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Can a Personal Judgment
Cost Someone Their Business Entity?

The title question is an important one for anyone who owns his or her own business. If such a person gets sued, in a matter unrelated to their business, the judgment creditor may seek the entity ownership interest of the judgment debtor in order to satisfy any judgment obtained. The statutory laws of all 50 states allow for this.

Shares of stock in any corporation are personal property. See Keith Paul Bishop, Nevada Law of Corporations & Business Organizations (Aspen Law Business 1998), § 5.10 at 5-21. Previously, "at common law, shares of stock in a corporation were not subject to execution." Trade Bond & Mortgage Co. v. Schwartz, 303 I11. App. 165, 24 N.E.2d 892, 893 (1940)(citing Alexander v. Live Stock National Bank, 282 I11. App. 315). However, this rule was subsequently changed by statute in all jurisdictions. See Schwartz, 24 N.E.2d at 893 ("In Illinois the statute has changed [the common law] rule and provides a mode by which the stock may be seized, sold and transferred.")

Statutory Law Allows for
the Execution of Corporate Stock!

Similar to real property, all personal property is subject to execution by a judgment creditor, unless the particular property is specifically exempt by law from execution. See, e.g., Sportsco Enter. v. Morris, 112 Nev. 625, 917 P.2d 934 (1996); Dodds v. Shamer, 339 Md. 540, 663 A.2d 1318 (1995); Amsouth Bank of Florida v. Hepner, 647 So.2d 907 (Fla. App. 1994); In re Marriage of Parscal, 148 Cal. App.3d 1098, 196 Cal. Rptr. 462 (1983). See also 33 C.J.S. ("Executions") §§ 25-26 (1998); 35 C.J.S. ("Exemptions") § 39 (1999).

As indicated, statutory law allows for the execution of corporate stock. The law of Nevada provides a typical example:

All goods, chattels, moneys and other property, real and personal, of the judgment debtor, or any interest therein of the judgment debtor not exempt by law, and all property and rights of property seized and held under attachment in the action, shall be liable to execution.Shares and interests in any corporation or company, and debts and credits and other property not capable of manual delivery, may be attached in execution in like manner as upon writs of attachments. (Emphasis added.)

NRS 21.080(1).

While certain property is exempt from execution, such as a homestead (see NRS 115.010) and certain personal items (see NRS 21.090), shares of stock enjoy no such general protection in this country. Thus, a judgment creditor can attach a judgment debtor's business entity to satisfy a judgment. This has not occurred all that often, probably for two reasons. First, up until the time the common law rule was changed by statute in each jurisdiction, the remedy was not allowed. Therefore, the possibility of an execution of corporate stock is a relatively recent phenomenon. Second, most judgment debtors, if at all possible, would satisfy the judgment before risking the loss of their business entity. However, some did not, and paid a huge price.

A Judgment Creditor can Attach a Judgment Debtor's Business Entity to Satisfy a Judgment!

For example, in Schwartz, supra, Mr. and Mrs. Schwartz were sued, and the plaintiff prevailed. He received judgment in 1932. An execution writ was issued, but was returned as no property was found with which to satisfy the judgment. In 1938, another execution was made, and the plaintiff obtained an injunction restraining the Schwartzs from divesting themselves of the stock in their company, the Schwartz Fur Sales Corporation. The plaintiff received stock in satisfaction of the judgment, and sold it at a bailiff's sale. The ultimate purchaser then obtained a court order requiring the Schwartzs to transfer ownership of the stock on the books of the fur corporation. Thus, the failure to make good on the judgment cost the Schwartzs their business entity.

Similarly, in In re Simrak, 61 Nev. 431, 132 P.2d 605 (1942), Simrak brought suit against one 0.0. Emmons. During the pendency of the action, Simrak caused Emmons' stock in the Double 0 Mining Company to be attached. When Simrak obtained a judgment in his lawsuit, execution issued against 456,572 shares of stock, which were sold at a sheriff's sale. Simrak then purchased the shares, and took control of the company.

The next case is the seminal case of Street v. Suqerman, 202 So. 2d 749 (Fla. 1967). Here, two attorneys were sued, and lost, on a matter unrelated to their practice. The two owned 90°/ of the stock in a professional law corporation. The judgment creditors made a levy upon the stock of the corporation. The trial court held that as a matter of law and public policy a non-professional could not hold the stock of a professional corporation. The Florida Supreme Court held otherwise.

What about a Professional Corporation?
Is that Stock at Risk?

While the court noted that state law prohibited the "issue, sale, or transfer" of stock in a professional service corporation to one not a member of that profession, this was not reason to prevent an execution and sale by law. Further, to hold otherwise would have the discriminatory effect of allowing professional shareholders to shelter their assets, while shareholders of non-professional corporations would not have the same benefit. Id. at 750-51.

With this decision, the non-lawyer judgment creditors ended up with the stock of the professional law corporation. The court then analogized this to a situation wherein a professional shareholder became disqualified from rendering professional services. In such a situation, the person must sever all financial ties with the corporation. If this is not accomplished, the penalty is dissolution of the corporation by law. Id. at 751. Thus, the judgment creditors were required to sell the stock upon receiving it in satisfaction of their judgment.

A similar result occurred in Udel v. Udel, 82 Misc. 2d 882, 370 N.Y.S.2d 426 (1975). Here, Mrs. Udel obtained a judgment in the amount of $9,931.40 against her ex-husband for alimony arrears. The court allowed the wife to execute against the husband's stock in a professional corporation, through which he practiced psychiatry. The court noted that New York law prevents the alienation of stock except to a professional in the same field. However:

While the professional corporation law restricts stock it does not restrict the court from directing a turn over of such stock to satisfy a judgment. This is in keeping with the traditional power of courts to disregard a corporate entity where it is used improperly. And a professional corporation, like any other corporation, cannot be used as a subterfuge to avoid payment of a personal judgment.

Udel, 370 N.Y.S.2d at 428.

The court then "directed that the stock be turned over to a receiver to do any act 'designed to satisfy the judgment,' including dissolution of the corporation." Id. (citation omitted). Thus, the failure to pay alimony led to the loss of a closely held corporation.

Another example is provided by Gulf Mortgage & Realty Investment v. Alten, 282 Pa. Super. 230, 422 A.2d 1090 (1980). Here, Gulf Mortgage obtained a judgment in the amount of $257,014.80 against three individuals. In seeking to recover this, Gulf Mortgage discovered that one of the defendants owned a 75% share of the stock in a professional corporation, a law firm. State law restricted the "issuance and transfer" of shares of professional corporations to those licensed to practice the profession engaged in by the corporation. 422 A.2d at 1092. Despite this, the court allowed the mortgage company to execute against the stock. Initially, the court stated:

Today, . . . all personal property is subject to seizure, unless specifically exempted, ordinarily by statutory enactment.

Id. at 1094 (citation omitted). It continued that, while state law:

May prevent unlicensed person from exercising control of shares obtained by judicial sale, it does not prevent the shares from being seized and sold to licensed persons or back to the corporation, or otherwise disposed of upon dissolution of the corporation.

Id. at 1095.

In reaching this decision, the court cited and approved the reasoning of Sugerman and Udel, supra.

A similar result occurred in In re Andrews, 14 B. R. 356 (M. D. Tenn. 1981). Here, Andrews, a physician, co-owned a medical corporation. He went bankrupt, and the trustee in bankruptcy attempted to levy the shares for the benefit of the doctor's creditors. Although state law stated that shares in a professional corporation could only be "issued to, held by, or transferred to" a person licensed to practice the profession for which the corporation was organized, id. at 357, the bankruptcy court allowed the trustee to seize the stock.

The court, relying on Sugerman, supra, stated:

The rationale of the Florida court opinion is persuasive and this court knows of no reason why Tennessee courts would not take the same position. The Tennessee General Assembly did not enact the Tennessee Professional Corporation Act with the intention of insulating the investment of professionals in such corporations from the claims of their creditors.

Id. at 358.

Thus, the doctor lost his stock in his professional corporation.

The last case which demonstrates the principle under review is Jackson v. Russell, 533 N.E.2d 153 (Ind. App.), cert. denied, 494 U.S. 1004 (1989). Here, Russell obtained a judgment in the amount of $2,000,000 against Mr. and Mrs. Jackson. The Jacksons, who lived in Arizona since 1969, owned 100°/ of the stock of a corporation located in Indiana. The Jacksons argued that since Arizona is a community property state, and corporate stock is personal property, Arizona law should control and as community property, the stock should not be subject to execution. The trial court agreed but the appeals court reversed, allowing the stock to be seized.

Initially, the court noted:

That every state has jurisdiction to determine for itself the liability of property within its territorial limits to seizure and sale under the process of its courts.

Id. at 155 (citing Clark v. Williard, 294 U. S. 211 (1935)).Since Indiana law
specifically allowed for the levy of stock in "any corporation" in Indiana by judgment creditors, id. at 156, the Jackson's stock was subject to execution, despite the fact that Arizona law may have mandated a different result.

As these cases reveal, one who owns a business and is sued for a matter unrelated to the business, and loses, risks losing the business to a judgment creditor. This universal rule of law admits of few exceptions. In fact, it even applies against not-for-profit corporations. See Icardi v. National Equipment Rental, Inc., 378 So. 2d 113 (Fla. App. 1980).

Further, a judgment creditor may execute against the incidences of a business. See, e.q., Moskin v. Midland Bank & Trust Co., 96 Misc. 2d 600, 409 N.Y.S.2d 327 (1978)(creditor could levy seat of debtor on the New York Stock Exchange); Adams Apple Distributing Co. v. Papeleras Reunidas, S. A., 773 F.2d 925 (7th Cir. 1985)(a trademark is subject to an involuntary judicial sale in order to satisfy a judgment); Dodds v. Shamer, 339 Md. 540 663 A.2d 1318 (1995)(judgment creditor can seize a debtors liquor license to satisfy a debt); Coney v. First State Bank of Miami, 405 So. 2d 257 (Fla. App. 1981) (same).

Thus, a business owner needs to be careful if they lose a lawsuit unrelated to the business.

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