New Jersey Appellate Division Holds That Creditor Must Seize Certificated Security from Debtor

Title:
New Jersey Appellate Division Holds That Creditor Must Seize Certificated Security from Debtor
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Riker Danzig Banking Alert: March 30, 2016
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In an opinion approved for publication, the New Jersey Appellate Division recently held that a creditor could only reach a debtor’s interest in certificated stock certificates through the actual seizure of the certificates, unless the debtor had already surrendered the certificates to the issuer or the creditor.  See Wolverine Flagship Fund Trading Ltd. v. Am. Oriental Bioengineering, Inc., 2015 WL 10438648 (N.J. Super. Ct. App. Div. Mar. 11, 2016).  There, the plaintiffs obtained a $21 million judgment against a debtor, American Oriental Bioengineering, Inc. (“AOB”).  The plaintiffs then discovered that AOB’s only significant assets were stock certificates in Aoxing Pharmaceutical Company, Inc. (“Aoxing”) that were held in China.  The plaintiffs filed a new lawsuit against AOB, Aoxing and Aoxing’s transfer agent, demanding that the certificated shares be cancelled, reissued and delivered to the sheriff for execution.  The Chancery Division denied the requested injunctive relief, and the plaintiffs appealed.

On appeal, the Appellate Division affirmed the lower court’s decision.  Citing to Section 8-112 of the Uniform Commercial Code, the Court found that, unless the certificated security has been returned to the issuer or was possessed by the secured party, “[t]he interest of a debtor in a certificated security may be reached by a creditor only by actual seizure of the security certificate by the officer making the attachment or levy[.]”  N.J.S.A. 12A:9-112 (emphasis added).  The Appellate Division further rejected the plaintiffs’ argument that section (e) of the statute, which states that the creditor “is entitled to aid from a court of competent jurisdiction, . . . in satisfying the claim by means allowed at law or in equity in regard to property that cannot readily be reached,” grants a court broad powers to order the transfer of shares when they could not otherwise be reached.  Finding that this exception would swallow the rule, the Court denied this interpretation and effectively limited the plaintiffs’ ability to recover on the judgment.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.