Matter of Hill

United States Court of Appeals,

Fifth Circuit.

No. 91-9502

(Summary Calendar).

In the Matter of J. Lawrence HILL, Debtor.

David V. ADLER, Appellant,

v.

J. Lawrence HILL and Whitney National Bank, Appellees.

Feb. 4, 1993.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before JONES, DUHÉ and WIENER, Circuit Judges.

WIENER, Circuit Judge:

On appeal from the district court's affirmation of a ruling by the bankruptcy court in the

Eastern District of Louisiana, Appellant David V. Adler, trustee of the estate of the Debtor, J.

Lawrence Hill, complains that those courts misconstrued the Civil Law meaning of the verb, to

hypothecate, as used in a corporate charter provision purporting to restrict alienation of corporate

stock, the purported pledge of which is the subject of the instant litigation. The district court affirmed

the bankruptcy court's holding that, although the restriction in question was properly referred to by

a legend on the stock certificate representing the stock that the Debtor, J. Lawrence Hill, purportedly

pledged to Appellee, Whitney National Bank (t he Bank), the act of pledge did not fall within the

ambit of the restriction and thus was neither a vo id nor a voidable transaction. The ruling was

grounded on the bankruptcy court's determination that under current Louisiana law the meaning of

to hypothecate is limited to mortgage and does not include the pledge of corporate stock.

Agreeing with Adler's contrary view that in current Louisiana legal parlance, to hypothecate

may connote to mortgage only but may also be synonymous with to pledge or to encumber,

depending on the context, circumstances and manner in which that verb is used, we conclude that the

use of "hypothecate" in the stock restriction provision here under consideration must mean pledge
or mean nothing at all, the latter being a result not permitted if any sensible meaning can be attributed

to a word employed in a writing. We therefore reverse and remand this case to the bankruptcy court

for further proceedings consistent with this opinion.

I

FACTS AND PROCEEDINGS

A. Operable Facts

The facts on which the bankruptcy court based its rulings were stipulated and are not at issue

here. Over time, Hill entered into various loan agreements with the Bank. By early 1988, he owed

the Bank in excess of $700,000, and it insisted that he furnish additional collateral. The collateral

demanded included Hill's 25 shares of the capital stock of Lucullus, Inc., a closely-held Louisiana

business corporation. Hill's shares represent 25% of all issued and outstanding stock of Lucullus.

The rest is owned by Patrick J. Dunne (50 shares or 50%) and John A. Pico (25 shares or 25%).

Under date of June 23, 1988, Hill signed a Pledge Agreement on the Bank's standard printed

form, purporting to pledge his Lucullus stock to the Bank. He did not endorse his stock certificate,

which he deposited with the Bank, but did execute and deliver to the Bank an undated and

unwitnessed "Assignment Separate from Certificate," signed in the blank by Hill.

Hill's 25 shares of Lucullus, Inc. is represented by Certificate No. 2. That certificate is

registered in the name of J. Lawrence Hill; it bears a reference on its face instruct ing "See

Restrictions on Transfer on Reverse Hereof"; and its reverse side bears the following legend:

The securities represented by this certificate are subject to restrictions on transferability as set
forth in the by-laws (or articles as the case may be) of the corporation. No stock may be
transferred or encumbered in any fashion without prior compliance with the requirements set
forth herein. All persons are referred thereto, a copy of which is on file with the Secretary
of this Corporation at the registered office of the corporation, for a full statement of the
restrictions on this stock. (emphasis added).

Article VIII of the Articles of Incorporation of Lucullus, Inc. states, in pertinent part:

No shareholder shall sell, transfer, hypothecate, assign, or in any manner convey his stock
without first offering same, in writing through the Board of Directors for a period of thirty
(30) days to the remaining shareholders, who shall be notified of such offer at once by the
Board of Directors. Within said thirty-day period, the remaining shareholders shall have the
right to purchase the stock so offered, at book value as reflected by the books of the
corporation as of the end of the month preceding the month in which said stock is first offered
for sale. (emphasis added).
 Notice of the June 23, 1988, stock pledge by Hill was sent to the corporation by letter dated

July 5, 1988, addressed to the attention of Patrick J. Dunne, President. Signed by Julian F. Neill,

Vice President of the Bank, that three-sentence letter stated:

Larry Hill has pledged 25 shares of Lucullus stock to us to secure any indebtedness
of his to the bank. This stock is legended so it has to be offered to the company before it is
sold to anyone else. At this time we do not plan to dispose of the stock; however, I want
you to know that it is pledged to us.

No response from the corporation was requested and none was given.

The record does not reflect additional correspondence among the Bank, the corporation, and

the shareho lders of Lucullus until November 21, 1989, when counsel for the Bank wrote to the

corporation and all three shareholders, notifying them, "pursuant to Article 8 [sic] of the Articles of

Incorporation of Lucullus, Inc.," of the Bank's intention to sell the pledged stock. By letter dated

November 29, 1989, Dunne as President and a stockholder, and Pico as Secretary-Treasurer and a

stockholder, jointly wrote to counsel for the Bank, formally repudiating the validity of Hill's pledge.

Additionally, the letter advised co unsel that the corporation and the remaining shareholders had a

continuing interest in purchasing the stock on the terms provided in Article VIII of the charter and

that they desired to cooperate with the Bank for the benefit of their fellow shareholder, Hill. The

record does not reflect the book value of Hill's Lucullus stock as of the date he purported to pledge

it to the Bank, but the bankruptcy court found, presumably based on a stipulation, that the book value

of that stock was $69,347.50 as of March 31, 1990.

On December 1, 1989, two days after the corporation, Dunne and Pico had responded to

counsel for the Bank, a state court consent judgment was entered into by the Bank and Hill. That

judgment purports to recognize rights of the Bank under the Pledge Agreement of June 23, 1988.

Less than two weeks later, on December 12, 1989, Hill filed a Petition for Relief under Chapter 7 of

the Bankruptcy Code.

B. Judicial Proceedings

Procedurally, this matter first came before the bankruptcy court on the Bank's motion to lift

the automatic stay as it applied to Hill's 25 shares of Lucullus stock. In the capacity of trustee, Adler

countered by filing an adversary proceeding against the Bank, seeking to have Hill's pledge of June
23, 1988 declared null and void. The bankruptcy court considered the facts stipulated, the

memoranda submitted by the parties, the arguments of counsel, and the record in the case, then

entered its memorandum opinion, the net result of which was to validate the stock pledge. The

bankruptcy court reached that result by holding the charter restriction on hypothecation inapplicable

to pledge. The court then superimposed on the Bank an obligation to "comply" with Article VIII of

the charter by offering the stock to the shareholders of Lucullus in the event the Bank decides to

foreclose the pledge by selling the stock.

Adler appealed the bankruptcy court's ruling to the district court, which made a one sentence

minute entry on August 15, 1991, that "[t]he ruling of [the bankruptcy court] is upheld." Thereafter,

the district court entered a separate judgment dated November 6, 1991, ordering that the bankruptcy

court's ruling "be, and it hereby is, upheld and affirmed." The district court made no independent

findings of fact or conclusions of law. Adler timely appealed the district court's affirmance of the

bankruptcy court's decision.

II

STANDARD OF REVIEW

As the facts found by the bankruptcy court and affirmed without comment by the district court

were either stipulated by the parties or based on documentary evidence filed in the record without

objection, the standard by which we review the factual findings of the bankruptcy court that reach

us following appeal to the district court is of no moment. The only issues before us are legal ones,

which we review de novo.

III

PRIOR PROCEEDINGS

A. Bankruptcy Court Opinion

As a preliminary matter the bankruptcy court found that Adler, as trustee, has standing to

bring the adversary complaint under 11 U.S.C. § 544. The court reasoned that even though "[t]he

Trustee has no independent power of avoidance, but may act only upon the right of one unsecured

creditor holding an allowable claim, against whom the transfer or obligation was invalid under state
law," the claim of John Pico—an unsecured creditor and stockholder in Lucullus who is entitled to

claim the benefit of the transfer restriction—supplies the necessary derivative standing.

Having found standing, the bankruptcy court considered whether the restrictions specified in

the Articles of Incorporation govern the encumbrance of Lucullus stock. The court found that the

stock certificate was properly legended to refer any interested party to the Articles of Incorporation

for a full statement of the restrictions on the stock, as required by the Louisiana Business Corporation

Law,1 presumably considering the specific requirements of section 57(F).2 The court correctly

acknowledged that its task was to "interpret Article VIII in order to determine if the pledge was

prohibited and therefore void."

After observing that Article VIII's restriction prohibits the holder of Lucullus stock from

selling, transferring, hypothecating, assigning, or in any other manner conveying the stock without

first offering it to the other shareholders, the bankruptcy court expressed the opinion that "[a]ll these

words except "hypothecate' indicate a change in the ownership of the stock." In progressing down

what turned out to be a primrose path artfully laid out by able Civilian counsel for the Bank, the court

then observed that pledge produces no change in ownership of the encumbered property, so that

unless pledge and hypothecate are synonymous, Article VIII would not apply to pledge. In its next

step down that path, the court relied on the interpretative rule contained in Louisiana Civil Code

article 2047 which directs that "words of art and technical terms must be given their technical

meaning when the contract involves a technical matter," concluding that "hypothecate" should be

given its technical meaning as a legal term of art. Turning next to Black's Law Dictionary, 5th

Edition, the court—apparently without being overly impressed—found "hypothecate" defined as "to

pledge property as security or collateral for a debt."

After then noting that, even though both pledgors and mortgagors retain ownership of the

thing encumbered, the pledgee obtains possession while the mortgagee does not, the bankruptcy court

stated the following non sequitur:

1
LA.REV.STAT.ANN. §§ 12:1 to 12:178 (West 1950 & Supp. 1992).
2
LA.REV.STAT.ANN. § 12:57(F) (West 1950).
 hypothecate, then, simply means to mortgage. In the case at Bar, there is no question that
the pledge was validly confected pursuant to La.C.C. Art. 3158.... Furthermore, the pledged
stock has been delivered to [the Bank].

Finally, and perhaps most mysteriously, the bankruptcy court—after reiterating the Louisiana

jurisprudential rule that restrictions on the transfer of stock ought to be strictly construed in favor of

transferability—concluded:

Accordingly, after strictly construing the stock restriction at issue, this Court finds that the
restriction did not prevent the pledge of the stock to [the Bank]. However, if the stock is sold
by [the Bank, t he Bank] must first comply with Article VIII and offer the stock to the
shareholders of Lucullus.

B. Appeal to the District Court

Adler appealed the ruling of the bankruptcy court to the federal district court pursuant to

notice of appeal filed in the bankruptcy court in April, 1991.3 After completion of briefing by the

parties, the case was orally argued to the district court which, in November 1991, affirmed the

bankruptcy court's ruling. The district court assigned no reasons for its affirmation, either orally or

in writing. When a district court sitting as a court of review furnishes neither reasons nor findings

for its decision, this court in essence disregards the legal conclusions of the district court and reviews

the findings, reasoning, and judgment of the bankruptcy court directly.

IV

ANALYSIS

A. Bankruptcy Issue

With one exception, the legal issues presented by this appeal are uniquely questions of

Louisiana law. The only purely bankruptcy issue concerns t he trustee's standing to bring this

adversary proceeding to challenge the validity of Hill's pledge of the Lucullus stock in the face of the

charter restriction in question. We affirm the analysis and holding of the bankruptcy court that Adler,

as trustee, enjoys such standing. Moreover, lest there be some question concerning the legal right

of the trustee, standing in the shoes of the Debtor, to contest the validity of a stock pledge which is

valid and uncontestable between the parties inter se, we note that for such purposes the trustee in

3
See 28 U.S.C. § 158 (1988); BANKR.R. 8001 et seq.
bankruptcy is accorded the status of a third party.4

B. Louisiana Law Issues

This case comprises two clear issues of Louisiana law. One, which turns on the meaning of

"hypothecate" as used in the charter of Lucullus, Inc., questions the applicability of the restriction

provision of Article VIII to pledge. The other, which turns on provisions of the Louisiana Business

Corporation Law, questions the legal effects produced by the actions or inactions of Hill, the Bank,

the corporation and t he remaining stockholders—and their remedies, if any—if the provisions of

Article VIII of the charter of Lucullus, Inc. do apply to pledges of stock in that corporation. We

consider these two issues of Louisiana law in inverse order.

1. Restrictions on Alienation of Corporate Stock.

The jurisprudence of Louisiana reflects over a century of use of restrictions on the alienation

of corporate stock.5 Nevertheless, the efficacy of such restrictions was not expressly recognized by

the courts of the state until 1964.6 Coincidentally, the restriction approbated in that case was, like

the one now before us, a right of first refusal.

This type of restriction has long been recognized as serving valid purposes in closely-held

corporations, principal among which are 1) controlling the makeup of the shareholder group, and 2)

preventing the stock from falling into the hands of undesirable corporate partners.7 Even though, as

correctly found by the bankruptcy court in the instant case, the courts of Louisiana at least give lip

service to the maxim that restrictions on alienation of corporate stock are to be construed narrowly

4
C.f., e.g., In re SEACO Int'l, Inc., 82 B.R. 821 (Bkrtcy.E.D.La.1987).
5
See, e.g., Ellison, Creevy & Emley v. Schneider, 25 La.Ann. 435, 436 (1873); Byron v.
Carter, 22 La.Ann. 98 (1870).
6
Phillips v. Newland, 166 So.2d 357 (La.Ct.App. 3d Cir.1964).
7
See, e.g., Martin v. McCloskey, 155 La. 604, 99 So. 477, 480 (1924) (The purpose of the
first refusal provision was "to guard against the stock getting into the hands of other persons who
might "cause trouble.' "); Crescent City Seltzer & Mineral Water Mfg. v. Deblieux, 40 La.Ann.
155, 3 So. 726, 727 (1888) (finding that first refusal provision intended to "prevent the
disposition of the stock to strangers").
because they impinge on free transferability of corporate ownership,8 such a position is not universally

applauded. It was roundly criticized, for example, by Professor Tom Andre, Jr. of the Tulane

University School of Law in his definitive work on the subject9 as lacking any valid public policy

foundation either in the Louisiana Civil Code or other legislation. Professor Andre makes a flawless

argument for liberal construction of such restrictions, illustrated with numerous valid business and

tax purposes for their use and evenhanded enforcement. Nevertheless, for purposes of the instant

case, we follow the dictates of constant Louisiana jurisprudence as it currently stands, and strictly

construe Article VIII of the charter of Lucullus, Inc.

Before parsing that charter provision, however, we are constrained to make several

observations. First, assuming he can prevail on the issue of the restriction's applicability to the

transaction here under litigation, Adler contends that the purported pledge to the Bank by Hill in

violation of the restriction is void, i.e., absolutely null. He contends in the alternative, however, that

even if the transaction is not absolutely null it is at least voidable, i.e., relatively null. Although we

assume without determining that a transfer or encumbrance in violation of such a stock restriction is

not an absolute nullity and at least is valid between the parties—after all, it may be waived or ratified

by the corporation or the other shareholders—it is sufficient for our purposes that if the restriction

applies to pledge and if Hill's purported pledge to the Bank violates the restriction, relative nullity is

all that is required to support Adler's attack on the transaction. Unlike the corporation and the other

shareholders, who might have waived, acquiesced in, ratified or otherwise acted (or failed to act) in

such a manner as to abrogate their right to attack the purported pledge transaction, the trustee in

bankruptcy has standing and acted timely to annul the subject transaction.

Second, we find no support for the secondary holding of the bankruptcy court that, even

though the restriction of Article VIII is inapplicable to pledge, the Bank as pledgee is bound to offer

the stock to the other shareholders (presumably for book value as specified in Article VIII) before

8
Goldblum v. Boyd, 341 So.2d 436, 448-49 (La.Ct.App. 2d Cir.1976).
9
Thomas J. Andre, Jr., Restrictions on the Transfer of Shares: A Search for a Public Policy,
53 TUL.L.REV. 776, 779 (1979).
foreclosing on the pledge by selling the stock. By its own terms the stock restriction applies only to

"a shareholder," and the bankruptcy court has already determined, correctly, that pledge does not

transfer title. Thus, even if Hill's pledge to the Bank is neither void nor voidable under the transfer

restriction, the pledgee Bank is still not a shareholder. Consequently, if we were to conclude that the

restrictions of Article VIII do not prohibit pledge, thereby validating Hill's pledge to the Bank, the

"first refusal" provisions of Article VIII would be equally inapplicable and would, therefore, impose

no duty on the Bank, as a non-shareholder pledgee, to offer the stock to the corporation or the other

shareholders. In short, either all features of the charter restriction apply or none does.

Third, we disagree with the bankruptcy court's contention that "hypothecate" is the only type

of transaction among those proscribed by Article VIII that is not a title-transferring act. Specifically,

the word "hypo thecate" is followed by the word "assign." "Assign" in current legal parlance may

signify either a title transferring act or a pignorative act, depending on the context in which that term

is used. For example, when a legal document refers to a lessee's assignment of a lease—particularly

a mineral lease—the statement usually connotes transfer of title (although it is not unheard of for a

mineral lessee to "assign" leasehold interests, particularly future royalties or "runs," to a lending

institution or other creditor by way of collateral). Similarly, a lessor may "assign" rents or royalties,

whether to a third party purchaser or to a creditor. On the other hand, an assignment under the

Louisiana Assignment of Accounts Receivable Law,10 from the creditor/owner of the receivables to

his lender or creditor, is clearly a pignorative transaction with title remaining in the assignor until or

unless the underlying obligation secured by such assignment becomes delinquent. In each instance,

then, the context must be considered before making a determination whether the parties intend for

the assignor of the lease to transfer title or merely to encumber his or her lease or leasehold interest.

The point we make is not that Hill might be found to have "assigned" his stock to the Bank

in some sort of secured transaction; clearly, the transaction attempted was pledge if it was anything.

Rather, the point we make is that "assign," as used in the Lucullus charter restriction, does not

necessarily refer exclusively to a title-transferring transaction—if it refers to such a transaction at all.

10
LA.REV.STAT.ANN. § 9:3101 et seq.
Like hypothecate, one of the meanings of "assign" in Art icle VIII could well be that of collateral

assignment. As such, the use of "hypothecate, assign" in the proscription sentence of Article VIII

could support an interpretation, under the doctrine of ejusdem generis, that would encompass any

recognized method of encumbering corporate stock—pledge being preeminent among such

encumbrances known to the law of Louisiana.

But, as explained more fully below, we need not explore such an interpretative process. At

this juncture, it suffices that Adler as trustee in bankruptcy would be entitled to a judgment nullifying

Hill's purported pledge of his Lucullus stock to the Bank if, in the context employed in Article VIII

of the corporate charter, "hypothecate" is found to be synonymous with "pledge." And if that should

turn out to be the case, the uncontested facts confirm beyond peradventure that Hill made no effort

to comply with the prerequisite for encumbering his stock—offering that stock to his fellow

shareholders at book value for a period of thirty days—and that the Bank did not require such

compliance despite its conceded knowledge of the legend and restriction. We turn, therefore, to the

meaning of "hypothecate."

2. The Meaning of Hypothecate in Article VIII

We have already noted, as did the bankruptcy court, that the leading law dictionary defines

to hypothecate as to pledge.11 Strong support for that definition is found in the leading dictionary of

the English language12 as well. But the bankruptcy court did not stop with dictionary definitions, and

neither do we. A brief review of the centuries long history of the term reveals that, when used as a

verb, hypothecate is sometimes expansive, denoting both pledge and mortgage, while at other times

it is narrow, denoting only mortgage.13 We look next to the history of the term.

11
BLACK'S LAW DICTIONARY 742 (6th ed. 1990).
12
"Hypothecate ... [t]o give or pledge as security; to pledge, pawn, mortgage." 7 OXFORD
ENGLISH DICTIONARY 581 (2d ed. 1989).
13
The court acknowledges a debt of gratitude to Ms. Linda Faucheux, formerly archivist of
The Historic New Orleans Collection, and currently a third year student and candidate for Juris
Doctorate degree at Tulane University School of Law, whose translation of the French
commentators and historical research, as reflected in her unpublished monograph of October 23,
1992, supply the historical backdrop for consideration of the concept of hypothecation.
a. Roman Law

"Hypothecate" stems from the Latin hypothecare. The Greek verb hypotithemi, from which

the Latin, French and English words derive, means to "lend money on pledge."14 Under Roman law

the hypotheca developed as a form of pignus which, like pledge, included delivery of possession of

the thing to the mortgagee or creditor. Unlike pignus, however, hypotheca did not require delivery

of the thing to the creditor.

The Roman law authority W.W. Buckland found that "[b]etween hypothec and pignus there

was in strictness no legal difference, but there was the physical fact that in the former the thing was

left in the hands of the debtor.... But it was equally possible to create hypothecs on a thing already

held by a pledgee...."15 Buckland also referred to the findings of Erman, who "seems to show that

hypotheca is in origin merely a Greek name for pignus.... Later jurists use it more freely and as

synonymous with pignus."16 Finally, Buckland maintained that the "actio hypothecaria is a distinct

action ... for the enforcement of the possessory right, and applies equally to pignus."17

Another Roman law authority, H.F. Jolowicz, thought that the "last form of pledge to develop

was that known ... as hypotheca, i.e., the pledging of a thing by mere agreement, without the transfer

of either ownership or possession."18 Extending the caution that the classical use of the word is

disputed, Jolowicz also emphasized the flexibility of the term:

Pignus and hypotheca are treated throughout [the Corpus Juris] as one and the same thing;
in some cases possession is transferred at once, in others it is not, but that is all. The word
pignus is freely used for both cases and indeed occurs in the formula of the very action which
made pledge without possession possible. It is clear too that the particular case from which

14
HENRY G. LIDDELL & ROBERT SCOTT, A GREEK-ENGLISH LEXICON 1898-99 (9th Ed.1940,
repr. 1968).
15
W.W. BUCKLAND, A TEXT-BOOK OF ROMAN LAW FROM AUGUSTUS TO JUSTINIAN 473
(1921).
16
Id. n. 1 (citation omitted).
17
Id. at 474 n. 2.
18
H.F. JOLOWICZ, HISTORICAL INTRODUCTION TO THE STUDY OF ROMAN LAW 319 (2d ed.
1965).
 hypotheca arose was one which was but a slight extension of the original principle.19

b. French Law

The French commentator Troplong regarded pledge and mortgage as different, particularly

in that hypothèque left to the debtor the possession of the property that pignus or pledge took from

him.20 Troplong did, however, describe hypothèque as a variant of pignus.21

The French not only retained a later Roman distinction between pledge and mortgage in

adapting Roman law governing security rights, but added another by restricting the hypothèque to

immovable property.22 The French Civil Code of 1804 (hereafter, the Code Napoleon) codified these

differences.23 Pothier, however, had drawn those distinctions earlier in his Traité de l'Hypothèque.

The hypothèque, Pothier said, was the right of a creditor in the property of another, consisting of the

power to cause the sale of the property for satisfaction of the debt. Pothier posited two forms of

hypothèques: 1) Nantissement [pledge] or pignus, contracted by delivery of the securing property

to the creditor; and 2) hypothèque [mortgage] "properly so called," contracted without delivery.24

Pothier noted that although under the Romans all things in commerce—movable or immovable,

corporeal or incorporeal—had been susceptible of hypothecation, under the French only immovables

19
Id. at 319-20 (footnotes omitted). Discussing security devices under Roman law, Alan
Watson proposed to "keep to the term pignus for a pledge delivered to the creditor and
hypotheca for a pledge which was not delivered though for the most part the Romans did not
bother with this distinction." ALAN WATSON, THE LAW OF OBLIGATIONS IN THE LATER ROMAN
REPUBLIC 179-80 (1965). The statement attributed to the Roman Marcianus goes so far as to
assert that between pignus and hypotheca, the only difference is in the names ("inter pignus et
hypothecam, tantum nominis sonus differt"). 2 DICTIONNAIRE FRANCAIS ET LATIN DE LA
LANGUE DES LOIS 160-61 (Ducasse, 1833).
20
9 TROPLONG, LE DROIT CIVIL EXPLIQUE: DU NANTISSEMENT, DU GAGE ET DE
L'ANTICHRESE 9, 14 (Hingray, 1847).
21
Id. at 14.
22
CAMILLE SOUFFLIER, VOCABULAIRE DE DROIT 224, 285 (Giard, 1908); VOCABULAIRE
JURIDIQUE 393, 517 (Gerard Cornu ed., Presses Universitaires de France, 1987).
23
CODE CIVIL [C.CIV.] arts. 2071, 2072, 2114, 2119 (fr.) (1804), reprinted in LES CODES
FRANCAIS 173, 179 (Marescq, 1858).
24
1 JEAN BAPTISTE HUTTEAU, RECUEIL DES DIVERS TRAITES SUR LES HYPOTHEQUES,
L'ANTICHRESE ET LE NANTISSEMENT 1 (Letellier, 1809); 9 OEUVRES DE POTHIER 423 (Marcel at
Billard, 3d ed. 1890).
were subject to the true hypothèque. According to Pothier, the customs of Paris and Orleans

permitted no hypothecation of movables whatsoever. Where, as in Normandy, local customary law

regarded movables as subject to hypothecation, this merely produced an imperfect form of security

right, lasting only as long as the debtor retained possession of the movable. The security right on

immovables, however, followed the property into whatever hands it passed, constituting, Pothier said,

a true hypothèque.25

Here, the Code Napoleon consolidated customary law with written law, conclusively

eliminating those customary laws by which some regions had regarded movables as subject to

hypothecation.26 While the hypothèque was defined as the real right itself, the Code Napoleon

defined pledge (nantissement ) as the contract by which a debtor remitted a thing to his creditor as

security for a debt.27 A hypothèque applied only to immovable property, yet it remained possible to

pledge a movable under "gage" [pawn], and an immovable under the contract denominated

antichrèse.28

c. Louisiana Codes

The classifications of the Code Napoleon (or, more accurately, of its projet) were adopted

by the redactors of the Louisiana Digest of Civil Laws in 1808. Thereafter, Louisiana "had no

general hypotheca in regard to movables ... until 1912, when the first chattel mortgage act was

passed," applying only to corporeal movables.29

The translation from French to English in the Louisiana Civil Code of 1825 renders

"d'hypothèquer" or "to hypothecate" as "to mortgage." An example, found in article 3116, under

Title 19 go verning Pledge, read: "where the power of attorney contains a general authority to

25
HUTTEAU, supra note 24, at 14-15; OEUVRES, supra note 24, at 434-35.
26
HARRIET SPILLER DAGGETT, LOUISIANA PRIVILEGES AND CHATTEL MORTGAGE 14 (Louisiana
State University, 1942).
27
C.CIV. art. 2071, 2114 (1804).
28
C.CIV. art. 2072, 2114 (1804).
29
DAGGETT, supra note 26, at 16, 21.
mortgage the property [pouvoir general d'hypothèquer les biens] of the principal, this power includes

that of giving it in pledge [de les donner en nantissement ]."30 This language survives as article 3149

of the Revised Civil Code of 1870. The hypothecary action for enforcement of the real security right

obtained through mortgage survives in the Louisiana Civil Code31 and in the Louisiana Code of Civil

Procedure as well.32

d. Louisiana Statutes

"Hypothecate" and its variations occurs as well in particular provisions of the Louisiana

Revised Statutes of 1950. For example, the statutory title governing banks and banking accords an

institution the power "[t]o borrow money and to mortgage, pledge, hypothecate, or grant a security

interest in any of its assets to secure such borrowings."33 The conjunction "or" here would not seem

to indicate that "hypothecate" stands separat e in meaning and function from either "pledge" or

"mortgage," or even from "granting a security interest" for that matter.

The most expansive statutory use of the term is in the Louisiana Business Corporation Law,

which gives a corporation or association the power "[t]o make contracts and guarantees ... to incur

liabilities, to borrow money, to issue notes, bonds and other obligations, and to secure any of its

obligations by hypothecation of any kind of property."34 "Hypothecation" here clearly denotes any

recognized method of creating a security interest in any form or type of property.

e. Louisiana Contracts and Jurisprudence

Despite such limited Code and statutory uses of "hypothecate" or its derivatives, referring

only to mortgage, and the treatment of pledge under a separate title of the Civil Code, opinions of

the Louisiana courts have used the terms "hypothecate" and "hypothecation" much less precisely and

30
A Republication of the Projet of the Civil Code of Louisiana of 1825, in 1 LOUISIANA
LEGAL ARCHIVES 361 (1937).
31
LA.CIV.CODE ANN. arts. 3399-3410 (West 1952 & Supp.1992).
32
LA.CODE CIV.PROC. arts. 3721-3743 (West 1961 & Supp.1992).
33
LA.REV.STAT.ANN. 6:242 (West 1986 & Supp.1992).
34
LA.REV.STAT.ANN. 12:41 (West 1969).
much less restrictively, usually as a result of language drawn from the specific contracts or security

agreements under scrutiny at the time. Several examples demonstrate the importance of context in

determining the intended meaning of the term. When "hypothecate" occurs in combination with terms

such as "pledge" or "mortgage," the conjunction "and" may or may not indicate that the additional

term has a separate meaning, and "or" may or may not introduce a separate idea with a meaning

exclusive of the other words in the same series. There seems to be no pattern to distinguish the use

of "hypothecate" as a synonym from its use as a discrete transaction. For example, in Succession of

Onorato,35 opponents of a succession argued that a writing by the decedent acknowledging 1) himself

as their debtor, and 2) that insurance proceeds should pay the debt "constitute[d] a pledge or

hypothecation of such life insurance policies[.]"

This phraseology found use earlier in Fasterling v. Kahn.36 Justice O'Neill, affirming the trial

court's finding of fraudulent misrepresentation by which plaintiff had been relieved of valuable stocks,

stated that the defendants "were not the owners of the stock ... and had no right to pledge or

hypothecate it." This eminent Louisiana jurist was clearly using "hypothecate" as a synonym of

"pledge," not as an additional mode of encumbering stock distinct from pledge.

First Guaranty Bank v. Alford,37 addressed a wife's liability, under a pledge agreement

executed as part of a collateral mortgage, for debts subsequently contracted by her husband. The

court's descript ion of the instruments executed by the husband included mention of two pledge

agreements by which he "pledged and hypothecated" other instruments as security for the later

obligations. Here again, "hypothecated" clearly is used as a synonym for "pledge."

In Baton Rouge Wood Products, Inc. v. Ezell,38 the language of a pledge agreement stipulated

that the party executing it did "pledge and hypothecate" securities. Similarly, in Webster v. Harman,39

35
219 La. 1, 51 So.2d 804, 807 (1951).
36
163 La. 424, 112 So. 33 (1927).
37
366 So.2d 1299, 1301 (La.1978).
38
251 La. 369, 204 So.2d 395, 398 (1967).
39
148 La. 1080, 88 So. 462, 463 (1921).
the cited language came from a contract by which the plaintiff agreed to "pledge and hypothecate into

and in favor of [defendant] forty (40) shares of ... capital stock." This contract was later referred to

by Justice Provosty in the same opinion as "the pledge which [defendants] held of plaintiff's 40 shares

of stock."40 The opinion in that case also refers to a power of attorney that grants the power "to sell,

pledge, mortgage, hypothecate or otherwise incumber any and all shares of stock held by [plaintiff]."41

As both pledge and mortgage are expressly listed, the scrivener's use of "hypothecate" must be as a

synonym for either or both, much as is "incumber" there.

Additional examples are found in two Louisiana circuit opinions. In General Motors

Acceptance Corp. v. Crain Chevrolet-Olds-Pontiac, Inc.,42 the court made note of the collateral

mortgage provisions by which the dealer agreed that he "mortgages, affects, and hypothecates" his

inventory, the merchandise, to remain so "mortgaged and hypothecated until payment in full of the

Note and any obligations secured by the pledge thereof." And in Plumbing Supply House, Inc. v.

Century National Bank,43 the court described "an hypothecation agreement authorizing [plaintiff

corporation] to pledge [a] ne varietur note as security."

f. Current Louisiana Usage

The point we so belaboredly make is that neither the history, the sources, the terminology of

the current codes and statutes, nor the jurisprudence conclusively and absolutely define the word

"hypothecate" either to include or to exclude the concept of encumbering movables. Nor do we find

that to hypothecate absolutely includes or excludes delivery of possession. The conclusion that does

come through "loud and clear," however, is that the drafters of statutes and legal instruments in

current Louisiana practice appear to play rather fast and loose with the verb, to hypothecate. Part

of such practice, we suppose, is the untidy but prevalent penchant of lawyers to invoke the mystique

of the profession's glossary of archaic and anachronistic terms without bothering to identify the

40
Id. at 464.
41
Id.
42
595 So.2d 346, 349 (La.Ct.App.2d Cir.1992).
43
440 So.2d 173, 175 (La.Ct.App. 4th Cir.1983).
precise legal meaning of the terms thus employed. That tendency, coupled with an equal penchant

for invoking solemnity by including several synonyms—usually the Biblical three—for the desired

word when that one word alone would suffice, leads to controversies (such as the instant litigation)

that could be avoided by a drafting technique that is more precise and less pretentious. Code

provisions, Revised Statute provisions, and documents quoted or referred to in the jurisprudence

illustrate just such imprecise, surplus usage o f "hypothecate" when all that is required is the word

"pledge" if that is what is intended, or "mortgage" if that is what is intended, or "encumber" if the

broader, all inclusive concept is intended.

All of this leads to one inescapable conclusion: To ascertain what the parties intend in using

the term "hypothecate," the context in which that term is used must be examined, and that

examination must be conducted according to Louisiana's rules for interpreting contracts. When we

do that in the instant case, we are disabused of any doubt that, in confecting Article VIII, the drafter

of the Articles of Incorporation of Lucullus, Inc., could only have been using "hypothecate" as a

synonym—albeit an unnecessarily fancy, "legalese" one—for "pledge."

g. Louisiana Rules of Contractual Interpretation

Our finding is confirmed when the methodology used in making it is tested by the applicable

Louisiana rules of interpretation. Even though the Articles of Incorporation of a Louisiana business

corporation implicate public administration through the office of the Secretary of State, such

instruments are contracts, first and foremost. As such, they are to be construed according to the rules

found in Book III, Title IV, Chapter 13, Interpretation of Contracts, of the Louisiana Civil Code.44

The bankruptcy court invoked only one among that "baker's dozen" of articles to support its

restrictive interpretation of Article VIII's use of "hypothecate," thereby excluding pledge from the

meaning of "hypothecate."45 When we visit all thirteen articles of Chapter 13, however, we reach the

opposite result.

Skimming quickly, we observe first that article 2045 defines interpretation of a contract as

44
LA.CIV.CODE ANN. arts. 2045-2057 (West 1987).
45
LA.CIV.CODE ANN. art. 2047.
"the determination of the common intent of the parties." Article 2046 eschews further interpretation

when the words of the contract are clear and explicit "and lead to no absurd consequences."

The reliance by the bankruptcy court on the next rule, article 2047, is questionable: Although

we find the first sentence of article 2047 ("The words of a general contract must be given their

generally prevailing meaning.") significant to the instant inquiry, the second sentence ("Words of art

and technical terms must be given their technical meaning when the contract involves a technical

matter.") may well be irrelevant here. The bankruptcy court relied on that second sentence as

authority to use the technical legal meaning of "hypothecate."

But it is axiomatic that legal terms are always given their legal meaning. As such, the phrase

"words of art and technical terms" in art. 2047 refers to technical terms of art from other disciplines,

such as the social sciences, the earth sciences, engineering, the construction industry, the oil and gas

industry, and the like.46

Article 2048, the one next following the article cited by the bankruptcy court, impresses us

as being more to the point of the instant inquiry than is article 2047. Article 2048 instructs that

"[w]ords susceptible of differing meanings must be interpreted as having the meaning that best

conforms to the object of the contract." We have already demonstrated that "hypothecate" can have

any of several meanings: mortgage only; pledge only; or any encumbrance, including both mortgage

and pledge. Here, corporate stock is the object of the Articles of Incorporation of Lucullus, the

contract in question. As Louisiana corporate stock is not susceptible of mortgage, defining

"hypothecate," as in a restriction on alienation of corporate stock, to cover only mortgage, relegates

that verb to meaningless surplusage. On the other hand, interpreting the restriction's use of

46
See, e.g., Reliance Ins. Co. v. Orleans Parish School Bd., 322 F.2d 803, 806 (5th Cir.)
("Terms of art or technical phrases are to be interpreted according to their received meaning with
those who profess the art or profession to which they belong." (quoting LA.CIV.CODE ANN. art.
1947)), cert. denied, 377 U.S. 916, 84 S.Ct. 1180, 12 L.Ed.2d 186 (1964); McCoy v. United
Gas Public Serv. Co., 57 F.Supp. 444, 445 (W.D.La.1944) (holding phrase in mineral lease to be
construed according to meaning of terms commonly understood in oil and gas industry; Agnelly
v. Lauricella, 383 So.2d 813, 815 (La.Ct.App. 4th Cir.1980) (finding accountant's testimony
proper proof of meaning of accounting term used in contract); Southern Excavation, Inc. v.
Department of Highways, 292 So.2d 310, 312-13 (La.Ct.App. 1st Cir.1974) (The phrase
"conditions considered unsuitable for the prosecution of the work" used in contract granting
engineer authority to suspend work given meaning understood in construction trade.).
"hypothecate" to mean pledge conforms precisely to the object of the contract and gives that verb

a sensible meaning in the phrase. Thus article 2048 augurs for an interpretation of "hypothecate" that

at a minimum includes pledge, and more properly includes any encumbrance applicable to corporate

stock, while at the same time eschewing mortgage because corporate stock is not susceptible of

mortgage.

This conclusion draws further support from the next Code article in the series. Article 2049

moves from consideration of single words to consideration of entire provisions, stating that "[a]

provision susceptible of different meanings must be interpreted with the meaning that renders it

effective and not one that renders it ineffective."47 As corporate stock cannot be mortgaged, the

bankruptcy court's interpretation of "hypothecate" in the Lucullus stock restriction provision to mean

mortgage rendered it nugatory. Giving "hypothecate" its extensively used, broader meaning of pledge

in particular or encumber generally renders it effective in the context of restrictions on alienation of

corporate stock as mandated by article 2049.48

At the time of Hill's transaction, pledge was the only nominate security device applicable to

47
See, e.g., West v. Kerr McGee Corp., 586 F.Supp. 493, 499 n. 8 (E.D.La.1984) (recognizing
that a clause in contracts should be interpreted in a manner that does not render the clause
redundant), rev'd on other grounds, 765 F.2d 526 (5th Cir.1985); Wier v. Texas Co., 79 F.Supp.
299, 310 (W.D.La.1948) (holding that if a contract is susceptible to two interpretations, the court
must adopt the meaning that will uphold rather than destroy the contract's validity), aff'd, 180
F.2d 465 (5th Cir.1950); Robbert v. Equitable Life Assur. Soc., 217 La. 325, 46 So.2d 286, 288
(1950) (same); Lower Terrebonne Ref. & Mfg. v. Barrow, 126 La. 263, 52 So. 487, 489-90
(1910) (holding that a contract cannot be interpreted to defeat the main purpose indicated by its
provisions taken as a whole or impute use of language without meaning or effect); Franks
Petroleum, Inc. v. Mayo, 438 So.2d 696, 699 (La.Ct.App. 2d Cir.) (Contracts are construed to
lead logical conclusions and give effect to obvious intention of parties; they must be interpreted
in a common-sense fashion according to common and usual significance of terms.), writ denied,
443 So.2d 595 (La.1983).
48
See LA.CIV.CODE ANN. arts. 2050 (West 1987) ("Each provision in a contract must be
interpreted in light of the other provisions so that each is given the meaning suggested by the
contract as a whole."); 2053 ("A doubtful provision must be interpreted in light of the nature of
the contract, equity, usages, the conduct of the parties before and after the formation of the
contract, and of other contracts of a like nature between the same parties."); 2054 ("When the
parties made no provision for a particular situation, it must be assumed that they intended to bind
themselves no only to the express provisions of the contract, but also to whatever the law, equity,
or usage regards as implied in the contract of that kind or necessary for the contract to achieve its
purpose."); 2055 ("Usage ... is a practice regularly observed in affairs of a nature identical or
similar to the object of a contract subject to interpretation.").
corporate stock under Louisiana law.49 By definition the conventional mortgage and the archaic

antichresis apply only to immovable property. So, in the context of restricting alienation of corporate

stock, "hypothecate" could not have referred to mortgage even if that were t he limited technical

meaning of that verb in late Roman law, in French law, and in the Louisiana Civil Code. Likewise,

"hypothecate" could not refer to chattel mortgage because in Louisiana chattel mortgage is available

to encumber corporeal movables only, and corporate stock is classified as an incorporeal movable

(even though for purposes of official transfer such stock is sometimes deemed to be "corporealized"

into the certificate that represents it). Conceivably, the use of "hypothecate" in Article VIII of the

Lucullus charter could have referred to the innominate security transact ion of "assignment" in its

pignorative connotation rather than its title-transferring connotation. But in this case such use would

be redundant, given that "assign" is the word next following "hypothecate" in Article VIII. Clearly,

then, in the context of a restriction on alienation of Lucullus stock, "hypothecate" is synonymous with

"pledge."

Any lingering doubt is removed by reading Article VIII in pari materia with the legend that

appears on the stock certificate. Given the almost universal practice among Louisiana lawyers who

incorporate closely-held businesses of preparing a comprehensive "package" of documents at the time

of incorporation—not merely Articles of Incorporation but such ancillary instruments as Bylaws,

Minutes, Shareholders' Agreements, and stock certificates for original issues of shares—we speculate

that the same scrivener who prepared the Articles of Incorporation for Lucullus, Inc. prepared the

stock certificates issued to the founders (including Hill) on September 25, 1984. The Articles of

Incorporation are dated September 13, 1984; they were filed and recorded in the office of the

Louisiana Secretary of State on September 17, 1984. Dunne was named as the sole incorporator of

Lucullus, but the corporation's Initial Report, executed and filed contemporaneously with the Articles,

lists Hill as 1) the registered agent, 2) one of the three initial Directors of the corporation, and 3) its

49
Since Hill's purported pledge of his stock to the Bank, Louisiana has adopted its own version
of Article 9 of the Uniform Commercial Code, which was effective January 1, 1990, and permits
creation of a "security interest" in shares of corporate stock. See, e.g., LA.REV.STAT.ANN. §
10:9-203 (West Supp.1992).
Vice President. The legend on the reverse side of the stock certificate—referring as it does to

restrictions "set forth in the by-laws (or Articles as the case may be)"—is obviously standard

"boilerplate" verbiage employed by the drafter here and in his general corporate practice. The legend

makes no mention of pledge, hypothecation, sale or any other particular transactions. It does,

however, refer generically both to "transferred" and "encumbered" when describing the types of

transactions that are conditioned on compliance with the provisions of the restriction.

Reference to encumbrance in the legend is strong evidence that the provisions of Article VIII

are not intended to cover title-transferring transactions only; and, indeed, the bankruptcy court

recognized that at a minimum "hypothecate" referred to mortgage, itself a pignorative contract not

translative of title. Again, irrespective of the context of its use, "hypothecate" can only have one of

its possible meanings: mortgage of immovable property only; encumbrance of either movable

property or immovable property; or both. As Article VIII applies to no property other than

corporate stock, which is an incorporeal movable, and as the legend on the certificate refers to

transfer and encumbrance, the legend supports Adler's contention that "hypothecate" here has to

mean pledge—or mean nothing at all. But, as expressed in Article 2049 of the Civil Code, the law

abhors an interpretation that results in the language of a contract having no meaning at all.

CONCLUSION

Given the history, usage, context and determined intent of the parties here, we are led to the

unavoidable conclusion that the charter provisions to which the Bank was referred by the legend on

Hill's stock certificate do apply to pledge. Hill ignored the restriction and failed to comply with the

requirement that he first offer his stock, through the corporation, to the other shareholders at book

value before hypothecating (pledging) such stock. The Bank officer who accepted Hill's deficient

pledge did not ignore the restriction; to the contrary, he acknowledged his awareness that the stock

was "legended" by writing to the corporation to advise it of the pledge, acknowledging (mistakenly)

that the stock nonetheless would not be sold without offering it to the shareholders first. As we find

that, under the totality of the circumstances, the prohibition against hypothecation is congruent with

a prohibition against pledge, the purported pledge by Hill to the Bank was voidable—not necessarily
by Hill or the Bank as knowing parties to the deficient transaction, but by those to whom the duty

created by the restriction ran: the corporation and t he other shareholders. And, by virtue of the

bankruptcy law, the trustee of Hill's Chapter 7 estate is another party entitled to assert the relative

nullity of that transaction. The trustee did so, and in a timely and proper manner.

For the foregoing reasons, we reverse the holding of the bankruptcy court, and the affirmation

thereof by the district court, and render judgment in favor of Adler as trustee and against the Bank,

annulling the pledge and thereby freeing the subject 25 shares of Lucullus, Inc. stock of that

impediment. As a result, we find that such stock must be included among the unencumbered assets

of the estate, free of any secured position of the Bank therein. Therefore, the judgment of the

bankruptcy court and t he affirmation thereof by the district court are reversed and the case is

remanded to the bankruptcy court for further proceedings consistent herewith.

REVERSED, RENDERED and REMANDED.