## Facts

- A family-owned, closely held farming corporation was formed by three couples who contributed farms and equipment in exchange for stock.
- One couple, Linda and Birchell Moore, contributed a jointly owned 180-acre farm and received 2,508 shares (about 14% of the corporation’s stock), issued primarily in Moore’s name.
- In 1977, the board (including Moore) adopted stock-transfer restrictions requiring director approval and establishing a tiered right of first refusal: first the corporation, then other shareholders, then “blood” family members, generally at no more than book value.
- The restrictions were not printed on the stock certificates, but Moore had actual knowledge from his participation as a director.
- Linda and Moore divorced in 1982; the dissolution decree awarded Linda all corporate shares and awarded Moore a money judgment secured by a lien on Linda’s shares.
- The judgment remained unpaid; in 1998 Moore executed on the lien, and Linda’s shares were sold at a sheriff’s sale, where Moore purchased them.
- The corporation and family shareholders attempted to prevent Moore’s ownership by cancelling the shares and invoking the transfer restrictions and right of first refusal after the sale.

## Issues

1. Whether corporate share-transfer restrictions (including board-approval and right-of-first-refusal provisions) are enforceable against a purchaser at a foreclosure (sheriff’s) sale when the purchaser has notice of the restrictions.
2. Whether such restrictions may prevent a judgment creditor from foreclosing a lien on the shares.
3. Whether a corporation or shareholders holding a right of first refusal may exercise it against a foreclosure-sale purchaser after title has passed when they had notice of the foreclosure.

## Decision

- The Indiana Supreme Court affirmed the result that Moore became the owner of the shares purchased at the sheriff’s sale.
- The court held that share-transfer restrictions, including board-approval requirements, are generally valid in closely held family corporations and are enforceable against purchasers with notice.
- The court held that transfer restrictions cannot bar a creditor from foreclosing a lien on shares; foreclosure may proceed, but a foreclosure purchaser with notice takes the shares subject to the restrictions.
- The court held that holders of a right of first refusal who have notice of the foreclosure cannot wait until after the foreclosure purchaser takes title to assert the right against that purchaser.
- Because the corporation and other shareholders had notice of the foreclosure and did not timely assert any right of first refusal before the sale, they could not later cancel Moore’s shares or retroactively enforce the right against him.

## Legal Principles

- Stock-transfer restrictions, including board-approval requirements, are generally valid and enforceable in closely held or family corporations against purchasers who have notice of the restrictions.
- Transfer restrictions may not be used to defeat a creditor’s ability to foreclose a lien on shares; instead, the restrictions may continue to burden the shares after foreclosure if the buyer had notice.
- A purchaser at a foreclosure sale with notice of transfer restrictions acquires the shares subject to those restrictions, rather than free and clear.
- A right of first refusal must be exercised timely when the holder has notice of the triggering foreclosure; failure to act before title passes prevents post-sale enforcement against the purchaser.

## Conclusion

Moore could foreclose his judgment lien and acquire the shares at the sheriff’s sale, but—because he had notice—he took them subject to otherwise enforceable transfer restrictions; the corporation and other shareholders, having notice and failing to act before the sale, could not later invoke a right of first refusal to undo or restrict his acquired title.


F.B.I. Farms, Inc. v. Moore, 798 N.E.2d 440 (Ind. 2003)