When Stock Certificates Disappear - e-LawLines

Personal LiabilityWhen operating a corporation, it is important to observe corporate formalities. This will ensure that the corporation protects the individual shareholders from the corporation’s liabilities but it can also protect shareholders from costly mistakes. In the recent case of Lamar Moore et. al. v. Armed Forces Bank, N.A., et. al. a shareholder, a purported investor in a company, tried and failed to get stock certificates reissued in his or his ex-wife’s estate’s name.

The Plaintiff claimed he bought five percent (5%) of a company, Armed Forces Bank, over thirty years ago. He made a deal with another man who was buying Armed Forces Bank at the time to contribute $180,000 for that 5% interest in the bank. The Plaintiff later agreed to transfer that 5% interest in the bank to his wife as part of a separation agreement. He informed the bank that he was planning to transfer the stock to his wife but never took any further steps to transfer the stock. The Pllaintiff’s then ex-wife later passed away and her son and executor of her estate could not find stock certificates and, together with his father, was forced to file a lawsuit to get a new stock certificate issued.

This problem could have been avoided if the Plaintiff had endorsed his stock certificate over to his wife when the separation agreement was final and recorded the transfer on the books of the corporation. The corporation could then have issued a new stock certificate to the Plaintiffs’s ex-wife, which her personal representative could have dealt with after her passing.

The lawsuit by the Plaintiff and his son to get a new stock certificate issued was ultimately dismissed. Among other counts, the Plaintiffs attempted to use a provision of the Uniform Commercial Code § 400.8-405 that allows owners of certificated securities, in this case the stock certificates, to seek replacement certificates. Because the Plaintiffs did not allege they had posted the bond required under that statutory section in order to have the new stock certificate issued, their claim was dismissed.

This case is a good reminder that shareholders, and members of limited liability companies, should make certain to observe corporate formalities and properly document transactions between themselves and the corporation or limited liability company. Stock and membership interest transfers and other transactions between shareholders/members and the corporation should be documented. This type of simple maintenance can avoid costly issues later.