markets or is commonly recognized as a medium for
investment becaus e the Official Comm ents accom panying our current version of the UCC have
specified that close ly-held stock is to be con sidered a secu rity under the U CC. See Tenn. Code
Ann. § 47-8-103, Com ments to Official Text, n.2 (Supp. 1998 ).
23
See Unif. Comm ercial Code, 1A U.L.A. 1 (Supp. 1999).
24
The allege d agr eem ent in this c ase is gov erne d by T enn . Cod e An n. § 4 7-8- 319 as it ex isted in
the 1992 Replacement volume. However the statute has not been amended since appearing in that
volume, and our analysis also applies to the current version of the statute, found in the 1996
Replac eme nt volum e.
16
agreement’s terms were reduced to a signed writing and, alternatively, one of the
statutory exceptions applies to prove the existence of the agreement. We
disagree with both contentions.
The statute of frauds governing Chapter 8 transactions provides, in relevant
part:
A contract for the sale of securities is not enforceable by way of
action or defense unless: (a) there is some writing signed by the
party against whom enforcement is sought or by his authorized
agent or broker sufficient to indicate that a contract has been made
for sale of a stated quantity of described securities at a defined or
stated price . . .
Tenn. Code Ann. § 47-8-319 (1992 Repl. & 1996 Repl.).
The plaintiff insists that ample proof exists, in a variety of forms, to show
that an agreement existed whereby he was to receive, as compensation for the
financial consulting services he had rendered, eighty percent of the stock in
MacTenn and eighty percent of that in MSI. As examples of this proof, the
plaintiff recalls comments by the defendant acknowledging such an agreement
and asserts that he has seen documents signed by the defendant evidencing an
agreement. However, throughout this litigation the plaintiff has failed to produce
a single writing, signed by the defendant, contemplating or effectuating the
transfer of the stock in question. Without such a writing, the requirements of
Tenn. Code Ann. § 47-8-319 (1992 Repl. & 1996 Repl.) are simply not satisfied.
In compliance with the plaintiff’s and attorney Gertz’s instructions to
prepare a series of documents that would facilitate the creation of the new
corporations, the defendant did draft a number of documents, including proposed
agreements transferring 80,000 shares of MSI stock and 80,000 of MacTenn
stock from the defendant to the plaintiff. However the defendant, apparently wary
17
of the plaintiff’s motivations concerning the transaction, and under the belief that
the documents were part of a mere contingency plan, did not sign the contracts,
but turned them over to the plaintiff without his signature. In the same manner,
when the plaintiff and Mr. Gertz requested stock certificates representing certain
shares of MSI and MacTenn, the defendant provided only copies of the
certificates and hid the originals.
The evidence in the record reveals that the dealings between the parties
were unusual, tinged with distrust and perhaps unethical motivations. An example
of this suspicion surrounds the “contingency plan,” complete with documents
back-dated six months. While we do not endorse the manner in which these
parties chose to transact their affairs, the fact remains that the record contains no
writing, signed by the defendant, that evidences an agreement for the transfer of
stocks, as required by Tenn. Code Ann. § 47-8-310 (1992 Repl. & 1996 Repl.).
The plaintiff next argues that even if no signed writing satisfies the statute
of frauds found in Chapter 8, the alleged agreement to transfer stock is
enforceable nonetheless because one of the statute’s exceptions to the writing
requirement applies in this case. The plaintiff directs us to the following exception:
A contract for the sale of securities is not enforceable by way of
action or defense unless:
* * *
the party against whom enforcement is sought admits in his
pleading, testimony or otherwise in court that a contract was
made for sale of a stated quantity of described securities at a
defined or stated price.
Tenn. Code Ann. § 47-8-319(d) (1992 Repl. & 1996 Repl.).
The plaintiff insists that this exception is satisfied because the defendant, in
18
a deposition in connection with an unrelated case,25 testified that he owned twenty
percent of the stock in MSI and that the plaintiff owned the remaining eighty
percent. When asked about this testimony during the trial in this case, the
defendant asserted that even though he had not signed the documents that would
have transferred the stocks in question, he was under the impression that the
contingency the documents were created to address was imminent, and that the
stocks would be transferred as soon as he signed the documents. Because the
documents were back-dated, he felt that he was “speaking for the future” while
testifying in the previous litigation, and so he referred to eighty percent of the stock
as belonging to the plaintiff. The defendant now insists that he never signed the
documents, after all, and that his previous testimony does not evidence an
enforceable agreement between the parties within the meaning of the statutory
exception.
After considering the plaintiff’s contention, we have determined that the
exception found at Tenn. Code Ann. § 47-8-319 (1992 Repl. & 1996 Repl.) is not
satisfied. The exception requires that the party against whom the writing is to be
enforced admit, in pleadings or otherwise in court, the existence of a contract
“made for sale of a stated quantity of described securities at a defined or stated
price.”26 As the defendant points out, his deposition testimony in unrelated
litigation merely acknowledged (incorrectly, as he contends) that the plaintiff was
the owner of eighty percent of MSI, but does not admit the existence of a contract
for a specified number of shares, nor does it discuss a price.
We have found no Tennessee cases defining the language, “a contract was
made for sale of a stated quantity of described securities at a defined or stated
25
See Bunch v. Macawber Engineering, Inc., No. 91-1374 (D. W . Penn.).
26
See Tenn. Code A nn. § 47-8-319(d) (1992 R epl. & 1996 Repl.).
19
price,” within the meaning of this exception.27 However we have determined that
the defendant’s admission does not satisfy these specific demands. The statute
of frauds’ requirements are designed to ensure that some conduct has occurred
that guarantees that an agreement has been reached that specifies the quantity
and price of the security to be transferred. Such conduct includes signing a
writing evidencing the agreement,28 delivering the security,29 or confirming, in
writing, the transfer of the security. 30 The judicial admissions exception “should be
applied only in situations where it constitutes a badge of credibility comparable in
strength to the other badges of credibility identified by the [statute of frauds].”31
No badge of credibility indicates that the parties in this case formed a
legally binding contract. Despite the defendant’s statement during deposition, in
an unrelated case, that the plaintiff was owner of eighty percent of MSI’s stock,
the plaintiff never took or attempted to take control of MSI and no original stock
certificates evidencing a transfer were delivered. While the defendant’s
statement and explanation of that statement are certainly unusual, the “admission”
simply did not acknowledge that a sale contract had been reached for “a stated
27
Cf. Keigan v. Goode, 556 N.E .2d 118, 1 19-20 (M ass. Ap p. Ct. 199 0) (holding , in a suit to
establish the existence of an oral agreement for the sale of stock, that the judicial admission
exception was not satisfied by the plaintiff’s deposition testimony ackn owledging that before
negotiations had broken down the parties had reached an agreement with regard to price and
quantity of sto ck and had dra fted a do cum ent reflec ting the agr eem ent); Oak ley v. Litt le, 272 S.E.2d
370, 374 (N.C. Ct. App. 1980) (holding that the judicial admission exce ption did not apply to prove
the existence of an oral agreement for the sale of stock, where the defendant offered his deposition
testimony acknowledging that the parties agreed to have a document transferring the stocks drafted
by an attorney, because the defendant’s references to the agreement we re “in terms of a tentative
or incomplete agreem ent” and because “[a]ny adm ission of such a contract would neces sarily have
to include a statem ent of the p rice and q uantity term s”); Nelson v. Brostoff, 689 P.2d 1056, 1060-62
(Or. Ct. App. 1984) (holding, in an action brought by buyers for specific performance of a contract
for the sale of stock, that the judicial admission exception was not satisfied by the seller’s deposition
testimony admitting that after meeting with the buyer he shook the buyer’s hand and stated “we’ve
got a deal” because the statement, even when taken in context with the preceding negotiations
described by the seller in his deposition, established neither a quantity nor price for the stocks).
28
See Tenn. Code A nn. § 47-8-319(a) (1992 R epl. & 1996 Repl.).
29
See Tenn. Code A nn. § 47-8-319(b) (1992 R epl. & 1996 Repl.).
30
See Tenn. Code A nn. § 47-8-319(c) (1992 R epl. & 1996 Repl.).
31
See Michae l J. Herbe rt, Procedure and Promise: Rethinking the Admissions Exception to the
Statute of Frauds Under U.C.C. Article 2, 2A, And 8, 45 Okla. L. Rev. 203, 209 (1992).
20
quantity of described securities at a defined or stated price.”
The intermediate court agreed with the trial court that the record contains
ample evidence to prove that the parties reached an oral agreement for the sale of
stock. We disagree. As we have already made clear, aside from the lack of a
signed writing evidencing an agreement, the parties’ actions do not indicate that a
contract had been formed. The plaintiff never exercised or attempted to exercise
any controlling interest in MSI and / or MacTenn. No certificates evidencing a
transfer were delivered. In fact, after exchanging a series of letters that each
party concedes did not ripen into an agreement, the parties parted ways.
CONCLUSION
In sum, we hold that closely-held stock is a security within the meaning of
the UCC’s Chapter 8, and that the closely-held stock at issue in this case is
governed by Chapter 8. Because the plaintiff cannot produce a signed writing
that comports with the statute of frauds found at Tenn. Code Ann. § 47-8-319
(1992 Repl. & 1996 Repl.), nor can he satisfy one of the statutory exemptions, we
reverse the judgments of the lower courts and dismiss this cause. Costs of this
appeal taxed against the plaintiff, Stephen A. Wakefield, for which execution may
issue if necessary.
______________________________________
FRANK F. DROWOTA, III,
JUSTICE
21
Concur:
Anderson, C. J.
Birch, Barker, JJ, Byers, Sp.J.
22