Article courtesy of Jeff Dutson of King & Spalding
The US Bankruptcy Court for the Western District of Louisiana held a corporate issuer of stock used as collateral for two loans liable to the first lender for breaching the express provisions of the terms of its merger agreement.
In re: Karcredit, LLC., 630 B.R. 14 (Bankr. W.D. La. 2021).
In 2006, Caldwell Bank & Trust Company made a loan of $683,825.00 to a company owned by Ronnie Ward. Ward pledged stock shares in Homeland Bancshares, Inc. to Caldwell to secure the loan. Caldwell took possession of the original stock shares, represented by Certificate 253, thereby perfecting its interest in the stock through possession.
Following the loan, Homeland Bancshares, Inc. merged with Homeland Interim Company. The merger agreement required the cancellation of all Homeland Bancshares, Inc. and the reissuance of stock under the newly formed entity. According to both Certificate 253 and the merger agreement, only the holder of the stock could surrender the stock for replacement shares. Although he was no longer in physical possession of the stock, as it was being held by Caldwell, Ward signed a lost stock affidavit falsely claiming that he lost Certificate 253 and requesting a replacement. In response, Homeland canceled Certificate 253 and issued Ward Certificate 495 as a replacement. Caldwell Bank was unaware at this time that Certificate 253 had been cancelled.
In 2012, a company owned by Ward, Karcredit LLC, obtained a loan from Cross Keys Bank and subsequently signed a security agreement granting Cross Keys Bank a security interest in the Certificate 495 stock. In 2019, the president of Homeland sent the president of Caldwell bank an email providing the value of the stock pledged as collateral for loans tied to Ward’s companies. The President of Homeland sent a similar email to Cross Keys Bank with the same information. The situation came to a head when Ward’s company defaulted on a loan made by Cross Keys Bank. Cross Keys Bank filed suit against Karcredit, LLC and Caldwell Bank Intervened.
Due to not having possession Certificate 495 and failing to file a UCC-1 financing statement for Certificate 253, Caldwell Bank went from secured to unsecured as to the double pledged stock. Homeland breached its obligations to Caldwell Bank by issuing the replacement stock, Certificate 495, to Ward, who was not in possession of Certificate 253. The court held that Homeland Bancshares, Inc. breached the express provisions of Certificate of 253 and the merger agreement by using Certificate 495 to Ward, a non-holder of Certificate 253. The court also found Homeland Bancshares, Inc. liable under UCC provisions that govern the replacement of lost, destroyed, or wrongfully taken security certificates.