
    Angelo FERRARO vs. John J. PATOTA
    No. 309
    District Court/Bristol, ss. Appellate Division/Southern District Trial Court of the Commonwealth of Massachusetts
    January 11, 1983
    
      Richard P. St. Pierre, Esq., counsel for plaintiff.
    Kenneth G. Littman, Esq., counsel for defendant.
   DECISION AND ORDER

This cause came on to and was heard in uie Appellate Division for the Southern District sitting at Dedham upon Report from the District Court Department, Fall River Division and it is found and decided that there was prejudicial error.

It is hereby

ORDERED: That the Clerk of the District Court Department, Fall River Division make the following entry in said case on the docket of said Court, namely; JUDGMENT FOR DEFENDANT VACATED; CASE REMANDED TO THE TRIAL COURT FOR A NEW TRIAL.

Date: January 11,1983

Richard O. Staff, Iustice

Charles E. Black, Justice

Opinion filed herewith.

Patricia D. Mlnotti, Clerk

OPINION

Black, J.

This is an action ^brought on February 21, 1979, by the plaintiff, Angelo Ferraro, against the defendant, John J. Patota, to recover monies advanced toward the purchase of a corporation known as “Sal’s Inc.,” and for losses occasioned by the plaintiff’s operating the business of the corporation.

The defendant failed to file a timely answer, and a default judgment was entered on May 4, 1979, with the execution bring issued on May 17, 1979.. On May 24, 1979, the defendant filed a Motion For Relief From J udgment, which was allowed on June 7, 1979. Judgment was vacated and the execution superseded. On that date, the defendant also filed a Motion To Join A Third. Party Defendant, namely Milton R. Souza. This motion was allowed. The defendant, Patota, answered by denying the plaintiff’s claim and by counter-claiming for rent, Federal and State taxes, and other operating expenses. The third-party defendant, Milton R. Souza, filed a Motion to Dismiss on August 7, 1979, which was denied on August 30, 1979.

A trial was held on December 18, 1979, at the close of which the plaintiff filed the following requests for rulings before final argument:

1. Plaintiff advanced to defendant the sum of $9,800 towards purchase of capital stock of corporation ($3,800 in cash and $6,000 by check). (Denied.)'

2. That said agreement to purchase called for a transfer of stock free from all encumbrances. (Granted.)

3. That said stock was encumbered by tax liens at the time of said agreement until early 1974. (Granted.)

4. That said stock was never transferred to plaintiff. (Granted.)

5. That plaintiff acted as a mere

custodian of the business during the period November 3, 1973 through December 28. 1973. (Denied.) j

6. That plaintiff, on almost a daily basis, from November 7, 1973 through 1974 demanded a return of his advances. (Denied.)

7. Asa matter of law, where defendant' breached his agreement to transfer unencumbered stock, and never made any tender, plaintiff is entitled to a return of his deposit plus interest from the date of deposit. (Denied.)

8. As a matter of law, if plaintiff was custodian or agent of defendant in operating said business, plaintiff is due his losses in said operation. (Granted.)

During the trial, there was evidence tending to show that the plaintiff agreed to purchase the capital stock of Sal’s Inc., a Massachusetts corporation apparently engaged in the restaurant business, from the defendant, Patota, free and clear from all encumbrances. The plaintiff paid the defendant $6,000.00 as. a down payment for the said stock. Shortly thereafter, a U.C.C. recording was discovered in favor of a Mr. Souza (presumably the third-party defendant, although the record is not clear on the point), against the equipment of the restaurant, and another encumbrance in the form of a tax lien in favor of the Commonwealth of Massachusetts came to light. The tax lien had been imposed during the time when a previous owner was operating the restaurant. (Whether that owner was the defendant, Souza, or someone else is not stated in the report.) The defendant was ready, willing, and able to discharge all liens and encumbrances and offered to do so, but the plaintiff rejected the defendant’s offer to remove all liens and encumbrances and insisted on the rescission'of the sale.

The defendant never; tendered or physically delivered the stock certificates of the corporation, to theplaintiff, nor did he at any time transfer the liquor or common victualler’s license to the plaintiff. Nevertheless, the plaintiff assumed control and the entire management of the business on November 3, 1973, the date on which the keys were turned over to the plaintiff, and until December 28, 1973, the plaintiff purchased all supplies required in the conduct of the restaurant business, paid rent to the defendant at the rate of $880.00 per month, paid the four employees of the business, and considered all receipts from the business as his own. As of December 28, 1973, the capital stock was encumbered, the encumbrance being removed by the defendant in February of 1974.

The court found for the defendant, Patota; and for the plaintiff, Patota, in the counterclaim. A Motion For A New Trial was then filed by the plaintiff. This motion jvas denied on June 23, 1981. An appeal was duly taken.

In our opinion, the decision of the trial judge cannot stand for a multitude of reasons. The first is the inconsistency between the court’s apparent findings of fact and rulings of law. (Because several of the requested “rulings of Law” actually call for findings of fact, we treat the judge’s actions thereon as his findings.) The trial judge found as a fact that the agreement between the parties called for a transfer of the corporate stock free and clear from all encumbrances, that the stock was encumbered by tax liens at the time of the agreement and remained so until early 1974, and that the stock was never transferred to the plaintiff. The court also found that the parties intended that the sale be consummated and title pass on November 3, 1973. In light of these findings, it is difficult to understand the basis upon which the trial judge could rule that, as a matter of law, the plaintiff was not entitled to a return of his deposit. Parenthetically, it might be noted that ordinarily where there is an apparent discrepancy between the findings of fact and rulings of law, the matter should be brought to the attention of the trial judge by means of an appropriate motion in order to accord him an opportunity to reconsider the matter (see Smith v. H. P. Hood & Sons, Inc., 52 Mass. App. Dec. 10, 15 (1973) ).

More importantly, perhaps, is the fact that implicit in the trial court’s ruling No. 7 is what we perceive to be an erroneous ruling of law. Although the report of the trial judge (erroneously entitled “Draft Report”) contains no discussion of the legal principles applied by the court in its finding for the defendant, the case clearly raises an issue on which, we find no Massachusetts authority directly in point. That issue is whether the title to the corporation known as “Sal’s Inc.” could have passed without physical delivery of the stock to the plaintiff. In this connection, we note that G.L. c. 106, secs. 8-301 and 8-313, require physical delivery of the certificate of stock in order to effectively transfer ownership of a corporation. The defendant argues that the transaction in question is not governed by Article 8 of the U.C.C. since stock in a closely held corporation is not a “security” within the meaning of G.L. c. 106, sec. 102(l)(a). Although the trial judge did not address the question whether Sal’s Inc., is a closely held corporation, it seems a fair inference that it was.

A review of case authorities in other jurisdictions discloses a split on the question whether stock in a close corporation is a “security” within the meaning of sec. 8-102(l)(a). Although the official text of sec. 8-102 was revised in 1977, the revised text appears to have been adopted only in Connecticut, Minnesota, and West Virginia. (See, T. Quinn, Uniform Commercial Code Commentary and Law Digest, 1982 Cum. Supp. No. 1 at S8-12). Massachusetts still has the 1973 version which defines a “security” as an instrument which (i) is issued in bearer or registered form; and (ii) is 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; and (iii) is either one of a class or series or by its terms is divisible into a class or series of instruments; and (iv) evidences a share, participation or other interest in property or in an enterprise or evidences an obligation of the issuer.”

The 1977 revision of sec. 8-102 introduces a . distinction between “certificated” and “uncertificated” securities. The official comment to the new text states that “(i)nterests such as 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.”

We note that there are some cases which hold that shares in certain close corporations are not “securities” within the meaning of sec. 8-102(l)(a). For example, in Silverman v. Alcoa Plaza Associates, 37 App. Div. 2d 166, 323 N.Y.S. 2d 39, 9 UCC Rep. 429 (1971), rev’g 8 UCC Rep. 57 (Sup. Ct. 1970), the Court held that cooperative apartment stock did not fall within the definition of sec. 8-102.

Similarly, where the defendant transferred title to his home from himself to a corporation of which he was the sole stockholder, the stock was held not to fall within the definitions in sec. 8-102(1), even though some stocks could be properly so classified. Rhode Island Hosp. v. Collins, 368 A.2d 1225, 21 UCC Rep. 619 (R.I. 1977). Also, in Zamore v. Whitten, 395 A2d 435, 25 UCC Rep. 1245 (ME 1978), the Court h'dd ¡h a i'i'ic) ir. j closely held family < otpcmiK v ■' • •. f e “security*' beixins- il W nos ton dealt in upon '.■eouiib?;, e*r.'b:ui; >■-. - market or recognized v- « nu* h,'- -- investment. In Gulf and .,«7 Investment v. Alten, ■>??. a. k' h.N-.\ 33 UCC Rep. 311 (pa. Sut.-er, '"i. 1 ' t court held Urn sOne'- ‘v corporation pi la» ::>-rd .' ' securities within n-s ,. ■ 102(1 ){ul ■ commonly b.:; » . • r;«-,. ■ . , exchanges or markets i» : - medium lor investum-ii.

The vast majoníy oí com-..1, . v follow what we believe n,. '< •, ¡7. . reasoned rule and bold ;!uu !> • ; close corporation arc “■.eum-b. v . the meaning of s<v. <7 KC' 17 . federal bankrupicy court, - bound in the paroco•••'>•-• ■ ■ Zamore v, Whittea «•',•*•>« ■■ >. criticized it and reí usen 10 *d **w. ■- • shares that were not “bsuni-, before their tra «sfer 3,1'^ , Kontaratos. H.b: v- ¡ .. 1124, 1129-1131 <D.

In Wamser v. Banth*2s. 637,305 N.W 23 153.3/ f •< v i- - 1 (1981). the Cuurí iidd shd ■' single nature, commo'ib h> -3 . v iu the seller's uane- rvetr. = . .; b family-owned corporal*: ; • transfer of whb'h the r;-5b- . personal limitation thm if 9. c 3 to someone who would gcc •- i t everyone or. die pavo -9 ■ .' corporation vo.d.l * „<I•. • . • , nendln-b a ' : rc,j n--3 > ' 1020)uk '■ he * -uut ¡ciOv . •: on the offick’i •; -no., n ' - r ' revision. Similar ly, in Kern:-, »\ .1 , 557 S.W.2d 589. 22 UCC Rep. NO GU*. Civ. App. 19“7» ’.be Cv.'p rc>t:a grant oí :.mnis- • -/> ;mí*> ir m. . - '3 question- wueu.a corporation H-i,- i.; ■ ' fact and on r ,■ ..vm; o! 7v n case, 604 S.W.A '«• O .. , ■ :• d (1980), upheld » )c:.i . . -n a . i the closely held in >ic c' >i a "security” for purpose of Article 8. The 'ouri, like the Wamser Court, also relied u the draftsmen’s comments to the 1977 r;-vision, although Texas had not adopted die 1977 amendment. Again in Gross v. Vogel, 437 N.Y.S.2d 431, 31 UCC Rep. 224 (App. Div. 1981), the Court held that 1 be shares of stock in a close corporation ;**o “securities” and that an employment sv.nlnicf exchanging services for shares of /vci. constituted a sales of securities >3;bin the meaning of sec. 8-319.

. vares in a closely held corporation ihat were in registered form and were dealt in as a medium-of investment by .mmc two dozen persons who had bought .-nd sold the stock were also held to be 1 ’securities” under sec. 8-102 in Schultz v. Schultz, 31 UCC Rep. 1442 (Mo. Ct. App. 1981). We would note that the “'port in this case indicates that there was ¡ least one previous owner of the • ■'.•iiiumtnl, It is not stated whether this - necio as owner owned the stock in nuradon. In Pantel v. Becker, 391 »'.Y.S.2d 325, 21 UCC Rep. 274 (Sup. Ct. 1), the Com! ruled that stock in a ' -. -luy held corporation did constitute ‘sc. oi ties’’ under sec. 8-102(1 )(a), . tali oy “(I)t might be argued that rvbPiS exchanges or markets seldom, if ver, d eel in the stock of any corporation bid) has fewer than four stockholders nd whose only substantial asset is a .vrueture housing but two professional mi ices. However, even the adoption of bis strained construction of the statute . ould not exclude this stock from the mtutory definition because such stock is ■ Tiainlv commonly recognized by many '-copie as a medium for investment.’’ 21 ■'CC Hep. at 275. In another New York case, the Court said, “The definition of a security under sec. 8-102 was intended to include all shares of stocks not only those 3. alt with by security brokers and their cc-itomers. The fact that there may be limitations on the transfer of the stock is cn material.” Previti v. Rubenstein, 3 UCC Rep. 882, 883 (N.Y. Sup. Ct. 1966). in mi Oklahoma case, very similar to tb”; % the Cour held that the capital stock of a restaurant constituted “a security’ ’ within the meaning of the act. It is not clear from the opinion whether the stock was in a closely-held corporation, although it may be assumed that it was. Fox v. Overton, 15 UCC Rep. 483 (Okla. Ct. App. 1974).

The only Massachusetts case we are aware of that bears on the point is E. H. Hinds, Inc. v. Coolidge Bank & Trust Co., 6 Mass. App. Ct. 5 (1978), in which the Court held that debentures issued by a bank to its directors and indorsed by them in blank and delivered to creditors as collateral security for loans were investment securities within the meaning of G.L. c. 106, sec. 8-102(l)(a), even though the debentures contained certain retirement restrictions. The Court said, “An instrument can qualify as a “security” under (G.L. c. 106, sec. 8-102(1 )(a))(ii) even if it has never been traded on any securities exchange or market; the question is whether a particular instrument ‘is of a type’ which is commonly dealt in upon securities exchanges or markets or ‘is of a type’ commonly recognized as a medium for investment in any area in which it is issued or dealt in.” Id. at 10 (emphasis in the original). Significantly, this case was cited by the Wisconsin Court in Warns», supra, in support of its holding. 32 UCC Rep. at 286 n. 11. The comment to the 1977 revision, which clarifies the drafters’ intent (albeit with hindsight) that closely held stock is a “security” within the meaning of the act, uses the same approach that the Appeals Court did in E. H. Hinds, Inc.

We also note that in Donahue v. Rodd Electrotype Co. of New Eng., Inc., 367 Mass. 578, 586 (1975), the Supreme Judicial Court said that . a close corporation was “typified by: (1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.” (Emphasis added.) Even if there is no ready market for the stock, it still may be “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 . . .” sec. 8-102(l)(a)(ii) (emphasis added).

The analysis used in E. H. Hinds, Inc., read in the light of the 1977 comment leads us to conclude that the shares here in question did constitute “securities” within the meaning of G.L. c. 1%, sec. 8-102(l)(a). This conclusion is in accord with the weight of authority elsewhere.

Although there are other procedural matters that could be addressed, we believe it unnecessary to do so in light of our decision to order a new trial. We should point out, however, that the report fails to comply with Dist./Mun. Cts. R. Civ. P. 64(c)(2) in that it fails to state that it contains all the evidence material to the questions reported as required by the rule. While its omission is not necessarily fatal to consideration of the appeal (Sutherland v. McGee, 329 Mass. 530 (1952), Comfort Air Systems, Inc. v. Cacopardo, 370 Mass. 255 (1976) ), it is essential that the draft report state that it contains all the evidence material to the questions being reported. Otherwise, there is a possibility that evidence not in the report has in fact been introduced in the trial sufficient to justify a result opposite to that reached by the trial judge. Conversely, the result reached by the trial judge could be supported by evidence not reported (see McGlinchey v. Tomasello, 43 Mass. App. Dec. 206 (1969), MacLellan v. Ace Recording Studios, Inc., 52 Mass. App. Dec. 143 (1973), Haverhill Builders Supply, Inc. v. Ortins, 58 Mass. App. Dec. 65 (1976), Cincevich v. Patronski, 304 Mass. 679 (1939)).

The judgment for the defendant is vacated, and the case is remanded to the trial court for a new trial.

So ordered,

Richard O. Staff, Justice

Charles E. Black, Justice

This certifies that this is the Opinion of the Appellate Division in this cause.

Patricia D. Minotti, Clerk 
      
       J iidge Rider participated as a member of the panel which heard oral argument but retired prior to the promulgation of this Opinion.
     