F.B.I. Farms, Inc. v. Moore
798 N.E.2d 440 (2003)
Rule of Law:
Corporate share transfer restrictions requiring director approval are generally reasonable and enforceable in a closely-held corporation, and while they cannot prevent a creditor from foreclosing on the shares, a purchaser at a foreclosure sale who has notice of the restrictions acquires the shares subject to them.
Facts:
- F.B.I. Farms, Inc., was formed in 1976 by the Burger family, including their daughter Linda and her then-husband, Birchell Moore.
- Linda and Moore contributed a farm to the corporation in exchange for F.B.I. Farms stock.
- In 1977, the F.B.I. Farms Board of Directors, which included Moore, adopted restrictions on share transfers.
- These restrictions required Board approval for any transfer and gave the corporation and other shareholders a right of first refusal, ultimately providing that shares could only be sold to a 'blood member of the family.'
- In 1982, Linda and Moore divorced.
- As part of the dissolution, Linda was awarded all the F.B.I. shares, and Moore was awarded a monetary judgment secured by a lien on those shares.
- Linda's judgment debt to Moore remained unsatisfied for many years.
Procedural Posture:
- Moore's judgment against Linda remained unsatisfied, so he obtained a writ of execution to enforce his lien against her F.B.I. Farms shares.
- At a sheriff's sale in February 2000, Moore purchased all of Linda's shares.
- Moore filed a lawsuit in the trial court against F.B.I. Farms, seeking a declaratory judgment that the share transfer restrictions were invalid and he owned the shares free of any restrictions.
- The trial court granted partial summary judgment for Moore, ruling that the restrictions requiring director approval and limiting transfers to 'blood members' were 'manifestly unreasonable' and unenforceable.
- F.B.I. Farms (appellant) appealed to the Indiana Court of Appeals, the state's intermediate appellate court.
- The Court of Appeals affirmed the trial court's judgment that the restrictions were unreasonable, holding they did not apply to involuntary transfers like a sheriff's sale.
- F.B.I. Farms (petitioner) sought, and was granted, transfer to the Indiana Supreme Court.
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Issue:
Are corporate share transfer restrictions that require director approval and limit transfers to 'blood members' of a family manifestly unreasonable and therefore unenforceable against a creditor who purchases the shares at a foreclosure sale with notice of the restrictions?
Opinions:
Majority - Boehm, J.
No. Corporate share transfer restrictions requiring director approval or limiting transfers to family members are not manifestly unreasonable and remain enforceable against a purchaser with notice, even if that purchaser is a creditor who acquired the shares at a foreclosure sale. The court reasoned that Indiana statutes explicitly permit share transfer restrictions that serve a reasonable purpose, such as maintaining control and ownership within a family in a closely-held corporation. The reasonableness of such a restriction must be evaluated at the time of its adoption, not in light of subsequent events like personal disputes between the parties. While public policy prevents such restrictions from completely blocking a creditor's right to foreclose on the shares as collateral, this does not extinguish the restrictions. A creditor or other purchaser at a foreclosure sale who has notice of the restrictions acquires no greater rights than the debtor-shareholder possessed; therefore, they take ownership of the shares subject to the pre-existing, valid restrictions.
Analysis:
This decision clarifies the balance between enforcing private ordering in closely-held corporations and protecting the rights of third-party creditors. It establishes that share transfer restrictions cannot be used to make shares judgment-proof, thus preserving a creditor's ability to execute a lien. However, the ruling strongly affirms the validity of such restrictions by having them 'run with the shares,' binding any subsequent purchaser with notice. This provides stability and predictability for family businesses and other close corporations, allowing them to maintain their intended ownership structure even when faced with a shareholder's financial distress or an involuntary transfer.
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