UNION BANK v. ANDERSON
[Sam Hamburg Farms, Inc. (SHF, Inc.) was a California corporation owning approximately 6200 acres of farming property in Merced and Fresno Counties. In 1975, John Anderson and Henry Stone negotiated to purchase the 6200 acres, intending to buy the land as an investment, farm it, then break it up and sell it. In order to comply with Federal Bureau of Reclamation requirements for federal water rights on the property, Anderson and Stone decided to buy the stock of SHF, Inc., and thereby acquire the control of the land, buildings, equipment, crops, and water rights. The purchase price was paid by a promissory note for $2,650,000, payable in ten annual installments commencing in January 1977, and the note was secured by a deed of trust on the real estate. Anderson and Stone failed to pay the promissory note and claimed they could not be sued for the difference between the value of the land and the amount of the note because of California Code of Civil Procedure section 580b, which stated:
“No deficiency judgment shall lie in any event after any sale of real property for failure of the purchaser to complete his contract of sale, or under a deed of trust, or mortgage, given to the vendor to secure payment of the balance of the purchase price of real property, or under a deed of trust, or mortgage, on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of such dwelling occupied, entirely or in part, by the purchaser.”]
It appears both Anderson and Stone acknowledge the instant transaction could only fall within section 580b protection as a variation on the standard purchase money transaction. The question presented is whether a sale of all of the stock of an existing farming corporation, whose tangible assets consisted of real property, buildings, equipment, growing crops and other assets, secured by a note and attendant subordinate deeds of trust executed by the shareholders of the corporation on the corporation’s real property, constitutes a variation on the standard purchase money transaction? Anderson maintains “[equitable] ownership of the real property was transferred” and that “[i]n their analysis of CCP § 580b, the courts have repeatedly disregarded the form of the transaction to determine its true substance.” Stone agrees and maintains “[t]he transaction was a real property purchase money transaction.”
Anderson and Stone’s arguments and case authority fail under these facts. It is well recognized that a corporation is a legal entity having an existence separate from that of its shareholders. (Merco Constr. Engineers, Inc. v. Municipal Court (1978) 21 Cal.3d 724, 729, 147 Cal. Rptr. 631, 581 P.2d 636.) When shareholders purchase stock in a corporation, and the corporation includes certain holdings in real property, the shareholders do not acquire an ownership interest in the real property. A share is simply a unit of proprietary interest which the shareholder holds in the corporation. (Kohl v. Lilienthal (1889) 81 Cal. 378, 385, 22 P. 689; Corp.Code, § 184.) That is, the shareholders are not the owners of corporate prop erty; the whole title is in the corporation. (Barnett v. Lewis (1985) 170 Cal.App.3d 1079, 1088, 217 Cal. Rptr. 80; Baker Divide Mining Co. v. Maxfield (1948) 83 Cal.App.2d 241, 248, 188 P.2d 538.) “The shareholders of a corporation do not have legal title to the assets or capital of the corporation, have no right to the possession thereof, may not transfer or assign the properties or assets of the corporation nor apply corporation funds to personal debts.” (In re Mercantile Guaranty Co. (1968) 263 Cal.App.2d 346, 352, 69 Cal.Rptr. 361.) Even upon dissolution, the shareholder is not entitled to a proportionate share of the property held by the corporation, only the assets left after liabilities of the corporation are adequately provided for or paid. (Corp. Code, § 2004.)
While Stone is correct in his assertion that “[t]he factual situations in which purchase money transactions occur . . . are limited only by the creative imaginations of the participants in real property sales,” here there was no real property sale. Indeed, Anderson and Stone’s then-attorney, during negotiations in 1975, acknowledged to the Department of the Interior that the transaction was “ ‘strictly a stock acquisition. . . .’ ”
Parties to a sale of stock cannot simply disregard the corporate form of the acquisition, no matter what the “intent” of the parties to the sale might have been at one time. While Anderson and Stone may have initially negotiated to buy real property, eventually they knowingly purchased only the stock of SHF, Inc.
Anderson and Stone specifically purchased all the outstanding shares of stock because it enabled them to retain federal water rights on all of the acreage, which a buy up of the corporation (and acquisition of its real property) would not have provided. Simply put, they bought out the shares of a corporation. The corporation owned the property. Their note was for the purchase of personal property (shares in the corporation). The fact that it may have been secured by real property does not render the transaction a purchase money transaction for real property. This is not a situation where they purchased the land from the corporation; they simply purchased all the shares of the corporation which owned the land. We conclude section 580b does not apply to the note.
