Sax, William L.

English

University of Miami School of Law

University of Miami Law SchoolInstitutional RepositoryUniversity of Miami Law Review1-1-1967Levy and Sale Under Judgment Execution on Stockin Professional Service CorporationsWilliam L. SaxFollow this and additional works at: http://repository.law.miami.edu/umlrThis Case Noted is brought to you for free and open access by Institutional Repository. It has been accepted for inclusion in University of Miami LawReview by an authorized administrator of Institutional Repository. For more information, please contact library@law.miami.edu.Recommended CitationWilliam L. Sax, Levy and Sale Under Judgment Execution on Stock in Professional Service Corporations, 22 U. Miami L. Rev. 438 (1967)Available at: http://repository.law.miami.edu/umlr/vol22/iss2/12UNIVERSITY OF MIAMI LAW REVIEW [VOL. XXIIpower to strike a contract provision which it finds to be "unconscion-able.""2 The second alternative would be for the courts to allow recoverybased upon strict tort liability." This cause of action is independent ofimplied warranty liability and cannot be disclaimed.-4With the decision in the instant case, Florida seems to have nowgiven full recognition to Lord Ellenborough's cogent statement. No longerwill a manufacturer immunize itself from liability by inserting a vaguephrase in a contract of sale. Henceforth, the only "lemons" Floridaconsumers must accept will be the agricultural variety.RONALD WM. SABOLEVY AND SALE UNDER JUDGMENT EXECUTION ONSTOCK IN PROFESSIONAL SERVICECORPORATIONSPlaintiffs brought suit to enjoin the sale of their stock in a profes-sional service corporation to satisfy a judgment against them individually.The chancellor permanently enjoined the sale of the stock on the basis ofFlorida Statutes, sections 621.09 and 621.11.1 The Third District Court32. FLA. STAT. § 672.2-302 (1965). However, it has not yet been held by any decisionwhich this writer is aware of, that a court may use this section to void a disclaimer whichmeets the requirements set forth in the U.C.C. At least one legal writer has taken the posi-tion that such a valid disclaimer cannot be struck by the courts:[lilt appears to be a matter of common assumption that section 2-302 is applicableto warranty disclaimers. I find this frankly, incredible. Here is 2-316 which setsforth clear, specific and anything but easy-to-meet standards for disclaiming war-ranties. It is a highly detailed section, the comments to which disclose full awarenessof the problems at hand. It contains no reference of any kind to section 2-302, al-though nine other sections of article 2 contain such references. In such circumstancesthe usually bland assumptions that a disclaimer which meets the requirements of2-316 might still be strikable as "unconscionable" under 2-302 seems explainable ifat all, as oversight, wishful thinking or (in a rare case) attempted sneakiness. (foot-notes omitted)Leff, Unconscionability and the Code-The Emperor's New Clause, 115 U. PA. L.REV. 485, 523 (1967).At least one court has inferentially taken the same view. Chronologically, the case was similarto the instant one in that the U.C.C. was not in effect when the cause of action arose, but itwas when the case was decided. There the court refused to strike the disclaimer as contrary topublic policy because they felt the legislature had established public policy when it adoptedthe U.C.C. which specifically declared that warranties may be disclaimed. Murray v. MarshallOldsmobile, Inc., - Va. -, 154 S.E.2d 140 (1967).33. The RESTATEMENT (SEcoND) OF TORTS § 402A (1965), provides:One who sells any product in a defective condition unreasonably dangerous to theuser or consumer or to his property is subject to liability for physical harm therebycaused to the ultimate user or consumer ....34. Id., comment m at 355.1. No corporation organized under the provisions of this act may issue any of itscapital stock to anyone other than an individual who is duly licensed or otherwiselegally authorized to render the same specific professional services as those for whichthe corporation was incorporated.FLA. STAT. § 621.09 (1965).No shareholder of a corporation organized under this act may sell or transfer hisCASES NOTEDof Appeal reversed,2 and certified a question to the Florida SupremeCourt.3 On certiorari to the Florida Supreme Court, held, affirmed: Thestock in a professional service corporation is not exempt from levy andsale, under execution of a judgment against some of its shareholders, bya non-professional judgment creditor. Street v. Sugerman, 202 So.2d 749(Fla. 1967).Professional service corporations4 are a recent development in thelaw, and are the result of the demand by professionals for equality of taxtreatment with non-professionals." Florida's Professional Service Corpora-tion Act' is typical of many statutes recently passed in other states.7 Noneshares in such corporation except to another individual who is eligible to be a share-holder of such corporation, and such sale or transfer may be made only after thesame shall have been approved, at a stockholders meeting specially called for suchpurpose ....FLA. STAT. § 621.11 (1965).The Florida legislature amended § 621.11 in 1967 to eliminate the need for stockholders'approval of a sale or transfer of shares by an individual stockholder, Fla. Laws 1967, ch.67-590 § 3. That amendment should not have any effect on this decision, but rather maystrengthen it.2. Sugerman v. Street, 198 So.2d 57 (Fla. 3d Dist. 1967).3. Whether stock owned by attorney-shareholders in a professional service corpora-tion is exempt from levy and sale, under execution, as a result of a judgment againstsome of the shareholders, by a non-professional judgment creditor.Street v. Sugerman, 202 So.2d 749, 750 (Fla. 1967).4. Before the advent of the Professional service corporation, the members of the learnedprofessions could not practice as or through a corporation. This bar was due to the personalnature of the services rendered, and the fear that a sloppy workman would hide behind theshield of limited corporate liability. To avoid this problem, the Florida legislature providedthat:[Any officer, agent, or employee of a corporation organized under this act shall bepersonally liable and accountable only for negligent or wrongful acts or misconductcommitted by him or by any person under his direct supervision and control, whilerendering professional service on behalf of the corporation to the person for whomsuch professional services were being rendered; and provided further that the per-sonal liability of shareholders . . . in their capacity as shareholders . . . shall be nogreater in any aspect than that of a shareholder-employee of a [normal business]corporation .... (emphasis supplied).FLA. STAT. § 621.07 (1965) as amended, Fla. Laws 1967, ch. 67-590 § 2. But, the corporateveil still exists as to negligent acts by persons not under "his direct supervision and control"or for corporate debts.5. See In re Florida Bar, 133 So.2d 554 (Fla. 1961), where the Florida Supreme Courtintimated that the only purpose for these statutes was to allow professionals the benefits ofcorporate tax treatment.The principle advantage of corporate tax treatment is the availability of pension fundsfor the employees of the corporation under INT. REV. CODE of 1954, § 404. Under this pro-vision, the corporation can deduct the premiums paid under a qualified plan, but the em-ployee does not have to pay income tax on the premiums paid for him. These pension fundsare not available to a partnership since a partner could not be considered an emloyee inrelation to the partnership. Whether or not these professional service corporations will betreated as corporations for tax purposes depends on future developments in the law andrulings by the Internal Revenue Service. See note 25 infra. For a discussion of corporate taxtreatment and. the professional service corporation see Annot., 4 A.L.R.3d 383 (1965);Buchmann and Bearden, The Professional Service Corporation-A New Business Entity, 16U. Mi MI L. REV. 1 (1961).6. FiA. STAT. ch. 621 (1965).7. E.g., IDAirO CODE tit. 30 ch. 13 (1967); MIcH. ComP. LAws ANN. §§ 450.221-.253(1967) ; REv. CODE OF MONT. tit. 15 ch. 21 (1967) ; CODE OF VA. tit. 54 ch. 25 (1967).1967]UNIVERSITY OF MIAMI LAW REVIEW [VOL. XXIIof these statutes provide for the possibility of a forced sale of an indi-vidual's stock in the corporation under a judgment execution,8 althoughall of them provide that only duly licensed or otherwise legally qualifiedindividuals may own stock in the corporation.' The case law is practicallynonexistent, and this specific question is one of first impression.' 0The Florida Supreme Court based its decision on public policy,"but the roots of the decision can be found in prior partnership law. UnderFlorida law, a partner's interest is subject to levy and sale under judg-ment execution.' 2 Furthermore, once the interest is sold, the partnershipis at an end, and the purchaser may maintain a bill in equity to have thepartnership dissolved and an accounting made of his interest.' It wastherefore only natural for the Florida Supreme Court, when faced witha business organization so closely resembling a partnership, 4 to applyreasoning to reach a result consistent with that of a debtor-partner in apartnership.Whether or not other states will follow Florida's lead when facedwith this question is a matter of speculation. States which have adoptedthe Uniform Partnership Act'5 are not subject to the same public policy8. See note 7 supra.9. E.g., IDAHO CODE § 30-1308 (1967); MICH. COmP LAWS ANN. § 450.230 (1967); REV.CODE OF MONT. § 15-2111 (1967) ; CODE OF VA. § 54-888 (1967).10. Approximately thirty states have professional service corporation statutes, but theearliest of these was enacted in 1951, and most of the statutes were enacted after 1961. Thelack of cases on the subject is due to the recent passage of the statutes.11. The privilege of incorporation was most definitely not created or extended inorder that those availing themselves of the benefits could be cloaked with an im-munity inimical to legal order and public interest.Street v. Sugerman, 202 So.2d 749, 751 (Fla. 1967). The Florida Supreme Court cited withapproval the Third District Court of Appeal's opinion that:Such a holding could afford professionals a shelter for their assets, which appears tobe inconsistent with the spirit of the [professional service corporation] act. We seeno reason to carve out a judicial "no man's land" for shareholders in a professionalcorporation which is not available to shareholders in non-professional groups.Sugerman v. Street, 198 So.2d 57, 59 (Fla. 3d Dist. 1967). Would a charging order on thestockholder's interest create a "judicial no man's land?" See note 17 infra.12. "The language of the statute is sufficiently comprehensive to authorize a sale underexecution of the judgment debtor's partnership interest in the firm." B.A. Lott, Inc. v.Padgett, 153 Fla. 308, 309, 14 So.2d 669, 670 (1943).13. Once that interest is sold the partnership is at an end and the purchaser at exe-cution sale becomes the owner of the property interest of the judgment debtor ....There can be little dispute but that the execution purchaser is authorized to main-tain a bill in equity to have his newly acquired property interest ascertained andadjudicated, and the property sold, the partnership debts paid, and the surplusdivided between the parties in accordance with their proportionate interests.B.A. Lott, Inc. v. Padgett, 153 Fla. 308, 309, 14 So.2d 669, 670 (1943)..14. The Florida Professional Service Corporation may so closely resemble a partnershipas to he taxed as one. See note 25 infra.15. Forty states plus the District of Columbia have adopted the UNnFORM PARTNERSHIPACT. 7 U.L.A. Partnership Table III (Supp. 1967). Besides Florida, the only states whichhave not adopted the U.P.A. while adopting a professional service corporation statute areAlabama, Georgia, and Kansas. Of these, Georgia definitely follows the U.P.A. view, Citi-zens' Bank & Trust Co. v. Pendergrass Banking Co., 164 Ga. 302, 138 S.E. 223 (1927).Alabama and Kansas have no definite rulings on the subject, although Kansas may follow1967] CASES NOTEDconsiderations as Florida. Under the Uniform Partnership Act, a partner'sinterest is not subject to attachment or execution,' 6 but rather is subjectto a charging order, which entitles the creditor to the partner's share ofthe income.' 7 The charging order does not dissolve the partnership as amatter of law.'" The creditor is held to be amply protected under this pro-vision. 9 Therefore, states under the Uniform Partnership Act may analo-gize their Professional Corporation Act to their existing partnership lawand thereby subject a stockholder's interest to a charging order ratherthan a levy and sale under judgment execution.The major question generated by this decision is, "what are theconsequences if a non-professional purchases the stock at the judgmentsale?" The holding of the stock by a non-professional would be incon-sistent with section 621.09 of the Florida Statutes, which provides thatonly authorized professionals in the same field may own stock in thecorporation.2 ° The Florida Supreme Court suggested, although not rulingon the point, that the only alternative open to the corporation was todissolve.2' This result would be consistent with the result under priorpartnership law,22 and may be the only logical possibility. 2the U.P.A. view, see Farmers' & Merchants' State Bank v. Lemley, 105 Kan. 15, 181 P. 606(1919) ; Gaynes v. Conn, 185 Kan. 655, 347 P.2d 458 (1959).16. "A partner's right in specific partnership property is not subject to attachment orexecution, except on a claim against the partnership." U.P.A. § 25(2)(c); Bushmiaer v.United States, 146 F. Supp. 329 (W.D. Ark. 1956) (applying Arkansas law); Sherwood v.Jackson, 121 Cal. App. 354, 8 P.2d 943 (1932) ; Northampton Brewery Corp. v. Lande, 133Pa. Super. 181, 2 A.2d 553 (1938).17. On due application to a competent court by any judgment creditor of a partner,the court .. .may charge the interest of the debtor partner with payment of theunsatisfied amount of such judgment debt with interest thereon; and may then orlater appoint a receiver of his share of the profits, and of any other money due orto fall due to him in respect of the partnership ....U.P.A. § 28(1).18. Scott v. Platt, 177 Ore. 515, 163 P.2d 293 (1945).19. "[A] creditor is fully protected by the power of a court of competent jurisdictionto charge the interest of the debtor partner with payment of the unsatisfied amount of suchjudgment debt." Sherwood v. Jackson, 121 Cal. App. 354, 357, 8 P.2d 943, 944 (1932).20. See note 1 supra.21. It is our impression that this matter could no doubt be effectively dealt withunder the provision for dissolution set forth in Chapter 608, Florida Statutes, F.S.A.[Corporate code] or Chapter 621, Florida Statutes, F.S.A., or by a bill in equity inaid of execution.Street v. Sugerman, 202 So.2d 749, 751 (Fla. 1967).22. Under prior partnership law, when a partner's interest was attached, the partnershipwas at an end, and the partnership would dissolve or the creditor could bring a bill inequity to have it dissolved. B.A. Lott, Inc. v. Padgett, 153 Fla. 308, 14 So.2d 669 (1943).23. If any officer, shareholder, agent or employee of a corporation organized underthis act who has been rendering professional service to the public becomes legallydisqualified to render such professional services within this State, .. . he shallsever . . . all financial interests in such corporation forthwith. A corporation'sfailure to require compliance with this provision shall constitute a ground for theforfeiture of its articles of incorporation and its dissolution.FLA. STAT. § 621.10 (1965).While the specific language of Section 621.10 speaks in terms of the legal disqualifi-cation of a shareholder "who has been rendering professional service," it is onlylogical to infer that the same standard of determination as to who may be anUNIVERSITY OF MIAMI LAW REVIEW [VOL. XXIITherefore, stock in a professional service corporation is subject tolevy and sale under judgment execution to the same extent as ordinarycorporate stock.2 ' However, the added feature of a possible forced dis-solution may destroy an essential element for an organization to be taxedas a corporation, that is, continuity of life, and result in Florida's pro-fessional service corporations being taxed as partnerships.2 If this shouldhappen, the essential purpose of the statute-to give to professionals theadvantages of corporate tax treatment-would be destroyed.WILLIAM L. SAXREMOVAL DENIED: THE SURVIVAL OF THE VOLUNTARY-INVOLUNTARY RULEThe plaintiff, a citizen of Mississippi, filed a suit in a Mississippistate trial court against two defendants: one a New York corporation,'and the other its employee, a resident of Mississippi. The court entereda directed verdict in favor of the resident' defendant. The remaining non-resident defendant immediately filed a petition for removal in the UnitedStates District Court for the Southern District of Mississippi contendingauthorized stockholder would serve to preclude as a stockholder any person not aprofessional within the meaning of the statute. This would be the case regardless ofthe manner in which a nonprofessional happened to legally acquire shares of stockin a professional service corporation.Street v. Sugerman, 202 So.2d 749, 751 (Fla. 1967).Even if Florida Statute § 621.10 was not to apply, the inconsistency between a non-professional's holding of stock which only professionals may hold per Florida Statute§ 621.09 would have to be resolved, and certainly not by avoiding the statute.24. "Lands and tenements, goods and chattels, equities of redemption in real and per-sonal property, and stock in corporations shall be subject to levy and sale under execution."FLA. STAT. § 55.20 (1965) (emphasis supplied).25. A professional service organization is treated as a corporation . . . only if it hassufficient corporate characteristics to be classifiable as a corporation ... rather thanas a partnership or proprietorship.Treas. Reg. § 301.7701-2(h) (1) (i) (1965).There are a number of major characteristics ordinarily found in a pure corporationwhich, taken together, distinguish it from other organizations. These are: (i)Associates, (ii) an objective to carry on business and divide the gains therefrom,(iii) continuity of life, (iv) centralization of management, (v) liability for corporatedebts limited to corporate property, and (vi) free transferability of interests. (em-phasis supplied).Treas. Reg. § 301.7701-2 (a) (1) (1960).Since many of these characteristics are common to both a partnership and a corpora-tion, only the strictly corporate characteristics are determinative. Therefore, each charac-teristic is important in determining the status of a corporation for tax purposes, and lack ofone characteristic could be determinative of the question.1. New York is Dreyfus' place of incorporation and also its principal place of business.For both of these reasons, Dreyfus is a citizen of New York for the purposes of removalunder 28 U.S.C. § 1441 (1964).2. While we recognize that residency is not the equivalent of citizenship, hereinafterdefendants will frequently be designated either as "resident" or "nonresident".

Levy and Sale Under Judgment Execution on Stock in Professional Service Corporations

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Levy and Sale Under Judgment Execution on Stock in Professional Service Corporations

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