Sonitrol Financial Corp. v. Oklahoma City Abstract & Title Co. (In re Yeary)

Citations: 55 F.3d 504; 1995 WL 297489Docket: Nos. 94-6109, 94-6190

Court: Court of Appeals for the Tenth Circuit; May 16, 1995; Federal Appellate Court

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James Harrison Yeary and Linda Jensen Yeary appealed a district court ruling that determined 10,500 shares of stock were not part of their bankruptcy estate. The court had granted summary judgment to Sonitrol Financial Corporation (SFC), interpreting a settlement agreement as a conditional equitable conveyance of the stock to SFC, which allegedly took effect before the Yearys' bankruptcy. The Yearys contended that the agreement only granted SFC a security interest in the stock. The appellate court agreed with the Yearys and reversed the lower court's decision.

The Yearys founded Sonitrol of Oklahoma City (SOKC) in 1979 and have acted as stockholders, officers, and directors. In 1986, Sonitrol Corporation and SFC sued SOKC for breach of a franchise agreement, breach of an equipment lease, and failure to repay a note. The district court granted partial summary judgment against SOKC regarding the equipment lease. Following this judgment, the parties entered a settlement agreement where SFC refrained from executing the judgment in exchange for two promissory notes from SOKC, signed by James Yeary.

The settlement required the Yearys to execute a Stock Pledge Agreement to pledge their stock in SOKC as security for the promissory notes. The agreement specifically granted SFC a security interest in the 10,500 shares, constituting 100% of SOKC's stock. Both Yearys signed the Stock Pledge Agreement, with James signing also as SOKC's President. The agreement mandated transferring the stock certificate and a Stock Power to an escrow agent. The Stock Power indicated a transfer of the shares to SFC upon default under the agreements. The parties established an Escrow Agreement detailing conditions for transferring the stock certificate back to SOKC or to SFC based on compliance with the Settlement Agreement and the Promissory Notes. Both Yearys signed the Escrow Agreement in their individual capacities, along with James as President of SOKC.

SOKC made timely payments on Note 1 but informed SFC on December 30 and 31, 1992, that it could not pay Note 2 by the January 1, 1993, due date. SFC subsequently notified the escrow agent of SOKC's default. On the same day, the Yearys filed for Chapter 13 bankruptcy, listing their SOKC stock as an asset and proposing to pay the outstanding amount on Note 2. SFC rejected this proposal and initiated an adversary proceeding, arguing that the stock was not part of the Yearys' bankruptcy estate as it had ceased to be their property before the filing. The escrow agent was included as a defendant due to its possession of the stock certificate.

The district court withdrew the case from bankruptcy court and the parties filed cross-motions for summary judgment. Citing Oklahoma law, the court determined that the escrow agreement transferred equitable interest in the stock to the recipient, leaving the Yearys with only legal title. The court concluded that the stock was not part of the Yearys' bankruptcy estate since their control over it ended with the escrow agreement in 1988. Additionally, SOKC's notification of non-payment extinguished the Yearys' legal interest in the stock before their bankruptcy filing.

The court granted SFC's summary judgment motion and ordered the transfer of stock certificates to SFC. Following this, the Yearys sought to stay the enforcement of the order, which the district court conditioned on posting a $1.5 million bond. The unpaid balance on Note 2 was approximately $150,000, while the Yearys valued the stock at $1.5 million. The bond amount was later reduced to $150,000, with the clerk of the district court tasked with maintaining custody of the stock pending appeal. The appellate court reviewed the summary judgment de novo and concluded that the documents indicated an intent to create a security interest in the stock, leading to a reversal and remand. The UCC defines a security interest as an interest in personal property securing payment or performance of an obligation, with the parties' intent playing a critical role in determining such interests.

For a court to ascertain the intent of the parties legally, the relevant documents must be clear. The Settlement Agreement stipulates that the Yearys’ SOKC stock acts as security for promissory note payments. The Stock Pledge Agreement explicitly grants SONITROL a security interest in 10,500 shares of SOKC stock as collateral for SOKC’s obligations. The Escrow Agreement mandates that the escrow agent transfer the stock certificates to SFC upon SOKC’s default or return them to SOKC upon fulfilling its obligations. This language demonstrates the parties’ intent to provide SFC with a security interest in the stock to ensure payment.

The lower court, however, concluded that the documents did not create a security interest but rather an equitable transfer, citing that the Yearys placed their stock certificates into escrow, which under Oklahoma law, conveys equitable interest to the recipient. The court relied on precedents related to real property, despite the Yearys arguing these cases were not applicable. The appellate view contends that Oklahoma law distinguishes the handling of stocks in escrow. According to the UCC, a security interest in a security is only enforceable if transferred to the secured party or their designated person. Possession by the escrow agent, as instructed by the Escrow Agreement, satisfies this requirement.

The presence of the escrow agent holding the SOKC stock fulfills the perfection of security interest under section 9-305, reinforcing the intent to establish a security interest, rather than nullifying the explicit language within the documents. SFC argues that Article Nine of the UCC does not apply to this agreement since it involves rights represented by judgments, specifically citing section 9-104(g) regarding assignment exclusions. However, it remains ambiguous whether this exclusion encompasses consent judgments as well as court-rendered judgments.

The Yearys did not list the judgments as part of their bankruptcy estate, leading to the district court's focus solely on the SOKC stock, which falls under Article Nine of the U.C.C. The court concluded that relevant documents clearly intended to grant SFC a security interest in the SOKC stock. The district court mistakenly classified the agreement as an equitable transfer, thus excluding the SOKC stock from the Yearys' bankruptcy estate, despite it being subject to SFC’s security interest. Under 11 U.S.C. § 541(a)(1), all legal or equitable interests of the debtor at the case's commencement are estate property, including property with a secured creditor's interest. Although SFC is a creditor of SOKC and not directly of the Yearys, the stock pledged by the Yearys as security for promissory notes constitutes property of their personal bankruptcy estate. The court reversed and remanded the case for further proceedings, noting that SFC's claim regarding the Yearys' ability to pay the note was irrelevant. The district court acknowledged that had the stock not been in escrow, the interests might have been viewed more favorably for the Yearys. However, the Escrow Agreement creates a distinct arrangement from a simple security interest. The court found that the precedent set in Carlson v. Farmers Home Admin. was not applicable, as it involved a debtor placing funds in escrow without securing any other obligations, unlike the Yearys, who used the escrowed stocks to secure notes. Despite the district court's view of the Yearys' actions as an anticipatory breach, the stocks had not been transferred, and any potential transfer is subject to the automatic stay provisions of 11 U.S.C. § 362(a).