Monday, January 16, 2017

Is It True, Is It Kind, Or Is It Necessary?

Rounds v. Malletts Bay Club, Inc., 2016 VT 102

By Thomas M. Kester

One must read contracts carefully. Sometimes reading between the lines and sometimes between the documents. The case essentially boils down to what an “if necessary” clause means in a sentence. Let’s look at a nifty lens through which this agreement’s clause can be understood, to wit: contemporaneous writings.

George purchased property in Malletts Bay Club, Inc. (MBC) in 1968 and received 27 shares of MBC stock. in 1975, he gave four shares of stock to his kids. Prior to 1992, the MCB bylaws required real property transfers to also include (at a minimum) seven shares of MBC stock. With a 1992 amendment, the real property sale must also include all shares of MBC stock. Both pre- and post-1992, MBC had a right of first refusal to purchase property or stock to anyone other than certain family members.

In 1997, George transferred his residence to his daughter, Sandy, as trustee of George’s personal residence trust (Trust). In 1998, the Trust sold the property to Douglas. In the Trust-to-Douglas transaction, MBC’s president signed a “Waiver and Agreement” okaying the transfer of the property and seven shares of MBC stock from Trust to Douglas and waived MBC’s right of first refusal to purchase the 23 shares and property.
George’s attorney wrote a letter to MBC’s president instructing him: “you are to now issue 7 shares to [Douglas] and retain the remaining 16 shares in escrow until further directive by George or, if necessary, pursuant to the order of a court of competent jurisdiction.” The letter similarly repeated again that “The remaining sixteen (16) shares shall remain in the control and custody of the transfer agent until further directive by George [] or, if necessary, the order of a court of competent jurisdiction.” The letter also gave Douglas a right of first refusal to the remaining shares that George had. George and Sandy (as Trustee) signed the letter as well. If you haven’t kept up with the math: 4 shares to George’s kids + 7 shares to Douglas + 16 shares held by MBC’s president for George = 27 total shares.

The day after the lawyer’s letter, George signed a Stock Transfer Agreement” which is “substantially similar” to the lawyer’s letter. The Stock Transfer Agreement stated that “I [George] do hereby direct that my remaining sixteen (16) shares of the capital stock of [MBC], shall remain in the control and custody of [MCB’s president] until further directive by me or, if necessary, pursuant to the order of a court of competent jurisdiction.”

Months later, George hasn’t received a new document evidencing his 16 MBC shares and asks MBC’s president to issue a stock certificate. MBC’s president doesn’t send a new stock certificate to George. George and MBC’s president send correspondence back and forth, and George states that he doesn’t like the 1992 by-law amendment (even though he voted for it).

In 2010, George passes away and leaves the 16 MBC shares to his four kids. A Pennsylvania court distributes four shares to each of the children. Sandy asks MBC’s president to distribute the 16 MBC shares to the four children. MBC and MBC’s president refuse, stating that “pursuant to the 1992 bylaw, [George] was required to include in his sale all of his MBC shares and therefore he had no transferable MBC shares at the time of his death” and “no transfer of stock would be made to [George’s] family without an order from a Vermont court.”

In 2014, a lawsuit is filed by the children against MBC. The children argue that MBC waived its right of first refusal and waived its objection of the Trust-to-Douglas sale of only 7 out of 23 shares, and the 16 shares belong to them. MBC argues, among other things, that the Trust-to-Douglas transfer is subject to the MBC bylaws. The trial court holds that (1) MBC’s president breached his fiduciary duty/the agreement as he was supposed to transfer the 16 shares when requested by Sandy, (2) MBC’s approval of the Trust-to-Douglas sale waived their right to challenge George’s failure to transfer the additional 16 shares to Douglas (per the 1992 amendment), and (3) the children own the 16 shares.

Right off the bat, the SCOV states that MBC’s president was not required to return the 16 shares to Sandy when demanded “but, rather, requires him to relinquish the shares upon a court order adjudicating the validity of the 1992 bylaw amendment” and MBC didn’t waive its challenge to the failure to transfer all MBC shares for the Trust-to-Douglas sale. So apparently the ’92 bylaw amendments are both passed/valid and are in contention/potentially invalid, like Schrödinger’s cat (and—spoiler alert—this validity issue will be addressed on remand).

The SCOV recites case law for the proposition that “[t]he circumstances surrounding the making of an agreement are admissible in determining whether the agreement is ambiguous” and comes to the conclusion that “The circumstances surrounding the execution of these documents undisputedly illuminates their clear meaning.” With such a bold assertion used (“undisputedly illuminates their clear meaning”), you know SCOV's about to bring the fire. Two  facts to keep in mind: (1) “Plaintiffs’ complaint acknowledges that at the time [being 1998] there was a dispute over the validity of the 1992 bylaw amendment” and Defendants concur that Plaintiff disputed the validity; and (2) “The only reasonable understanding of the [Stock Transfer Agreement] document is that [MBC’s president] was required to release the shares upon an agreement between the parties or an order arising out of litigation resolving the validity of the bylaw amendment.” The SCOV states “If [MBC's president] was unconditionally required to relinquish the stocks upon [George]’s directive, as [George] contends, the if necessary’ clause contemplating a court order as an alternative would serve no purpose.”

Now, you might be asking yourself (I sure was) “why did MBC approve of the Trust-to-Douglas transfer if the validity of the ’92 bylaw amendment was in contention?” At this juncture, the SCOV reads the Stock Transfer Agreement and the Waiver and Agreement together because they “were undisputedly executed at the same time and neither should be construed in isolation.” When read together, “[T]he only coherent explanation of the parties’ intent is that they sought to allow the [Trust-to-Douglas] property transfer to close notwithstanding their differences.” Thus, according the SCOV, MBC didn’t waive its right to enforce the 1992 amendment to the MBC bylaws by its actions. Further, MBC is entitled to summary judgment dismissing the declaratory judgment request.

Hold the phone—doesn’t that result in MBC’s president still holding onto the shares for George’s benefit? True, and the SCOV acknowledges that the issue of whether the amendment is actually valid was not raised on this appeal. The SCOV kicks the case back to address that issue.

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