A Louisiana bankruptcy court, in the Karcredit LLC case, recently considered a case involving two lenders and one stock certificate. At the heart of the Karcredit case was a party who relied on a stock certificate to satisfy loan duties owed to another party. After a replacement certificate was reissued, one party relied on this replacement to receive a separate loan from a second lender. The court found that the corporation that issued the share was liable to the first lender due to Uniform Commercial Code Article 8, which was adopted in Louisiana. This article both examines this case as well as the potential impact it might have for debtors and creditors.

The Facts Behind the Case

In 2006, a borrower guaranteed a loan of approximately $600,000 by Caldwell Bank & Trustee Company to the entity that was owed by the first lender. The borrower offered stock shares to Caldwell as a means to secure the loan.

In accordance with the Uniform Commercial Code Section 9, secured parties can obtain security interests in property by filing the corresponding Uniform Commercial Code documents. 

In accordance with these terms, only one entity at any one time can perfect an agreement through stock certificate ownership. Caldwell, in this case, obtained a note under Certificate 253. Caldwell later perfected this property’s security interest.

Meanwhile, Homeland Bancshares Incorporated joined with Homeland Interim Company. The joining of these two entities resulted in the cancellation of Homeland Bancshares Incorporated’s stock as well as Homeland’s stock issuance. This venture contained a term that the only entity holding existing Homeland certificates was able to surrender the certificates to obtain replacement shares. 

The borrower then signed paperwork addressing a lost stock. After falsely alleging that he lost the stock certificate, the borrower requested a duplicate certificate. Subsequently, Homeland cancelled the certificate while Ward issued a second certificate. Caldwell then made other secured loans without being aware that the first stock certification had been cancelled. 

While interacting with Caldwell, the borrower guaranteed loans issued by Cross Keys Bank to other companies including Karcredit. In 2019, Homeland’s president issued a letter to the president of Caldwell stating the stock’s value which let Caldwell valuate the stock that the borrower had used as collateral. Shortly after, the president of Homeland emailed Cross Keys for the same purpose. In 2019, the borrower signed an agreement that granted Cross Keys a security interest in the stock certificate.

The borrower also delivered possession of Certificate 495 to Cross Keys Bank. At that point, the borrower had pledged the same stock on two separate occasions to two separate parties.

Karcredit LLC later defaulted on the loan, which caused Cross Keys Bank to call the loan.

Cross Keys Bank later pursued legal action against Karcredit and Karcreditor’s guarantors to obtain a promissory note to enforce the applicable commercial guarantees. Caldwell later intervened in this case and argued it had greater priority than Cross Key involving the collateral.

Because the stock was pledged twice, Caldwell lost its priority interest in the stock. While the first certificate was canceled, the second certificate was delivered to Cross Keys because only one secured party is permitted by law to have control of the stock through possession of the original certificate. At this time, Caldwell Bank’s possession also became unsecured.

The Role of Uniform Commercial Code Section 9

Borrowers are afforded various protections under the law. Creditors, however, need protection in case of a loan default. Section 9 deals with secured transactions, which involve transactions in which a borrower agrees to offer personal property for security against a debt. 

The primary purpose behind Article 9 is to help lenders become secured creditors by regulating security interests in personal property as collateral for outstanding debts. Consequently, if a debtor defaults on a payment or performing certain duties, a creditor still can receive due compensation from the seizure or sale of the debtor’s personal property. Collateral for personal property can include equipment, fixtures, bonds, or stocks. As a result, Article 9 helps to make sure that debtors and creditors are treated fairly.

The Rationale Behind the Court’s Decision

The bankruptcy court in this case found that Homeland breached its merger agreement and other provisions found in certificate 253. Under the merger’s terms, only entities who held Homeland stock could surrender the certificate. Consequently, the court found that Homeland breached its duty to Caldwell Bank when it issued Certificate 495 to Ward. 

The court also found that Certificate 253 was transferable only on Corporate books either by the holder in person or attorney following the certificate’s surrender. The court determined that Homeland breached Certificate 253’s express provisions by issuing Certificate 495 without necessitating that either Caldwell Bank or Ward surrender Certificate 253.

The court held that Homeland was responsible under Uniform Commercial Code and that Caldwell as well as Cross Keys constituted protected purchasers who gave value, lacked notice of a claim against their interest, and took possession of the security interest despite the certificate. 

The court held that Uniform Commercial Code Article 8 dictates situations where security certificates are lost or destroyed. In cases like this one, the court found that Homeland is required to honor and register the two certificates provided an overissue does not occur. Consequently, the court found that Homeland was liable to Caldwell for the amount that the borrower owed to Caldwell Bank. 

The Case’s Ramifications for Issuers and Lenders

This case likely has substantial repercussions for issuers as well as lenders. Among other implications, lenders must remember to stay alert to third-party transactions as well as comply with duties related to shares of stock certificates.

The case also has significant repercussions for lenders. Lenders must make sure to promptly notify issuers that lenders represent secured parties when it comes to issuer’s shares. Lenders also must make sure to work on interests connected with assets by filling the appropriate work to take ownership of these interests. 

Obtain the Assistance of an Experienced Bankruptcy Lawyer

Failure to understand one of the many nuanced areas of bankruptcy can leave a person facing countless complications. If you or a loved one needs help navigating the bankruptcy process, obtain the assistance of a knowledgeable bankruptcy attorney. Contact attorney Melanie Tavare today to schedule a free initial case evaluation.