BROWN, Judge.
In this interlocutory appeal, Andrew C. Kesling, individually and as Trustee of the Andrew C. Kesling Trust Dated March 28, 2001 (the "Trust"), appeals the judgment of June 23, 2011 (the "Judgment") in favor of his father, Peter Kesling.
The relevant facts follow. In 1955, Harold Kesling, who was Peter's father, along with Peter and Peter's brother David Kesling, founded TP Orthodontics, Inc. ("TPO"), which is in the business of developing, marketing, and selling orthodontic devices.
The corporate by-laws, adopted in 1956, set forth the method for transferring stock in TPO:
Exhibit 1 at 26.
In 1973, the TPO shareholders entered into an agreement which restricted a shareholder's ability to transfer shares of TPO to a non-shareholder, noting that "the parties desire by mutual agreement to protect the small business corporation classification from destruction due to the transfer of shares to persons not now shareholders." Exhibit 3 at 1. On July 8, 1993, this agreement was amended and restated (the "Shareholder Agreement"), noting that "all of its shareholders, hereinafter collectively referred to as `Shareholders', WITNESSETH:" and reiterating at the outset that "the parties desire by mutual agreement to protect the small business corporation qualification by restricting the transfer of shares to persons not now shareholders" and that "there are now voting and non-voting shares of [TPO] having the same rights and privileges, except voting rights." Exhibit 4 at 1. The Shareholder Agreement stated the following:
Exhibit 4A at 1-5.
On September 24, 1999, a special meeting of the Board of Directors was held in which Peter, Andrew, and David were present and in which Peter held a voting proxy for Christopher Kesling; the minutes of the meeting noted that "[a] majority of the directors were present for the transaction of business." Exhibit 5A. At the meeting, a variety of topics were addressed including "a proposed resolution governing requests to transfer shares into the name of a revocable trust." Id. The following resolution (the "1999 Resolution") was unanimously adopted:
NOW, THEREFORE, BE IT AND IT IS HEREBY RESOLVED that:
Id. The minutes from the meeting also noted that Peter was stepping down as Chairman of the Board of Directors but that he would continue as a member of the board. The minutes were signed by Andrew, as President, and Peter, as Chairman.
In 2001, prior to the annual shareholder meeting,
Section 2.01, entitled "Funding," states that "I hereby transfer to the trust estate the property listed in Exhibit `A' attached hereto," and Exhibit A listed, among other things, Andrew's shares of TPO voting and non-voting stock (540 and 3,488 shares, respectively). Id. at 2, 34. Also, Section 2.03, entitled "Distributions," stated the following:
Id. at 2-3.
Article Three, which governs disposition of the Trust's property upon Andrew's death, directs that the assets be allocated into a marital fund, in which a separate trust would be formed for the benefit of Dorothy, and a family fund for distribution to Andrew's four children and their descendants. Section 3.08 is entitled "Family Disaster" and states that "[i]n the event [Dorothy] fails to survive my death, and in the further event there are no descendants of mine surviving my death, then the Trustee shall distribute the trust estate as follows," and further states that Andrew's TPO shares "shall be sold to that corporation in accordance with the terms of the Shareholders Agreement then in effect." Id. at 8. Also, Article Five listed the powers of the trustee and included, under Section 5.01(e), the power:
Id. at 14. Finally, Paragraph 8.01 denoted the power reserved by the grantor and stated: "I reserve, during my lifetime, the right to amend, modify or revoke this Agreement, in whole or in part, at any time or times, by notice in writing to the Trustee, and such amendment, modification or revocation shall be effective immediately upon actual delivery to the Trustee." Id. at 25.
In February 2004, at a time in which Andrew was serving as the CEO of TPO and Doug Biege was serving as President, tension developed between Andrew and Peter regarding Andrew interfering with Biege's duties as President, and Peter made a decision to remove Andrew from TPO's day-to-day operations. After a conversation between Peter and Andrew, however, Peter decided not to remove Andrew. However, in May 2004, tension between Peter and Andrew resurfaced, and Andrew told Peter that Peter had "three choices. . . . [Andrew] said, I can buy you out; you can buy me out; or we can sell the company." Transcript at 503. Soon after, Andrew became "really shocked" when Peter told him that he decided to sell Andrew "enough [voting stock] to give [Andrew] 51 percent." Id. at 503-504.
Peter informed TPO's Board of his intention to sell a majority interest in TPO to Andrew, and on May 15, 2004, the Board "noted and approved . . . the sale of 5,410 shares of voting stock by Peter C. Kesling to Andrew C. Kesling."
On May 21, 2004, Lewis sent a letter to Andrew with enclosed drafts of the two agreements to purchase stock, and on May 24, 2004, Lewis sent the same to Peter. The drafts listed "PETER C. KESLING" as Seller and "ANDREW C. KESLING" as Buyer, stated that "[s]ince Buyer is an existing shareholder of [TPO], this sale and transfer of shares is permitted under the terms" of the Shareholder's Agreement, and noted that "[s]o long as Buyer is not in default in making the payments . . . the Buyer shall be entitled to all rights to vote the shares deposited with the Escrow Agent," which was NLKJ. Exhibit 11.
Soon after, Andrew expressed concern to Lewis about what would happen with his TPO shares "if something happened to him," and on June 16, 2004, Lewis sent Andrew a letter with enclosures consisting of amended purchase agreements and a draft of a Voting Trust Agreement (the "Voting Trust"). The Voting Trust stated that it was an agreement "between ANDREW C. KESLING ("Shareholder"), and ANDREW C. KESLING ("[Voting] Trustee")" and that at its execution, "Shareholder shall assign and deliver all stock certificates representing shares of voting stock of [TPO] to the [Voting] Trustee, who shall cause the shares represented thereby to be transferred to the [Voting] Trustee as voting trustee on the books of" TPO, and indicated that this included the shares he was purchasing from Peter. Exhibit 17 at Paragraph 1. The Voting Trust stated that the Voting Trustee or any successor "shall have the exclusive right to vote upon such shares" and noted that in the event of death or disability of the Voting Trustee, "Peter C. Kesling or Charlene J. Kesling, or their survivor, shall serve as first alternate successor Trustee(s)," and that Lewis was named as
Also, language was added to the purchase agreements reading: "So long as Buyer is not in default in making the payments herein provided, the Buyer or any voting trustee designated by Buyer shall be entitled to all rights to vote the shares deposited with the Escrow Agent." Exhibit 13 at Paragraph 5. Also, a new paragraph titled "Death of Buyer" was added to the draft purchase agreements which stated that "[i]n the event of the death of the Buyer . . . the shares are subject to purchase by [TPO] or its shareholders pursuant to the provisions of the Shareholder Agreement." Id. at Paragraph 7. Lewis included this paragraph "to remind everyone . . . what would happen," because under the Shareholder Agreement, if Andrew died, "he couldn't pass the shares onto his children. . . . Or his wife. . . . Because she was not a shareholder." Transcript at 953.
On June 21, 2004, Andrew and Lewis spoke by telephone and discussed making amendments to the Trust. Andrew "wanted to be more precise about what would happen to his shares" in the event of his death, and also wanted language in the purchase agreements allowing for an opportunity to cure in the event of default in making installment payments. Id. at 955. Based upon these concerns, Lewis made further changes to the purchase agreements in what would be the final drafts. Paragraph 7 was changed to read: "Death of Buyer. In the event of the death of the Buyer . . . the shares are subject to disposition as stated in the Declaration of Revocable Living Trust dated March 28, 2001, established by Buyer, as amended June 25, 2004." Exhibit 15A, B at Paragraph 7. Also, the default provisions were changed to provide Andrew a thirty-day grace period and to allow Andrew to keep any shares he had paid for in the event of default.
On June 25, 2004, Peter, his wife Charlene, Andrew, Lewis, and another attorney, James Kaminski, met at the NLKJ offices to finalize the sale of stock to Andrew. Andrew, individually, and Peter signed both purchase agreements as amended (the "Stock Purchase Agreements"), and Lewis signed both agreements to accept his appointment as escrow agent. Andrew's Voting Trust was also executed; Andrew signed as both Shareholder and Trustee of the Voting Trust, Peter and Charlene signed as the First Successor Trustees, Lewis signed as the Second Successor Trustee, and Kaminski signed as the Third Successor Trustee. Overall, the meeting lasted thirty minutes or less.
Further, on that same day Andrew signed the First Amendment to Declaration of Revocable Living Trust (the "Trust Amendment"), in which Andrew's "[v]oting and nonvoting shares of [TPO], together with any voting trust certificates representing voting shares of [TPO] held in voting trust" were allocated to the Marital Fund provided for in the Trust upon the death or incapacity of Andrew. Exhibit 16 at Paragraph 3.04(a)(iii). Also, Paragraph 3.06 states the following:
Id. at Paragraph 3.06. A similar provision for selling Andrew's TPO shares to his relatives was included in Paragraph 3.08 in the event of a Family Disaster. The Trust Amendment was signed by Andrew as Grantor, pursuant to the Grantor's power of amendment reserved in Paragraph 8.01 of the Trust.
After the Stock Purchase Agreements were signed, Peter endorsed his stock certificates, which included certificates 56, 61, and 70, and provided them to his assistant, Lori Allen, and Allen prepared the back of the certificates pursuant to instructions which she received and noted that the new stock certificates were issued to "Andrew C. Kesling Trust dated March 28, 2001." Exhibits 36A, 36B, 36C. Previously, Lewis had prepared a checklist regarding the steps necessary to prepare the stock certificates to complete the transfer. Peter signed each of the certificates. Three stock certificates were issued in the name of the Trust: Certificate 176 reflected ownership of the 117 shares Andrew purchased at the premium rate, Certificate 177 reflected ownership of the other 5,293 shares Andrew purchased from Peter, and Certificate 178 reflected the 540 shares Andrew owned prior to the purchase from Peter.
On February 28, 2006, at the TPO Board of Directors meeting, Peter expressed concern regarding royalty payments paid to Andrew "for the '859 patent invented by Andrew Kesling as well as payments from Kesling & Rocke for rent and no charge product supplied to the Kesling and Rocke clinic." Exhibit 51. Then, at the September 26, 2006 board meeting, the directors adopted a resolution forming an investigating committee to determine whether TPO "has a legal or equitable right or remedy to recover funds improperly paid by [TPO] to Andrew" and whether "it is in the best interest of [TPO] to pursue that right or remedy," and delineating the specificities of the task. Exhibit 5 J. In November 2006, based on this investigation, Peter filed a complaint against Andrew which was removed to federal court. On November 19, 2007, Andrew filed a reply brief in support of his summary judgment motion which contained the following footnote:
Exhibit 45 at 1 n. 2.
On January 10, 2008, siblings of Andrew, Christopher, Adam, and Emily Kesling (the "Siblings"), filed a complaint naming Andrew, the Trust, Peter, and TPO as defendants, and requested that an "order be entered declaring that [they] are entitled to purchase the 5,950 voting shares of TPO stock pursuant to the terms of the Shareholder Agreement . . ." Appellant's Appendix at 50. In their complaint, the Siblings stated that, as a result of Peter's lawsuit in federal court, they were made aware that the 5,410 shares of stock sold to Andrew were not transferred to Andrew but rather to the Trust, that "[t]he Trust was not an existing shareholder of TPO at the time the TPO shares were transferred into it," that this was a violation of the Shareholder Agreement, and that therefore they were entitled to purchase the shares. Id. at 46. On February 29, 2008, Peter, as part of his answer to the Siblings' complaint, asserted a cross-claim against Andrew requesting that the court rescind Stock Purchase Agreements executed on June 25, 2004 and return the stock to Peter because "Peter would not have entered into the 2004 Transaction, giving Andrew voting control of the Company, had he known that Andrew had caused the Company to pay himself substantial royalties to which he was not entitled." Id. at 74. On September 5, 2008, Peter moved for leave to amend his answer and cross-claim, stating that, based upon discovery provided by Andrew on July 17, 2008, Peter "learned that Andrew Kesling was not a shareholder of [TPO] in June, 2004. The discovery of this new fact is important because it forms an additional basis for Peter's actual and constructive fraud claims. . . ." Id. at 265.
On July 12, 2010, the court commenced a five-day bench trial in which evidence consistent with the foregoing was presented. At trial, Peter testified that, at the meeting on June 25, 2004, the only changes highlighted by Lewis between the first drafts and final copies of the purchase agreements were regarding the inclusion of the Voting Trust and the changes to the default provisions. Peter also testified that he believed Andrew was a shareholder on that date. Peter testified that he did not discuss the preparation of the stock certificates with Allen or otherwise instruct her with regard to their preparation. Peter testified that he did not read
On August 20, 2010, Andrew, Peter, the Siblings, and TPO each filed a post-trial brief. On June 23, 2011, the court issued its Judgment and, after reciting the basic facts of the case, stated as follows:
Appellant's Appendix at 40-42 (citations omitted).
The issue is whether the court abused its discretion in concluding that Peter was entitled to rescission of the Stock Purchase Agreements. Where, as here, the trial court enters findings and conclusions sua sponte, we apply the standard of review set out in Trial Rule 52. Chidester v. City of Hobart, 631 N.E.2d 908, 909 (Ind.1994). "We determine whether the evidence supports the findings and the findings support the judgment." Bowyer v. Ind. Dep't of Natural Res., 944 N.E.2d 972, 983 (Ind.Ct.App.2011) (quoting Garling v. Ind. Dep't of Natural Res., 766 N.E.2d 409, 410 (Ind.Ct.App.2002) (quoting Chidester, 631 N.E.2d at 910), trans. denied), reh'g denied. "In deference to the trial court's proximity to the issues, `we disturb the judgment only where there is no evidence supporting the findings or the findings fail to support the judgment.'" Id. (quoting Garling, 766 N.E.2d at 410) (quoting Oil Supply Co. v. Hires Parts Serv., Inc., 726 N.E.2d 246, 248 (Ind. 2000)). "We do not reweigh the evidence, but only consider the evidence favorable to the trial court's judgment." Id.
While we review findings of fact under the clearly erroneous standard, we review de novo a trial court's conclusions of law. Id.; Fobar v. Vonderahe, 771 N.E.2d 57, 59 (Ind.2002). "Where cases present mixed issues of fact and law, we have described the review as applying an abuse of discretion standard." Bowyer, 944 N.E.2d at 983; Fraley v. Minger, 829 N.E.2d 476, 482 (Ind.2005). We will conclude a judgment is clearly erroneous if no evidence supports the findings, the findings fail to support the judgment, or if the trial court applies the incorrect legal standard. Bowyer, 944 N.E.2d at 983-984. "In order to determine that a finding or conclusion is clearly erroneous, an appellate court's review of the evidence must leave it with the firm conviction that a mistake has been made." Id.; Yanoff v. Muncy, 688 N.E.2d 1259, 1262 (Ind.1997). However, sua sponte findings control only as to the issues they cover and a general judgment will control as to the issues upon which there are no findings. Tracy v. Morell, 948 N.E.2d 855, 862 (Ind.Ct.App.2011). A general judgment entered with findings will be affirmed if it can be sustained on any legal theory supported by the evidence. Id.
As chronicled above, the crux of the trial court's Judgment is that: (A) Andrew, due to his Trust Declaration in 2001, was not a shareholder of TPO on June 25, 2004; and
Before addressing the issues presented, however, we note that the doctrine of mutual mistake provides that "[w]here both parties share a common assumption about a vital fact upon which they based their bargain, and that assumption is false, the transaction may be avoided if because of the mistake a quite different exchange of values occurs from the exchange of values contemplated by the parties." Perfect v. McAndrew, 798 N.E.2d 470, 478 (Ind.Ct. App.2003) (quoting Bowling v. Poole, 756 N.E.2d 983, 988-989 (Ind.Ct.App.2001) (quoting Wilkin v. 1st Source Bank. 548 N.E.2d 170, 172 (Ind.Ct.App.1990))). "It is not enough that both parties are mistaken about any fact; rather, the mistaken fact complained of must be one that is `of the essence of the agreement, the sine qua non, or, as is sometimes said, the efficient cause of the agreement, and must be such that it animates and controls the conduct of the parties.'" Id. (quoting Bowling, 756 N.E.2d at 989 (quoting Jackson v. Blanchard, 601 N.E.2d 411, 416 (Ind.Ct.App. 1992))). Where a mutual mistake of fact is present, the equitable doctrine of rescission may apply. Tracy, 948 N.E.2d at 866; see also Poppe v. Jabaay, 804 N.E.2d 789, 796 (Ind.Ct.App.2004) (noting that rescission of a contract may be available in cases of "fraud, illegality, or mutual mistake"), trans. denied, cert. denied, 543 U.S. 1164, 125 S.Ct. 1333, 161 L.Ed.2d 138 (2005); Franklin v. White, 493 N.E.2d 161 (Ind. 1986) (holding rescission of contract proper after determination of mutual mistake of fact).
We begin by addressing Andrew's shareholder status on June 25, 2004, the date the Stock Purchase Agreements were executed. First, to the extent that we must interpret the Trust, we note that the interpretation of a trust is a question of law for the court. Paloutzian v. Taggart, 931 N.E.2d 921, 925 (Ind.Ct.App. 2010) (citing Univ. of S. Ind. Found. v. Baker, 843 N.E.2d 528, 531 (Ind.2006)). The primary purpose of the court in construing a trust instrument is to ascertain and give effect to the settlor's intention and carry out this intention unless it is in violation of some positive rule of law or against public policy. Id. (citing Baker, 843 N.E.2d at 532; Malachowski v. Bank One, Indianapolis, 590 N.E.2d 559, 565 (Ind.1992); Walz, 423 N.E.2d at 733). This court is not "at liberty to rewrite the trust agreement any more than it is at liberty to rewrite contracts." Id. (quoting Malachowski, 590 N.E.2d at 565-66). When a trust instrument must be construed by a court, we attempt to discern the settlor's intent in light of the facts and circumstances existing at the time the instrument was executed. Id. (citing Malachowski, 590 N.E.2d at 566).
Also, we note that this court has stated:
Breeze v. Breeze, 428 N.E.2d 286, 287-288 (Ind.Ct.App.1981) (quoting In re Trusteeship of Creech, 130 Ind.App. 611, 619, 159 N.E.2d 291, 295 (1959)). Further, we note that "`[i]f the owner of property declares himself trustee of the property, a trust may be created without a transfer of title to the property.'" Hinds v. McNair, 235 Ind. 34, 52, 129 N.E.2d 553, 563-564 (1955) (quoting 1 Restatement, Trusts, § 17, cmt. a (1935); 1 Scott, Trusts, § 17.1).
Although the question of whether the settlor, who places shares of stock into a revocable inter vivos trust and names himself as trustee and as a beneficiary, retains his shareholder status has not been examined in Indiana case law, the Indiana Supreme Court has examined an instance in which an individual asserted property rights where the property was held in a revocable trust. In Marshall Cnty. Tax Awareness Comm. v. Quivey, remonstrater David Good collected 129 signatures on six remonstrance petitions and "signed the verification form as a carrier of the petitions" as an individual rather than as the trustee of a revocable living trust in which his interest in his home was held.
On appeal, the Court observed that "[t]here seems to be no question that Good is the beneficial owner of real property located in the school corporation, and as trustee is also a record owner" and that the property was "located within the relevant school district." Id. at 385. The Court held: "We think it was clear enough who Good was and that, as trustee of a revocable trust created by himself and his wife, he was an owner of property within the district." Id. In so holding, the Court also discussed Ind.Code § 6-1.1-20-3.2, which governs the verifications of petitions and remonstrances and noted that the "statute does not permit County Auditors to add their own requirements for the verification procedure." Id. See also Oken v. Hammer, 791 P.2d 9, 10-13 (Colo.App. 1990) (holding that deed conveying property was valid despite the fact that seller executed the deed of trust as "Rosann H. Stegall, a single person" rather than signing as trustee of her living trust, in which the property was held).
Assuming that Andrew's Trust Declaration in 2001 had the effect of placing Andrew's shares into the Trust,
In re Walz, 423 N.E.2d 729, 732 (Ind.Ct. App.1981); see also In re Weitzman, 724 N.E.2d 1120, 1123 (Ind.Ct.App.2000) (citing Walz with approval). Thus, Walz states that an inter vivos, revocable trust is a tool for estate planning and describes it as both "unique" and a "legal entity." Accordingly, Peter argues that the court did not abuse its discretion when it "concluded based upon the fact that Andrew had transferred all of his TPO shares to his Revocable Trust that `Andrew, individually, was not a TPO shareholder.'" Appellee's Brief at 37 (quoting Appellant's Appendix at 41).
The evolution of the treatment of trusts in the law is highlighted by the Restatements of Trusts. The Second Restatement states the following in its introductory note:
RESTATEMENT (SECOND) OF TRUSTS intro. note (1959).
The Third Restatement contains the following introductory note to Chapter 21, titled "Liability of Trust or Trustee to Third Party:"
RESTATEMENT (THIRD) OF TRUSTS ch. 21, intro. note (2007) (emphasis added) (parentheses omitted).
Thus, as indicated by the most recent Restatement of Trusts (and indeed as the arguments of the parties demonstrate), the legal status of a trust is an evolving concept.
Andrew argues that "the Trust or trustee did not become an `owner' merely by taking legal title" because "[t]he Trust Code makes clear that a trustee is not an `owner.'" Appellant's Brief at 21 (citing Ind.Code § 30-4-3-15). Andrew argues that "the primary indicia of ownership are title, possession, and control," and that because "as grantor, Andrew reserved the power to amend, modify or revoke the Trust Declaration and [ ] remove the Trustee with or without cause," "the trustee lacked sufficient control over the Trust and its estate to indicate that the trustee had become the owner of Andrew's Pre-2004 Shares." Id. at 22-23. As support for his position, Andrew directs our attention to instances in the law in which the settlor is assigned an ownership interest over assets held in trust.
First, Andrew points to the Internal Revenue Code, which provides that "[t]he grantor shall be treated as the owner of any portion of a trust . . . where at any
Peter argues that "[t]he possibility that a grantor of a trust may be accountable for federal tax purposes does not address whether the grantor was individually divested of ownership of the shares upon creation of a valid trust," noting that such a "circumstance is analogous to the tax treatment of a limited liability company," in which "there is no dispute that when a limited liability company elects to pass its tax liability through to its members, it remains a separate entity notwithstanding the election." Appellee's Brief at 50. Peter argues that Andrew's arguments regarding creditors' rights are not applicable to this matter because "Andrew is not the sole beneficiary of the Revocable Trust." Id. at 51. Peter also distinguishes the cases cited by Andrew on factual grounds.
Under the circumstances, in which Andrew in 2001 formed a revocable trust, naming himself as trustee and beneficiary for life, and in his Trust Declaration assigned his shares of TPO to the Trust, we find that Andrew was a Shareholder of TPO on June 25, 2004, when he entered into the Stock Purchase Agreements with Peter. As in Marshall Cnty., there is no question that Andrew is the beneficial and record owner of the shares of TPO, and indeed the Trust under Section 5.01(e) makes clear that Andrew is entitled to vote the shares. In so holding, we are mindful
We are also persuaded by Andrew's arguments pertaining to the Internal Revenue Code, which assigns ownership of assets under such circumstances to the grantor. In addition to the arguments advanced by Andrew, as one commentator has observed, the IRS has repeatedly "ruled that the trust and the settlor are a single entity, thus making a sale or bona fide debt obligation between them impossible." Howard M. Zaritsky, Revocable Inter Vivos Trusts, 860 Tax Management Portfolio (BNA), A-57 (2003) (citing Rev. Rul. 85-13, 1985-1 C.B. 184).
Further, the blurring of the lines between a settlor of a revocable trust and the assets held in trust regarding ownership in tax law is illustrated by examining the reasoning found in W & W Fertilizer Corp. v. U.S., 208 Ct.Cl. 443, 527 F.2d 621 (1975), cert. denied, 425 U.S. 974, 96 S.Ct. 2173, 48 L.Ed.2d 798 (1976), and subsequent legislative action. In W & W Fertilizer, at issue was whether a corporation became ineligible for S Corporation status after the taxpayer transferred his shares into a revocable inter vivos trust. 527 F.2d at 622, 627. On appeal, the taxpayer argued that "it would be inconsistent not to consider him the owner of the shares for Subchapter S eligibility purposes and yet tax him as their `owner' on the income they produce." Id. at 627. The court held that although "the `grantor trust rules' of section 671 et seq." are concerned "with actual command over the property taxed," "[s]ubchapter S was enacted as a remedial measure to relieve qualifying small business corporations of a tax otherwise payable" and "[s]ection 1371(a)(2) limits the benefits of the Act to corporations whose stock is owned solely by individuals or estates" and thus "[w]here such a deliberately specific qualification is imposed, we must strictly apply it lest the narrow benefit intended by Congress be unduly broadened." Id. at 627-628.
However, W & W Fertilizer was decided prior to the Subchapter S Revision Act of 1982, Pub.L. No. 97-354, 96 Stat. 1669 (1982), which added § 1361 redefining an S Corporation. § 2, 96 Stat. 1669 (1982). As currently constituted, I.R.C. § 1361(b)(1) defines an S Corporation as:
I.R.C. § 1361(c)(2)(A) permits certain trusts to be included as shareholders of an S Corporation, including "[a] trust all of which is treated (under subpart E of part I of subchapter J of this chapter) as owned by an individual who is a citizen or resident of the United States," which includes Andrew's Trust. I.R.C. §§ 676, 1361(c)(2)(A)(i) (emphasis added).
Thus, Congress amended the Internal Revenue Code and expanded upon the Code's view that settlors with the ability to control the assets of their revocable trusts possess an ownership interest.
We turn next to the relevant TPO corporate documents and apply these principles. First, we note that, under the corporate by-laws, two alternative methods for transferring TPO stock were established, both of which required "delivery of the certificate" and either an endorsement to the recipient or a separate document assigning the certificate or a power of attorney. In either case, it is undisputed that Andrew did not "deliver" his stock certificates for transfer prior to June 25, 2004; rather, to the extent that Andrew placed his shares in the Trust, such placement was effected merely by the execution of his Trust Declaration. As noted above, "`[i]f the owner of property declares himself trustee of the property, a trust may be created without a transfer of title to the property.'" Hinds, 235 Ind. at 52, 129 N.E.2d at 563-564; see also Taliaferro v. Taliaferro, 260 Kan. 573, 921 P.2d 803, 810 (1996) ("So also, the owner of property can create a trust by executing an instrument conveying the property to himself as trustee. In such a case there is not in fact a transfer of legal title to the property, since he already has legal title to it, but the instrument is as effective as if he had declared himself trustee.")
Second, the Shareholder Agreement restricting a shareholder's ability to transfer shares of TPO to a non-shareholder stated that its purpose was "to protect the small business corporation qualification by restricting the transfer of shares to persons not now shareholders." Exhibit 4 at 1. The Shareholder Agreement established that while there would not be limits imposed on transferring shares to existing shareholders, if a shareholder desired to sell shares the shareholder would first have to give TPO the right to purchase and subsequently give the other shareholders the same right. However, Andrew's Trust Declaration for estate planning purposes did not deprive Andrew of control of his property, and he continues to be responsible for the taxes thereon and his creditors can reach the shares. At any point, Andrew can revoke the Trust, in which case there would be no debate about where ownership lies. Finally, to the extent that Indiana law provides that the equitable interest in property held in trust is vested in the trust beneficiaries, we note that Andrew is the named beneficiary for life. Thus, we conclude that Andrew's Trust Declaration did not deprive him of his status as a shareholder of TPO.
Because we hold that Andrew's Trust Declaration did not extinguish his rights as a Shareholder of TPO, and therefore that he was a Shareholder on June 25, 2004, there is no mutual mistake of fact upon which to base an order of rescission in favor of Peter. Accordingly, we conclude that the court abused its discretion when it ordered the Stock Purchase Agreements to be rescinded and the shares returned to Peter.
In his reply to the Siblings' brief, Andrew argues that they "are not entitled to ask the Court of Appeals to remand the case to the Trial Court" because "they failed either to appeal directly or to assert cross-appeal." Reply to Siblings' Brief at 1. Ind. Appellate Rule 9(D) provides in part that "[a]n appellee may cross-appeal without filing a Notice of Appeal by raising cross-appeal issues in the appellee's brief." In their brief, the Siblings repeatedly assert that if this court reverses the trial court's order of rescission, then we should remand for the court to rule on their claims. See Siblings' Brief at 1, 2, 6-7. Accordingly, we find this sufficient to preserve the issue on appeal, and we remand for the court to rule on the claims raised by Siblings.
For the foregoing reasons, we reverse the court's Judgment and remand.
Reversed and remanded.
MAY, J., and CRONE, J., concur. Exhibit 6B.
Also, in its Judgment the court denied the Siblings' request for relief as moot because "[a]ll of the stock at issue is being returned to Peter" pursuant to rescission. Appellant's Appendix at 41. In their complaint, the Siblings alleged five counts: Count I, breach of fiduciary duty; Count II, tortious breach of duty of good faith and fair dealing; Count III, actual fraud; Count JV, constructive fraud; and Count V, breach of contract.
Exhibit 6A.
Peter C. Kesling 16,670
Timothy J. Kesling 7,049
David L. Kesling, Trustee 4,526
Andrew C. Kesling 4,028
Christopher K. Kesling 3,632
Adam W. Kesling 3,483
Emily A. Kesling 3,483
Sharon F. Kesling, Trustee 3,234
Douglas L. Biege 1,265
R. Thomas Rocke Exemption
Equivalent Trust 1,152
Charlene J. Kesling 50
Exhibit 6B.
Also, at some point Certificates 176-178 were lost, and on January 9, 2008, Andrew executed an affidavit to obtain a replacement stock certificate. In the affidavit, Andrew stated that he "is the Trustee of the Andrew C. Kesling Trust dated March 28, 2001 and is the true, lawful, present and sole owner" of the stock, and he signed the affidavit as the Trustee of the Trust. Exhibit 28.
Indeed, for judicial estoppel to apply, "[t]here must have been a determination of the prior action, or, at least, the allegations or admission must have been acted on by the court in which the pleadings were filed or by the parties claiming the estoppel." Alaska Seaboard Partners Ltd. P'ship v. Hood, 949 N.E.2d 1247, 1254 (Ind.Ct.App.2011). We note that Peter does not direct us to, and our review of the record does not reveal, that the federal court decision makes reference to this assertion by Andrew in his reply brief in that litigation.
Id. Section 302 of the Uniform Act, titled, "Statutory Trust as Entity," states: "A statutory trust is an entity separate from its trustees and beneficial owners."
Id. at § 102(3).
